SOURCE: Prudential plc

March 16, 2006 02:04 ET

Prudential Plc announces 2005 Full Year Results - Part 2

LONDON, UK -- (MARKET WIRE) -- March 16, 2006 --PRUDENTIAL PLC 2005 FULL YEAR RESULTS CONTINUED

EUROPEAN EMBEDDED VALUE (EEV) BASIS RESULTS

BASIS OF PREPARATION OF RESULTS

The European Embedded Value (EEV) basis results have been prepared in accordance with the European Embedded Value principles issued by the CFO Forum of European Insurance Companies in May 2004 and expanded by the Additional Guidance on EEV Disclosures published in October 2005. Where appropriate the EEV basis results include the effects of adoption of International Financial Reporting Standards.

The EEV results for the Group include the results for the covered business on the EEV basis. These results are then combined with the IFRS basis results for the Group's other operations.

With two exceptions, covered business comprises the Group's long-term business operations. The definition of long-term business operations is consistent with previous practice under the Modified Statutory Basis and Achieved Profits basis reporting and comprises those contracts falling under the definition of long-term insurance business for regulatory purposes together with, for US Operations, contracts that are in substance the same as Guaranteed Investment Contracts but do not fall within the technical definition. Under the EEV principles, the results for covered business now include the projected margins of attaching internal fund management.

The exceptions are for the closed Scottish Amicable Insurance Fund (SAIF) and in respect of the Group's defined benefit pension schemes. SAIF is closed to new business and the assets and liabilities of the fund are wholly attributable to the policyholders of the fund. As regards the Group's defined benefit pension schemes, the deficits attaching to the Prudential Staff Pension Scheme and Scottish Amicable Pension Scheme are excluded. These deficits are partially attributable to the PAC with-profits fund and shareholder backed long-term business.

Previously, the Group has reported supplementary information on the Achieved Profits basis for its interim and full year financial reporting. The adoption of EEV basis reporting in place of Achieved Profits basis reporting reflects developments through the CFO Forum to achieve a better level of consistency, an improved embedded value methodology, and is applied by the major European insurance companies in their financial reporting.

Except where indicated in this announcement, the Group has applied the same methodology as previously advised with the announcement of 2004 EEV results on 13 December 2005.

ECONOMIC ASSUMPTIONS

Deterministic

In most countries, the long-term expected rates of return on investments and risk discount rates are set by reference to period end rates of return on fixed interest securities. This 'active' basis of assumption setting has been applied in preparing the results of all the Group's UK and US long-term business operations. For the Group's Asian operations, the active basis is appropriate for business written in Japan, Korea and US dollar denominated business written in Hong Kong.

An exception to this general rule is that for countries where long-term fixed interest markets are underdeveloped, investment return assumptions and risk discount rates are based on an assessment of longer-term economic conditions. Except for the countries listed above, this basis is appropriate for the Group's Asian operations.

Expected returns on equity and property asset classes are derived by adding a risk premium, based on the long-term view of Prudential's economists in respect of each territory, to the risk free rate. In the UK the equity risk premium is 4.0% (2004 - 3.0%) above risk free rates. The equity risk premium in the US is also 4.0% (2004 - 3.0%). In Asia, equity risk premiums range from 3.0% to 5.75%. Assumptions for other asset classes, such as corporate bond spreads, are set consistently as best estimate assumptions.

The investment return assumptions as derived above are applied to the actual assets held at the valuation date to derive the overall fund-earned rate.

The table below summarises the principal financial assumptions.

                                            31 Dec      31 Dec 
                                              2005        2004
UK Insurance Operations
Risk discount rate
New business                                 7.55%        7.1%
In-force                                      7.7%        7.1%
Pre-tax expected long-term nominal rates
of investment return:
UK equities                                   8.1%        7.6%
Overseas equities                          8.1% to     7.3% to
                                             8.75%        8.3%
Property                                      6.4%        6.3%
Gilts                                         4.1%        4.6%
Corporate bonds                               4.9%        5.5%
Expected long-term rate of inflation          2.9%        2.9%
Post-tax expected long-term nominal rate
of return:
Pension business (where no tax applies)       7.1%        6.8%
Life business                                 6.3%        5.9%

US Operations (Jackson National Life)
Risk discount rate:
New business                                  6.9%        6.1%
In-force                                      6.1%        5.8%
Expected long-term spread between earned
rate and rate credited to
policyholders for single premium             1.75%       1.75%
deferred annuity business
US 10 year treasury bond rate at end of       4.4%        4.3%
period
Pre-tax expected long-term nominal rate       8.4%        7.3%
of return for US Equities
Expected long-term rate of inflation          2.4%        2.6%


Asian Operations

              China   Hong Kong     India Indonesia    Japan   Korea
                          (iii)
             31 Dec      31 Dec    31 Dec    31 Dec   31 Dec  31 Dec
               2005        2005      2005      2005     2005    2005
Risk
discount
rate
New           12.0%        5.9%     16.5%     17.5%     5.0%   10.3%
business
In-force      12.0%       6.15%     16.5%     17.5%     5.0%   10.3%
Expected       4.0%       2.25%      5.5%      6.5%     0.0%   2.75%
long-term
rate of
inflation
Government     9.0%        4.8%     10.5%     11.5%     1.8%    5.8%
bond yield

           Malaysia Philippines Singapore    Taiwan Thailand Vietnam
                                               (ii)
             31 Dec      31 Dec    31 Dec    31 Dec   31 Dec  31 Dec
               2005        2005      2005      2005     2005    2005
Risk
discount
rate
New            9.4%       16.5%      6.7%      9.0%   13.75%   16.5%
business
In-force       9.0%       16.5%      6.8%      9.4%   13.75%   16.5%
Expected       3.0%        5.5%     1.75%     2.25%    3.75%    5.5%
long-term
rate of
inflation
Government     7.5%       10.5%      4.5%      5.5%    7.75%   10.5%
bond yield




              China   Hong Kong     India Indonesia    Japan   Korea
                          (iii)
             31 Dec      31 Dec    31 Dec    31 Dec   31 Dec  31 Dec
               2004        2004      2004      2004     2004    2004
Risk
discount
rate
New           10.0%        4.7%     16.0%    18.75%     5.0%    7.1%
business
In-force      10.0%        5.0%     16.0%    18.75%     5.0%    7.1%
Expected       3.0%       2.25%     5.25%     7.75%     0.0%   2.75%
long-term
rate of
inflation
Government    7.25%        4.9%    10.25%     13.0%     1.9%    3.9%
bond yield

           Malaysia Philippines Singapore    Taiwan Thailand Vietnam
                                               (ii)
             31 Dec      31 Dec    31 Dec    31 Dec   31 Dec  31 Dec
               2004        2004      2004      2004     2004    2004
Risk
discount
rate
New            9.0%      16.25%      6.3%      7.1%    13.5%   15.5%
business
In-force       8.7%      16.25%      6.4%      8.2%    13.5%   15.5%
Expected       3.0%       5.25%     2.25%     2.25%    3.75%    4.5%
long-term
rate of
inflation
Government     7.0%       10.5%      5.0%      5.5%    7.75%   9.75%
bond yield





                                       Asia Total   Asia Total
                                           31 Dec       31 Dec 
                                             2005         2004
Weighted risk discount rate (i)
New business                                 9.8%         8.0%
In force                                     8.4%         7.9%

(i) The weighted discount rates for the Asian Operations shown above have been determined by weighting each country's discount rates by reference to the EEV basis operating result for new business and the closing value of in-force business.

(ii) For traditional business in Taiwan, the economic scenarios used to calculate 2005 EEV basis results reflect the assumption of a phased progression of the bond yields from the current rates to the long-term expected rates. The projections assume that, in the average scenario, the current bond yields of around 2% trend towards 5.5% at 31 December 2012. Allowance is made for the mix of assets in the fund, our future investment strategy and the market value depreciation of the bonds as a result of the assumed yield increases. This gives rise to an average assumed Fund Earned Rate that trends from 2.3% to 5.4% in 2013 and falls below 2.3% for seven years due to the depreciation of bond values as yields rise. Thereafter, the Fund Earned Rate fluctuates around a target of 5.9%. This compares to a grading of 3.4% at 31 December 2004 to 5.9% by 31 December 2012 for the 2004 results. Consistent with our EEV methodology, a constant discount rate has been applied to the projected cash flows.

(iii) Assumptions for US dollar denominated business which comprises the larger proportion of the in-force Hong Kong business.

(iv) Assumed equity yields

The most significant equity holdings in Asian Operations are in Hong Kong, Singapore and Malaysia. The mean equity return assumptions for these three territories at 31 December 2005 (2004) were 8.6% (7.3%), 9.3% (9.75%) and 12.8% (12.25%) respectively. To obtain the mean, an average over all simulations of the accumulated return at the end of the projection period is calculated. The annual average return is then calculated by taking the root of the average accumulated return minus 1.

Stochastic

The economic assumptions used for the stochastic calculations are consistent with those used for the deterministic calculations described above. Assumptions specific to the stochastic calculations such as the volatilities of asset returns reflect local market conditions and are based on a combination of actual market data, historic market data and an assessment of longer-term economic conditions. Common principles have been adopted across the Group for the stochastic asset models, for example, separate modelling of individual asset classes but with allowance for correlation between the various asset classes.

Details are given below of the key characteristics and calibrations of each model.

UK Insurance Operations

Interest rates are projected using a two-factor model calibrated to actual market data.

The risk premium on equity assets is assumed to follow a log-normal distribution.

The corporate bond return is calculated as the return on a zero-coupon bond plus a spread. The spread process is a mean reverting stochastic process.

Property returns are modelled in a similar fashion to corporate bonds, namely as the return on a risk-less bond, plus a risk premium, plus a process representative of the change in residual values and the change in value of the call option on rents.

The rates to which the model has been calibrated are set out below:

Mean returns have been derived as the annualised arithmetic average return across all simulations and durations.

Standard deviations have been calculated by taking the annualised variance of the returns over all the simulations, taking the square root and averaging over all durations in the projection. For bonds the standard deviations relate to the yields on bonds of the average portfolio duration. For equity and property, they relate to the total return on these assets. The standard deviations applied are as follows:

                                                    Standard
                                                   Deviation
Government bond yield                                   2.0%
Corporate bond yield                                    5.5%
Equities
UK                                                     18.0%
Overseas                                               16.0%
Property                                               15.0%

Jackson National Life

Interest rates are projected using a log-normal generator calibrated to actual market data.

Corporate bond returns are based on Treasury securities plus a spread that has been calibrated to current market conditions and varies by credit quality.

Variable annuity equity and bond returns have been stochastically generated using a regime-switching log-normal model with parameters determined by reference to historical data. The volatility of equity fund returns ranges from 18.6% to 28.1% depending on risk class, and the standard deviation of returns for bond funds ranges from 1.4% to 1.8%.

Asian Operations

The same asset return model, as used in the UK, appropriately calibrated, has been used for the Asian operations. The principal asset classes are government and corporate bonds. Equity holdings are much lower than in the UK whilst property is not held as an investment asset.

The stochastic cost of guarantees are only of significance for the Hong Kong, Singapore, Malaysia and Taiwan operations.

The mean stochastic returns are consistent with the mean deterministic returns for each country. The volatility of equity returns ranges from 18% to 26%, and the volatility of government bond yields ranges from 1.6% to 8.9%.

NOTES ON THE EEV BASIS RESULTS

a) The EEV basis results for 2005 and 2004 have been derived from the EEV basis results supplement to the Company's statutory accounts for 2005. The supplement included an unqualified audit report from the auditors.

b) Under the EEV basis, the operating profit from new business represents the profitability of new long-term insurance business written in the year, and the operating profit from business in force represents the profitability of business in force at the start of the year. These results are combined with the IFRS basis results of the Group's other operations including banking and fund management business.

To the extent applicable, presentation of the EEV profit for the year is consistent with the basis the Group applies for analysis of IFRS basis profits before shareholder taxes between operating and non-operating results. Operating results reflect the underlying results of the Group's continuing operations including longer-term investment returns. Non-operating results include certain recurrent and exceptional items that primarily do not reflect the underlying performance in the year of the Group's continuing operations.

The recurrent items that are excluded from operating profit are short-term fluctuations in investment returns, the effects of changes in economic assumptions on shareholders' funds at the start of the year, the change in the time value of the cost of financial options and guarantees attributable to changes in economic circumstances, and actuarial gains and losses on defined benefit pension schemes.

c) The proportion of surplus allocated to shareholders from the UK with-profits business has been based on the present level of 10%. Future bonus rates have been set at levels which would fully utilise the assets of the with-profits fund over the life of the business in force.

d) Consistent with prior periods for the Taiwan operation, the projections include an assumption of phased progression of the bond yields of around 2% towards 5.5% at 31 December 2012 as described in the section on economic assumptions of this announcement. This takes into account the effect on bond values of interest rate movements. The principal cause of the GBP265m charge for the effect of changed economic assumptions is the reduction in short-term earned rates in Taiwan. This reduction has the effect of delaying the emergence of the expected long-term rate.

The EEV basis embedded value of the Taiwan life operation at 31 December 2005 was GBP(311)m with sensitivities to bond rates as follows:

   - A 100 basis point fall in starting bond rates would 
     reduce embedded value by GBP108m.
   - A 100 basis point increase in starting bond rates would 
     increase embedded value by GBP104m.
   - A 100 basis point parallel decrease in bond rates with 
     an equivalent adjustment to the risk discount would reduce 
     embedded value by GBP174m.
   - A 100 basis point parallel increase in bond rates with an 
     equivalent adjustment to the risk discount rate would 
     increase embedded value by GBP106m.

e) Additional analysis of the Group's EEV basis results and sensitivities of these results to alternative assumptions can be found at the Group's website at www.prudential.co.uk or on request.

IFRS BASIS RESULTS

STATUTORY BASIS RESULTS

CONSOLIDATED INCOME STATEMENT

                                              2005       2004
                                              GBPm       GBPm
                                                     (note C)
Gross premiums earned                       15,225     16,408
Outward reinsurance premiums                 (197)      (256)
Earned premiums, net of reinsurance         15,028     16,152
Investment income                           24,013     15,750
Other income                                 2,084      2,002
Total revenue (note D)                      41,125     33,904
Benefits and claims and movement in       (33,100)   (26,593)
unallocated surplus of with-profits funds
Acquisition costs and other operating      (5,552)    (5,563)
expenditure
Finance costs: interest on core              (208)      (187)
structural borrowings of shareholder
financed operations
Goodwill impairment charge                   (120)          -
Total charges (note D)                    (38,980)   (32,343)
Profit before tax* (note D)                  2,145      1,561
Tax attributable to policyholders'         (1,147)      (711)
returns
Profit before tax attributable to              998        850
shareholders
Tax expense (note M)                       (1,388)      (951)
Less: tax attributable to policyholders'     1,147        711
returns
Tax attributable to shareholders' profit     (241)      (240)
(note M)
Profit from continuing operations after        757        610
tax
Discontinued operations (net of tax)             3       (94)
Profit for the year                            760        516
Attributable to:
Equity holders of the Company                  748        517
Minority interests                              12        (1)
Profit for the year                            760        516

Earnings per share
Basic (based on 2,365m and 2,121m shares
respectively)
Based on profit from continuing              31.5p      27.5p
operations attributable to the equity
holders of the Company
Based on profit (loss) from discontinued      0.1p     (3.1)p
operations attributable to the equity
holders of the Company
                                             31.6p      24.4p
Diluted (based on 2,369m and 2,124m
shares respectively)
Based on profit from continuing              31.5p      27.5p
operations attributable to the equity
holders of the Company
Based on profit (loss) from discontinued      0.1p     (3.1)p
operations attributable to the equity
holders of the Company
                                             31.6p      24.4p

Dividends per share
Dividends relating to reporting period
Interim dividend (2005 and 2004)             5.30p      5.19p
Final dividend (2005 and 2004)              11.02p     10.65p
Total                                       16.32p     15.84p
Dividends declared and paid in reporting
period
Interim dividend for current period          5.30p      5.19p
Final dividend for prior period             10.65p     10.29p
Total                                       15.95p     15.48p

* 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, unit-linked policies and shareholders' profits.

IFRS BASIS RESULTS

STATUTORY BASIS RESULTS

SUMMARY OF STATEMENT OF CHANGES IN EQUITY

                                                2005
                                    Shareholders' Minority  Total
                                           equity interest equity
                                             GBPm     GBPm   GBPm
Reserves
Profit for the year                           748       12    760
Items recognised directly in
equity:
Exchange movements                            268             268
Movement on cash flow hedges                  (4)        1    (3)
Unrealised valuation movements on
securities classified as
available-for-sale from 1 January
2005 (see note H)
Unrealised holding losses arising           (773)           (773)
during the year
Less reclassification adjustment               22              22
for losses included in the income
statement
Related change in amortisation of             307             307
deferred income and acquisition
costs
Related tax                                   218             218
Total items recognised directly in             38        1     39
equity

Total income and expense for the              786       13    799
year
Cumulative effect of changes in               226      (3)    223
accounting policies on adoption of
IAS 32, IAS 39 and IFRS 4, net of
applicable taxes at 1 January 2005
(note G)
Dividends                                   (380)           (380)
Reserve movements in respect of                15      (1)     14
share-based payments
Change in minority interest arising                     26     26
principally from purchase and sale
of venture investment companies and
property partnerships of the PAC
with-profits fund

Share capital and share premium
Proceeds from Rights Issue, net of
expenses
Other new share capital subscribed             55              55

Treasury shares
Movement in own shares purchased in             0               0
respect of share-based payment
plans
Movement on Prudential plc shares               3               3
purchased by unit trusts
consolidated under IFRS

Net increase in equity                        705       35    740
At beginning of year:
As previously reported under UK             4,281       71  4,352
GAAP
Changes arising from adoption of              208       66    274
IFRS (note F)
As restated under IFRS                      4,489      137  4,626
At end of year                              5,194      172  5,366



                                                2004
                                    Shareholders' Minority  Total
                                           equity interest equity
                                             GBPm     GBPm   GBPm
Reserves
Profit for the year                           517      (1)    516
Items recognised directly in
equity:
Exchange movements                          (172)           (172)
Movement on cash flow hedges
Unrealised valuation movements on
securities classified as
available-for-sale from 1 January
2005 (see note H)
Unrealised holding losses arising
during the year
Less reclassification adjustment
for losses included in the income
statement
Related change in amortisation of
deferred income and acquisition
costs
Related tax                                    12              12
Total items recognised directly in          (160)           (160)
equity

Total income and expense for the              357      (1)    356
year
Cumulative effect of changes in
accounting policies on adoption of
IAS 32, IAS 39 and IFRS 4, net of
applicable taxes at 1 January 2005
(note G)
Dividends                                   (323)           (323)
Reserve movements in respect of                10              10
share-based payments
Change in minority interest arising                      1      1
principally from purchase and sale
of venture investment companies and
property partnerships of the PAC
with-profits fund

Share capital and share premium
Proceeds from Rights Issue, net of          1,021           1,021
expenses
Other new share capital subscribed            119             119

Treasury shares
Movement in own shares purchased in           (2)             (2)
respect of share-based payment
plans
Movement on Prudential plc shares              14              14
purchased by unit trusts
consolidated under IFRS

Net increase in equity                      1,196        0  1,196
At beginning of year:
As previously reported under UK             3,240      107  3,347
GAAP
Changes arising from adoption of               53       30     83
IFRS (note F)
As restated under IFRS                      3,293      137  3,430
At end of year                              4,489      137  4,626





IFRS BASIS RESULTS


STATUTORY BASIS RESULTS

CONSOLIDATED BALANCE SHEET                         31 Dec   31 Dec
                                                     2005     2004
                                                     GBPm     GBPm
                                                          (note F)
Assets
Goodwill:
Attributable to PAC with-profits fund                 607      784
Attributable to shareholders                        1,341    1,461
Total                                               1,948    2,245

Other intangible assets (primarily deferred
acquisition costs):
PAC with-profits fund (note I)                         35      798
Other operations                                    2,405    2,244
Total                                               2,440    3,042

Other non-investment and non-cash assets:
Property, plant and equipment                         910      967
Reinsurers' share of policyholder liabilities       1,278    1,018
Deferred tax assets                                   755      827
Current tax recoverable                               231      159
Accrued investment income                           1,791    1,733
Other debtors                                       1,318    1,188
Total                                               6,283    5,892

Investments of long-term business, banking and
other operations:
Investment properties                              13,180   13,303
Investments accounted for using the equity              5        5
method
Financial investments:
Loans and receivables                              13,245   12,430
Equity securities and portfolio holdings in unit   71,985   54,466
trusts
Debt securities                                    82,471   76,374
Other investments                                   3,879    2,537
Deposits                                            7,627    5,271
Total                                             192,392  164,386

Held for sale assets                                  728      100
Cash and cash equivalents                           3,586    4,341
Total assets                                      207,377  180,006



Equity and liabilities

Equity
Shareholders' equity (note K)                       5,194    4,489
Minority interests                                    172      137
Total equity                                        5,366    4,626

Liabilities
Banking customer accounts                           5,830    6,607

Policyholder liabilities and unallocated surplus
of with-profits funds*
Insurance contract liabilities                    120,436        -
Investment contract liabilities with               26,523        -
discretionary participation features
Investment contract liabilities without            12,026        -
discretionary participation features
Technical provisions in respect of non-linked           -  104,996
business
Technical provisions for linked liabilities             -   24,066
Unallocated surplus of with-profits funds:
Reflecting application of 'realistic' basis        11,357        -
provisions for UK regulated with-profits funds
Reflecting previous UK GAAP basis of                    -   16,149
provisioning

Total                                             170,342  145,211

Core structural borrowings of
shareholder-financed operations:
Subordinated debt (other than Egg)                  1,646    1,429
Other                                               1,093    1,368
                                                    2,739    2,797
Egg subordinated debt                                 452      451
Total                                               3,191    3,248

Other borrowings:
Operational borrowings attributable to              6,432    6,421
shareholder-financed operations (note L)
Borrowings attributable to with-profits funds       1,898    2,137
(note L)

Other non-insurance liabilities:
Obligations under funding, securities lending       4,529    3,819
and sale and repurchase agreements
Net asset value attributable to unit holders of       965      808
consolidated unit trusts and similar funds
Current tax liabilities                               962    1,018
Deferred tax liabilities                            2,991    2,279
Accruals and deferred income                          506      655
Other creditors                                     1,478      996
Provisions                                            972    1,006
Other liabilities                                   1,769    1,175
Held for sale liabilities                             146        -
Total                                              14,318   11,756
Total liabilities                                 202,011  175,380
Total equity and liabilities                      207,377  180,006

* The presentation of insurance and investment contracts liabilities to policyholders reflects the adoption of IAS 32, IAS 39 and IFRS 4 at 1 January 2005. The comparative liabilities for 2004 reflect the previous UK GAAP basis.

IFRS BASIS RESULTS

STATUTORY BASIS RESULTS

CONSOLIDATED CASH FLOW STATEMENT

                                                      2005     2004
                                                      GBPm     GBPm
Cash flows from operating activities (note (i))

Profit before tax (note (ii))                        2,145    1,561
Changes in operating assets and liabilities
Investments                                       (21,462) (14,741)
Banking customer accounts                            (861)    (330)
Other non-investment and non-cash assets             (970)    (105)
Policyholder liabilities (including unallocated     21,126   13,639
surplus)
Other liabilities (including operational               180    1,061
borrowings)
Interest income and expense and dividend income    (8,410)  (7,371)
included in profit before tax
Other non-cash items                                     0       73
Operating cash items:
Interest receipts                                    5,946    5,660
Dividend receipts                                    2,680    1,853
Tax paid                                             (573)    (450)
Net cash flows from operating activities             (199)      850
Cash flows from investing activities
Purchases of property, plant and equipment           (160)    (227)
Proceeds from disposal of property, plant and            6        4
equipment
Acquisition of subsidiaries, net of cash balances     (68)     (92)
(note (iii))
Disposal of subsidiaries, net of cash balances         252      218
(note (iii))
Net cash flows from investing activities                30     (97)
Cash flows from financing activities
Structural borrowings of the Group:
Shareholder-financed operations (note (iv)):
Issue                                                  168      344
Redemption                                           (308)     (61)
Interest paid                                        (204)    (189)
With-profits operations (note (v)):
Interest paid                                          (9)      (9)
Equity capital:
Issues of ordinary share capital                        55    1,140
Dividends paid                                       (380)    (323)
Net cash flows from financing activities             (678)      902

Net (decrease) increase in cash and cash             (847)    1,655
equivalents
Cash and cash equivalents at beginning of year       4,341    2,756
Effect of exchange rate changes on cash and cash        92     (70)
equivalents
Cash and cash equivalents at end of year (note       3,586    4,341
(vi))

Notes

(i) The adjusting items to IFRS basis income include changes in operating assets and liabilities, and other items comprising adjustments in respect of non-cash items, operational interest receipts and payments, dividend receipts, income tax paid and cash flows in respect of assets categorised as available-for-sale investments. The most significant elements of the adjusting items are the changes in operating assets and liabilities made up as shown above.

(ii) 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, unit-linked policies and shareholders' profits. It does not represent profit before tax attributable to shareholders.

(iii) Purchases and sales of subsidiaries shown above include purchases and sales of venture subsidiaries of the PAC with-profits fund.

(iv) Structural borrowings of shareholder-financed operations consists of the core debt of the parent company and related finance subsidiaries, Jackson National Life surplus notes and Egg debenture loans. Core debt excludes borrowings to support short-term fixed income securities reinvestment programmes and non-recourse borrowings of investment subsidiaries of shareholder-financed operations. Cash flows in respect of these borrowings are included within operating cash flows.

(v) Structural borrowings of with-profits operations relate solely to the GBP100m 8.5% undated subordinated guaranteed bonds which contribute to the solvency base of the Scottish Amicable Insurance Fund (SAIF), a ring-fenced sub-fund of the PAC with-profits fund. Cash flows on other borrowings of with-profits funds, which principally relate to venture subsidiaries, are categorised as operating activities in the presentation above.

(vi) Under IFRS the cash flow statement comprises consolidated cash flows for the Group as a whole, including those of long-term business funds. Of the cash and cash equivalents amounts of GBP3,586m and GBP4,341m, GBP263m and GBP325m represent cash and cash equivalents of the parent company and related finance subsidiaries.

IFRS BASIS RESULTS

STATUTORY BASIS RESULTS

NOTES ON THE STATUTORY BASIS RESULTS

A. Basis of preparation and audit status

The statutory basis results included in this announcement have been extracted from the audited financial statements of the Group for the year ended 31 December 2005. These statements have been prepared in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union (EU), as required by EU law (IAS Regulation EC 1606 / 2002).

The Group has applied all IFRSs and interpretations adopted by the EU at 31 December 2005, and has early adopted the amendment to IAS 39 (The fair value option) and IAS 19 (Employee benefits) (as amended in 2004).

Compared to the UK GAAP basis of presentation, the statutory IFRS basis results reflect the application of:

(i) Measurement and recognition changes arising from policies the Group has applied on the adoption of all IFRS standards, other than IAS 32 (Financial Instruments: Disclosure and Presentation), IAS 39 (Financial Instruments: Recognition and Measurement), and IFRS 4 (Insurance Contracts), from 1 January 2004. The 2005 results include the effect of these three standards from 1 January 2005.

(ii) Changes to the format of the results and other presentational changes that the Group has applied in its 2005 financial statements in so far as they affect the summary results included in this preliminary announcement.

In addition, compared to the basis of preparing supplementary results and earnings per share basis information previously provided under UK GAAP, a discretionary change of policy for the basis of determining longer-term investment returns included in operating profit based on longer-term investment returns has been applied. This change was first applied in the Group's Interim 2005 results.

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 December 2005 or 2004 but is derived from the 2005 accounts. Statutory accounts for 2004, which were prepared under UK GAAP, have been delivered to the Registrar of Companies and those for 2005, prepared under International Financial Reporting Standards as adopted by the EU, will be delivered following the Company's Annual General Meeting. The auditors have reported on both those accounts; their reports were (i) unqualified, (ii) did not include references to any matters to which the auditors drew attention by way of emphasis without qualifying their reports and (iii) did not contain statements under Section 237(2) or (3) of the Companies Act 1985.

B. Effects of adoption of IFRS basis reporting

The changes of accounting policy that arise on the conversion to IFRS basis reporting are numerous and extend to many items of income, expenditure, assets and liabilities. Comprehensive details of the changes were included with the announcement of restated 2004 comparative results on 2 June 2005 and the interim results announcement on 27 July 2005. These details are available at the Group's web-site at www.prudential.co.uk or on request. Notes C and F show the effect of IFRS adoption on the income statement for 2004 and shareholders' equity at 1 January 2004 and 31 December 2004. Note G shows the effect of the adoption of the standards IAS 32, IAS 39 and IFRS 4 at 1 January 2005.

C. Reconciliation of the summary income statement

Year ended 31                      IFRS adjustments
December 2004
                       UK GAAP Presentation Recognition, Statutory
                       (note C   of UK GAAP  measurement      IFRS
                          (i))      in IFRS    and other     basis
                               format (note      changes
                                      C(i)) (note C(ii))
                          GBPm         GBPm         GBPm      GBPm
Earned premiums, net    16,099           53                 16,152
of reinsurance
Investment income       13,917        2,082        (249)    15,750
UK fund management         136        (136)
result
US broker-dealer and      (14)           14
fund management
result
Asia fund management        19         (19)
result
UK banking result           63         (63)
(continuing
operations)
Other income                            773        1,229     2,002
Total revenue           30,220        2,704          980    33,904
Benefits and claims   (26,598)         (83)           88  (26,593)
and movement in
unallocated surplus
of with-profits
funds
Acquisition costs      (2,069)      (2,434)      (1,060)   (5,563)
and other operating
expenditure
Finance costs:                        (187)                  (187)
interest on core
structural
borrowings of
shareholder-financed
operations
Amortisation of           (94)                        94
goodwill (continuing
operations)
Total charges         (28,761)      (2,704)        (878)  (32,343)

Profit before tax*       1,459                       102     1,561
Tax attributable to      (701)                      (10)     (711)
policyholders'
returns
Profit before tax          758                        92       850
attributable to
shareholders
Tax expense              (947)                       (4)     (951)
Less: Tax                  701                        10       711
attributable to
policyholders'
returns
Tax attributable to      (246)                         6     (240)
shareholders'
profits
Profit from                512                        98       610
continuing
operations after tax
Discontinued              (94)                                (94)
operations (net of
tax)
Profit for the year        418                        98       516

Attributable to:
Equity holders of          428                        89       517
the Company
Minority interests        (10)                         9       (1)
Profit for the year        418                        98       516

* 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, unit-linked policies and shareholders' profits.

Notes

C(i) UK GAAP results

The UK GAAP basis results shown above reflect those previously recorded in the technical accounts and non-technical account of the Group's profit and loss account under Companies Act requirements. These results are then reconfigured to be consistent with the format applied for reporting in the Group's 2005 financial statements under IFRS.

C(ii) Recognition, measurement and other changes

Changes to profit from continuing operations (including actual investment returns) before and after tax attributable to shareholders reflect the effects of IFRS adoption. In summary the effects are for:

                                                          GBPm
Egg - primarily relates to charges for                     (2)
share-based payments in respect of Egg shares
Additional pension costs and share-based                   (4)
payments costs in respect of Prudential plc
shares not allocated by business unit
Amortisation of goodwill not permitted under                94
IFRS
Actuarial gains and losses of defined benefit              (7)
schemes recognised under IFRS
Value movements of US investment funds newly                 2
consolidated under IFRS
Share of profits of venture investment                       9
companies and property partnerships of the PAC
with-profits fund consolidated under IFRS,
that is attributable to external investors
Total changes before tax                                    92
Related tax attributable to shareholders                     6
Total changes after tax                                     98

Changes to revenue, charges and related tax of the Group's with-profits funds principally relate to measurement differences on investments, consolidation criteria for venture funds and other investment subsidiaries, and pension cost accounting. These changes have been reflected by transfers of an equal and opposite amount to unallocated surplus and hence have no net effect on shareholder results.

D. Segmental disclosure

The Group's primary reporting segments are long-term business, banking and broker-dealer and fund management.

                                                2005      2004
                                                GBPm      GBPm
Revenue
Long-term business                            39,296    32,073
Banking                                        1,115     1,110
Broker-dealer and fund management                895       823
Unallocated corporate                             98       151
Intragroup revenue eliminated on               (279)     (253)
consolidation
Total revenue per income statement            41,125    33,904

Charges (before income tax attributable to
policyholders and unallocated surplus of
long-term insurance funds)


Long-term business including post-tax       (36,968)  (30,531)
transfers to unallocated surplus of
with-profits funds
Banking                                      (1,071)   (1,049)
Broker-dealer and fund management              (740)     (682)
Unallocated corporate                          (480)     (334)
Intragroup charges eliminated on                 279       253
consolidation
Total charges per income statement          (38,980)  (32,343)

Segment results - Revenue less charges
(continuing operations)
Long-term business                             2,328     1,542
Banking                                           44        61
Broker-dealer and fund management                155       141
Unallocated corporate                          (382)     (183)

Profit before tax*                             2,145     1,561

Tax attributable to policyholders' returns   (1,147)     (711)
Profit before tax attributable to                998       850
shareholders
Tax attibutable to shareholders' profits       (241)     (240)
                                                     .
Profit from continuing operations after          757       610
tax

Segment results - Discontinued operations
Long-term business                                 -         4
Banking                                            3      (98)
                                                   3      (94)
Profit for the year                              760       516

* 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, unit-linked policies and shareholders' profits.

E. Supplementary analysis of profit from continuing operations before tax attributable to shareholders and related earnings per share

Profit from continuing operations before
tax
                                                2005      2004
                                                GBPm      GBPm
Operating profit from continuing                 957
operations based on longer-term investment
returns (note E(i))
Goodwill impairment charge                     (120)
Short-term fluctuations in investment            211
returns on shareholder-backed business
Shareholders' share of actuarial and other      (50) (see note
gains and losses on defined benefit                     E(ii))
pension schemes

Profit from continuing operations before         998
tax attributable to shareholders
(including actual investment returns)

Earnings per share from continuing
operations

From operating profit based on longer-term     32.2p
investment returns after related tax and
minority interests of GBP761m
Adjustment for goodwill impairment charge     (5.1)p
Adjustment from post-tax longer-term
investment returns to post-tax actual
investment
returns (after related minority interests)      5.9p (see note
                                                        E(ii))
Adjustment for post-tax shareholders'         (1.5)p
share of actuarial and other gains and
losses on defined benefit pension schemes
Based on profit from continuing operations     31.5p
after tax and minority interests of
GBP745m

Notes

E(i) Under the Group's accounting policies additional analysis is provided of profit before tax attributable to shareholders that distinguishes operating profit based on longer-term investment returns from other constituent elements of total profit before tax attributable to shareholders.

For the purposes of measuring operating profits based on longer-term investment returns, investment returns are based on the expected longer-term rate of return. The expected long-term rates of return are intended to reflect historical real rates of return and, where appropriate, current inflation expectation, adjusted for consensus economic and investment return forecast. The significant operations that require adjustment for the difference between actual and longer-term investment returns are Jackson National Life and certain businesses of the Group's Asian Operations. The amounts included in operating results for longer-term capital returns for debt securities comprise two components. These are a risk margin reserve based charge for expected defaults, which is determined by reference to the credit quality of the portfolio, and amortisation of interest related realised gains and losses to operating results based on longer-term returns to the date when sold bonds would otherwise have matured.

Items excluded from operating profit based on longer-term investment returns but included in profit before tax attributable to shareholders of continuing operations include goodwill impairment charges, short-term fluctuations in investment returns (i.e actual less longer-term returns), actuarial gains and losses on defined benefit pension schemes and exceptional items.

With the exception of derivatives used for managing equity exposure, value movements on derivatives held by Jackson National Life are included within short-term fluctuations.

For the purposes of distinguishing actuarial gains and losses on defined benefit pension schemes in this analysis, plan assets include Prudential policies held by the Prudential Staff Pension Scheme and the M&G pension scheme. At 31 December 2005, these policies had a carrying value of GBP253m.

E(ii)The supplementary analysis of statutory IFRS basis results shown above has been presented only for 2005. Details have not been provided for 2004 in this announcement as the results would not be comparable. This is due to IAS 32, IAS 39 and IFRS 4 only being adopted from 1 January 2005. Details of the analysis of the statutory IFRS basis results for 2004 on this basis will be published in the Group's financial statements.

Additional analysis of the 2005 result, and pro forma basis comparative results for 2004 as if the above standards had been applied by the Group's insurance operations from 1 January 2004, is provided as supplementary information to this announcement. The analysis on those pages has not been extracted from the Group's IFRS financial statements.

F. Reconciliations of equity and balance sheet

At 1 January 2004                  Shareholders'  Minority  Total
                                          equity interests equity
                                            GBPm      GBPm   GBPm

Changes on adoption of statutory
IFRS basis

Treasury shares adjustment for              (40)             (40)
Prudential plc shares held by unit
trusts consolidated under IFRS
(note F(i))
Minority share of equity of                             32     32
consolidated venture investment
companies and property
partnerships of the PAC
with-profits fund (note F(i))
Shareholders' share of deficits            (110)            (110)
(net of tax) of defined benefit
pension schemes (note F(ii))
Timing difference on recognition             214              214
of dividend declared after balance
sheet date

(note F(iii))
Other items                                 (11)       (2)   (13)

Total                                         53        30     83

Equity at 1 January 2004
As previously published under UK           3,240       107  3,347
GAAP
As restated under statutory IFRS           3,293       137  3,430

At 31 December 2004   Effect of changes on implementation of IFRS
                          recognition and measurement changes
                      UK GAAP        Newly    Defined       Other
                              consolidated    benefit recognition
                                  entities    pension         and
                               (note F(i))    schemes measurement
                                           accounting     changes
                                              (note F     (note F
                                                (ii))      (iii))
                         GBPm         GBPm       GBPm        GBPm
Assets
Goodwill:
Attributable to PAC                    784
with-profits fund
Attributable to         1,367                                  94
shareholders
Investments: per IFRS                1,963                     35
balance sheet
Investments: per UK   129,468
GAAP analysis
(non-linked, linked
and banking business
assets)
Other items            43,741        1,477        102          50
Total assets          174,576        4,224        102         179

Equity and
liabilities
Equity
Shareholders' equity    4,281         (30)      (117)         355
Minority interests         71           68                    (2)
Total equity            4,352           38      (117)         353
Liabilities
Banking customer
accounts: per IFRS
balance sheet
Banking business       11,216
liabilities: per UK
GAAP balance sheet
Policyholder
liabilities and
unallocated surplus
of with-profits funds
Technical provisions  129,101                   (125)           8
Unallocated surplus    16,686         (31)      (472)        (34)
of with-profits funds
Borrowings per IFRS
balance sheet
Core structural
borrowings of
shareholder-financed
operations
Operational                            972                      9
borrowings
attributable to
shareholder-financed
operations
Borrowings                           1,888                    105
attributable to
with-profits funds
Borrowings per UK       4,673
GAAP balance sheet
(subordinated
liabilities,
debenture loans and
other borrowings)
Dividend payable          253                               (253)
Other non-insurance     8,295        1,357        816         (9)
liabilities
Total liabilities     170,224        4,186        219       (174)

Total equity and      174,576        4,224        102         179
liabilities





At 31 December 2004     Effect of changes on
                       implementation of IFRS
                          recognition and
                        measurement changes
                       Grossing-up  Total IFRS   Statutory IFRS
                         and other     changes            basis
                            format
                           changes
                              GBPm        GBPm             GBPm
Assets
Goodwill:
Attributable to PAC                        784              784
with-profits fund
Attributable to                             94            1,461
shareholders
Investments: per IFRS      162,388     164,386          164,386
balance sheet
Investments: per UK      (129,468)   (129,468)                0
GAAP analysis
(non-linked, linked
and banking business
assets)
Other items               (31,995)    (30,366)           13,375
Total assets                   925       5,430          180,006

Equity and
liabilities
Equity
Shareholders' equity                       208            4,489
Minority interests                          66              137
Total equity                               274            4,626
Liabilities
Banking customer             6,607       6,607            6,607
accounts: per IFRS
balance sheet
Banking business          (11,216)    (11,216)                0
liabilities: per UK
GAAP balance sheet
Policyholder
liabilities and
unallocated surplus
of with-profits funds
Technical provisions            78        (39)          129,062
Unallocated surplus                      (537)           16,149
of with-profits funds
Borrowings per IFRS
balance sheet
Core structural              3,248       3,248            3,248
borrowings of
shareholder-financed
operations
Operational                  5,440       6,421            6,421
borrowings
attributable to
shareholder-financed
operations
Borrowings                     144       2,137            2,137
attributable to
with-profits funds
Borrowings per UK          (4,673)     (4,673)                0
GAAP balance sheet
(subordinated
liabilities,
debenture loans and
other borrowings)
Dividend payable                         (253)                0
Other non-insurance          1,297       3,461           11,756
liabilities
Total liabilities              925       5,156          175,380

Total equity and               925       5,430          180,006
liabilities

Notes

F(i)Newly consolidated entities

Under IAS 27 and SIC 12, the Group is required to consolidate the assets and liabilities of certain entities which have previously not been consolidated under UK GAAP. The principal change to shareholders' equity arises from an adjustment in respect of Prudential plc shares held by unit trusts that are newly consolidated. These shares are accounted for as treasury shares and the cost of purchase of GBP44m and GBP29m is deducted from shareholders' equity at 1 January 2004 and 31 December 2004 respectively. The change to the minority share of equity reflects external parties' interest in consolidated venture investment companies and property partnerships of the PAC with-profits fund. Measurement changes to the carrying value of these companies that are attributable to the PAC with-profits fund share are reflected in unallocated surplus.

F(ii)Defined benefit pension schemes accounting

Provisions for deficits on the Group's defined benefit pension schemes are absorbed by the unallocated surplus of the PAC with-profits fund and shareholders' funds on a basis that reflects the weighted cumulative activity attaching to the contributions paid in the past, and after deduction of deferred tax. The M&G scheme held Prudential Group insurance policies as scheme assets of GBP125m at 31 December 2004. The asset and liability are eliminated on consolidation.

F(iii)Other recognition and measurement changes

Under IFRS, dividends declared after the balance sheet date are not recognised as a liability. In addition, subject to required impairment testing, goodwill under IFRS represents the balance sheet carrying value at 1 January 2004. Adjustments in the table include the write-back of amortisation previously charged under UK GAAP in 2004.

G. Effect of adoption of IAS 32, IAS 39, and IFRS 4 at 1 January 2005

                      Effect of adoption of IAS 32, IAS 39 and
                                       IFRS 4
                     Statutory         UK  Jackson   Banking and
                          IFRS  Insurance National non-insurance
                      basis at Operations     Life    operations
                        31 Dec    (note G  (note G (note G(iii))
                          2004       (i))    (ii))
                      (note F)
                          GBPm       GBPm     GBPm          GBPm
Assets
Goodwill
Attributable to PAC        784
with-profits fund
Attributable to          1,461
shareholders

Other intangible
assets (primarily
deferred acquisition
costs)
PAC with-profits           798      (765)
fund (note I)
Other operations         2,244         23    (456)
Investments            164,386      (145)    1,262           145
Other assets            10,333         10       66          (92)
Total assets           180,006      (877)      872            53

Equity and
liabilities
Equity
Shareholders' equity     4,489       (22)      273          (25)
Minority interest          137                               (3)
Total equity             4,626       (22)      273          (28)
Liabilities
Banking customer         6,607                                84
accounts
Policyholder
liabilities and
unallocated surplus
of with-profits
funds
Contract liabilities   129,062      7,020     (51)
(non-linked and
linked business)
Unallocated surplus     16,149    (7,807)
of with-profits
funds
Borrowings
Core structural          3,248
borrowings of
shareholder-financed
operations
Other borrowings         6,421                 207            62
attributable to
shareholder-financed
operations
Borrowings               2,137
attributable to
with-profits funds
Other non-insurance
liabilities
Deferred tax             2,279       (91)      218           (6)
liabilities
Other                    9,477         23      225          (59)
Total liabilities      175,380      (855)      599            81

Total equity and       180,006      (877)      872            53
liabilities



                            Effect of
                           adoption of
                          IAS 32, IAS 39
                            and IFRS 4
                             Grossing-up    Total Statutory
                               and other   effect      IFRS
                          format changes           basis at
                                                      1 Jan
                                                       2005
                                    GBPm     GBPm      GBPm
Assets
Goodwill
Attributable to PAC                                     784
with-profits fund
Attributable to                                       1,461
shareholders

Other intangible assets
(primarily deferred
acquisition costs)
PAC with-profits fund                       (765)        33
(note I)
Other operations                            (433)     1,811
Investments                           68    1,330   165,716
Other assets                                 (16)    10,317
Total assets                          68      116   180,122

Equity and liabilities
Equity
Shareholders' equity                          226     4,715
Minority interest                             (3)       134
Total equity                                  223     4,849
Liabilities
Banking customer accounts                      84     6,691
Policyholder liabilities
and unallocated surplus
of with-profits funds
Contract liabilities                        6,969   136,031
(non-linked and linked
business)
Unallocated surplus of                    (7,807)     8,342
with-profits funds
Borrowings
Core structural                        5        5     3,253
borrowings of
shareholder-financed
operations
Other borrowings                    (13)      256     6,677
attributable to
shareholder-financed
operations
Borrowings attributable                               2,137
to with-profits funds
Other non-insurance
liabilities
Deferred tax liabilities                      121     2,400
Other                                 76      265     9,742
Total liabilities                     68    (107)   175,273

Total equity and                      68      116   180,122
liabilities

Notes

The changes shown above reflect the impact of re-measurement for :

G(i)UK Insurance Operations

(a) The reduction of shareholders' equity of GBP22m includes GBP20m relating to certain unit-linked and similar contracts that do not contain significant insurance risk and are therefore categorised as investment contracts under IFRS 4. The reduction of shareholders' equity at 1 January 2005 on adoption of IFRS 4 for these items is GBP10m different from the amount reported in the interim results due to refinements to the IFRS methodology applied.

(b) Changes to insurance assets and liabilities of the PAC with-profits fund following the improvement of accounting policy applied on adoption of IFRS 4. The changes correspond to those applicable if the Group had adopted FRS 27 under UK GAAP. As a result of the policy improvement, liabilities, deferred acquisition costs, deferred tax and unallocated surplus of UK regulated with-profits funds are remeasured as described in note I. At 1 January 2005, the unallocated surplus is subject to a transition adjustment of GBP(7.8)bn. Shareholders' equity is not affected by this change.

The unallocated surplus of GBP8.3bn at 1 January 2005 post IAS 39 and IFRS 4 adoption, comprises GBP8.0bn for the PAC with-profits fund and GBP0.3bn for Asian subsidiaries. The GBP8.0bn for the PAC with-profits fund represents:

                                           GBPbn
Regulatory basis realistic surplus of        6.0
with-profits sub-fund and SAIF
Add back: Regulatory basis provision         2.9
for future shareholder transfers
Less: Other adjustments to align with      (0.9)
accounting basis
Accounts basis                               8.0

G(ii) Jackson National Life

Under IAS 39, JNL's debt securities and derivative financial instruments are re-measured to fair value from the lower of amortised cost and, if relevant, impaired value. Fair value movements on debt securities, net of shadow changes to deferred acquisition costs and related deferred tax are recorded directly to equity. Fair value movements on derivatives are recorded in the income statement.

G(iii)Banking and non-insurance operations

Under IAS 39, for Egg, changes to opening equity at 1 January 2005 arise from altered policies for effective interest rate on credit card receivables, impairment losses on loans and advances, fair value adjustments on wholesale financial instruments and embedded derivatives in equity savings products. The net effect on shareholders equity of these changes, after tax, is a deduction of GBP15m. A further GBP10m reduction in equity arises on certain centrally held financial instruments and derivatives.

H. Jackson National Life - Debt securities

Changes in equity

IAS 32 and IAS 39 have been adopted from 1 January 2005. Accordingly, for 2004 under IFRS, financial instruments continue to be accounted for under previous GAAP. For Jackson National Life debt securities have been accounted for at amortised cost, unless impaired. From 1 January 2005, these assets have been classified as available-for-sale under IAS 39 with valuation at fair value. Unrealised gains and losses and reclassification adjustments for gains and losses included in net income are recorded from 1 January 2005 within the statement of changes in equity.

Balance sheet

Due to the change in the valuation basis referred to above, the carrying values of the debt securities of Jackson National Life that have been included in the consolidated balance sheet are not comparable. The fair value of the debt securities at 31 December 2004 was GBP22.5bn. After deduction of related changes to deferred acquisition costs and deferred tax, there was a consequential impact on shareholders' equity at 1 January 2005, on adoption of IAS 32 and IAS 39, of GBP397m for the changed basis of valuation of Jackson's securities.

I. Unallocated surplus of with-profits funds

The unallocated surplus of with-profits funds reflects the excess of assets over technical provisions and other liabilities and represents amounts that have yet to be allocated to policyholders and shareholders. For the Group's 2004 financial statements, and as applied for IFRS purposes for 2004 in these financial statements, the technical provisions in respect of insurance and investment contracts of UK regulated with-profits funds have been determined in accordance with the modified statutory basis of accounting that applied under UK GAAP. With the exception of minor accounting adjustments, the technical provisions reflect the UK regulatory basis of reporting which effectively constitutes the Peak 1 basis under the new FSA regime.

On this basis the unallocated surplus of the PAC with-profits fund at 31 December 2004 was GBP16,301m. After inclusion of the unallocated surplus of with-profits funds of Asian subsidiaries the unallocated surplus in the consolidated balance sheet at 31 December 2004 was GBP16,686m. Following changes arising from the application of IFRS requirements applicable for 2004, the IFRS basis unallocated surplus for the Group is altered as described in note F.

On adoption of IFRS 4 at 1 January 2005, the Group has chosen to improve its accounting policy in respect of the insurance assets and liabilities of UK regulated with-profits funds. The improvement is consistent with the requirements of FRS 27 that apply for life assurers reporting under UK GAAP in 2005 for the application of the Peak 2 realistic basis.

The main accounting changes that are required for UK regulated with-profits funds are:

De-recognition of deferred acquisition costs and related deferred tax

Inclusion of the FSA Peak 2 basis of the value of in-force non-participating business written by the PAC with-profits sub-fund, and the Scottish Amicable Insurance Fund; and

Replacement of modified statutory basis liabilities for with-profits business with adjusted realistic basis liabilities.

Adjusted realistic liabilities represent the Peak 2 realistic liabilities for with-profits business included in Form 19 of the FSA regulatory returns, but after excluding the element for shareholders' share of future bonuses. This latter item is recognised as a liability for the purposes of regulatory returns but for accounting purposes shareholder transfers are recognised only on declaration.

For accounting purposes, to the extent that the value of non-participating business has been taken into account in determining projected policyholder benefits, deduction is made from the gross regulatory value of realistic liabilities. The balance is deducted from the accounting balance of unallocated surplus.

In determining accounting basis liabilities and unallocated surplus, an adjustment is also required where the regulatory and accounting carrying values of assets and liabilities differ for altered measurement or recognition criteria. For the Group's UK with-profits funds the main additional item for which adjustment is necessary is the attributable share of deficit of the Group's UK defined benefit pension schemes, net of related tax.

The impact of the changes at 1 January 2005, on adoption of IFRS 4, are shown in note G. At 31 December 2005, the unallocated surplus of GBP11.4bn comprises GBP11.3bn for the PAC with-profits sub-fund and GBP0.1bn for Asian subsidiaries. The GBP11.3bn for the PAC with-profits fund represents:

                                         GBPbn
Estimated regulatory basis                 8.0
realistic surplus of the PAC
with-profits sub-fund
Add back: Provision for future             3.5
shareholder transfers
Less: Other adjustments to align         (0.2)
with accounting basis

                                          11.3

The GBP11.3bn is attributable solely to the PAC with-profits sub-fund. No amount is recognised for SAIF. This treatment is to comply with actuarial guidance note GN 45 which requires that for a closed fund where the fund will be distributed fully the working capital is shown as zero with the future enhancements to asset shares being increased by the free capital.

The GBP0.1bn of unallocated surplus for Asia subsidiaries almost wholly relates to the Malaysian life business. Following local regulatory changes which affect the presentation of the balance sheet, unallocated surplus of the Singapore with-profits business is now amalgamated with policyholder liabilities.

J. Dividend

A final dividend of 11.02p per share was proposed by the directors on 15 March 2006. This dividend will absorb an estimated GBP267m of shareholders' funds. Subject to shareholder approval, the dividend will be paid on 26 May 2006 to shareholders on the register at the close of business on 24 March 2006. A scrip dividend alternative will be offered to shareholders.

K. Shareholders' equity
                                      2005        2004
                                      GBPm        GBPm
Share capital                          119         119
Share premium                        1,564       1,558
Reserves                             3,511       2,812
Total                                5,194       4,489

L. Other borrowings
                                      2005        2004
                                      GBPm        GBPm

Operational borrowings
attributable to
shareholder-financed
operations
Borrowings in respect of             1,472       1,079
short-term debt securities
reinvestment programmes
Non-recourse borrowings of           1,085       1,155
investment subsidiaries
managed by PPM America
Borrowings in respect of             3,856       4,159
banking operations
Other borrowings                        19          28
Total                                6,432       6,421

Borrowings attributable to
with-profits funds
Non-recourse borrowings of             988       1,167
venture fund investment
subsidiaries
Subordinated debt of the               100         100
Scottish Amicable Insurance
Fund
Other borrowings                       810         870
(predominantly external
funding of consolidated
investment vehicles)
Total                                1,898       2,137

M. Tax charge

The total tax charge of GBP1,388m for 2005 (GBP951m) comprises GBP1,119m (GBP805m) UK tax and GBP269m (GBP146m) 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 GBP241m for 2005 (GBP240m) comprises GBP(21)m (GBP63m) UK tax and GBP262m (GBP177m) overseas tax.

N. Acquisitions

In May 2005, Jackson National Life completed the purchase of Life Insurance Company of Georgia from ING Groep N.V. for GBP142m subject to post-completion adjustments. There is currently no goodwill arising on the transaction.

O. Taiwan life operation: Sensitivity of liabilities to projected investment returns

The in-force business of Taiwan life operation includes traditional whole of life policies where the premium rates have been set by the regulator at different points for the industry as a whole. Premium rates were set to give a guaranteed minimum sum assured on death and a guaranteed surrender value on early surrender based on prevailing interest rates at the time of policy issue. Premium rates also included allowance for mortality and expenses. Guarantees have fallen over time as interest rates have reduced from a high of 8% to current levels of around 2%. The current low level of bond rates in Taiwan gives rise to a negative spread in Taiwan of around GBP30m a year.

The profits attaching to these contracts is particularly affected by the rates of return earned, and estimated to be earned, on the assets held to cover liabilities and on future investment income and contract cash flows. Under IFRS the insurance contract liabilities of the Taiwan business are determined on the US GAAP basis as applied previously under UK GAAP. Under this basis the policy liabilities are calculated on sets of assumptions, which are locked in at the point of policy inception, and a deferred acquisition cost is held in the balance sheet.

The adequacy of the insurance contract liabilities is tested by reference to best estimates of expected investment returns on policy cash flows and reinvested income. The assumed earned rates are used to discount the future cash flows. The assumed earned rates consist of a long-term best estimate determined by consideration of long-term market conditions, and rates assumed to be earned in the trending in period. For 2005, it has been projected that rates of return for Taiwanese bond yields will trend from the current levels of some 2% to 5.5% by 31 December 2012.

The liability adequacy test results are sensitive to the attainment of the trended rates during the trending period. Based on the current asset mix, margins in other contracts that are used in the assessment of the liability adequacy tests, and currently assumed future rates of return, if interest rates were to remain at current levels in 2006 the premium reserve, net deferred acquisition costs, would be broadly sufficient. If interest rates were to remain at current levels in 2007 then some level of write-off of deferred acquisition costs may be necessary. However, the amount of the charge, currently estimated at GBP50m to GBP70m is sensitive for the previously mentioned variables.

The adequacy of the liability is also sensitive to the level of the projected long-term rate. The current best estimate of 5.5% has been determined on a prudent best estimate basis by reference to detailed assessments of the financial dynamics of the Taiwanese economy. In the event that the rate applied was reduced or increased the carrying value of the liabilities would be effected.

In broad terms, if the assumed long-term rate applied was to fall by 0.25% from 5.5% to 5.25% the impact on IFRS basis results would be a charge of some GBP120m to GBP130m. If the rate were to further reduce the incremental increase in liabilities would be of a similarly commensurate size. The effects of changes in any one year reflect the combination of short-term and long-term factors described above.

P. Effect of changes of assumptions and other bases of preparation of liabilities of insurance contracts

Profit before tax attributable to shareholders for 2005 includes the impact of the following items:

UK Insurance Operations

For shareholder-backed non-participating business, changes of assumptions were made which had the effect of increasing liabilities by GBP36m with a consequent reduction in operating profit based on longer-term investment returns. The reduction arose from a charge of GBP69m for strengthened mortality assumptions being partially offset by a net credit of GBP29m in respect of a reduced level of defaults for fixed income securities, and a credit of GBP4m for other changes.

In addition to this GBP36m charge to operating profit based on longer-term investment returns a further GBP20m charge for the effect of changes of assumption for renewal expenses, which relates to an increase in ongoing pension scheme contributions for future service of active members, has been recorded as part of actuarial and other gains and losses excluded from operating profit based on longer-term investment returns, but included in total profit before shareholder tax.

US Operations

The operating profit based on longer-term investment returns of GBP362m for US Operations for 2005 has been determined after taking account of material changes of assumption during the year. Several changes were modified to conform to more recent experience. The most significant changes included a write-off of deferred acquisition costs of GBP21m for Single Premium Deferred Annuities partial withdrawal changes and a Universal Life SOP 03-01 (Accounting and Reporting by Insurance Enterprises for Certain Non-Traditional Long Duration Contracts and Separate Accounts) reserve increase of GBP13m due to increasing the mortality assumption. Several smaller changes relating to Single Premium Whole Life surrenders and annuity mortality and annuitisation rates resulted in a GBP19m benefit on adjusting amortisation of deferred acquisition costs. Combined with other minor modifications, the resulting net impact of all changes during the year was a decrease to pre-tax profit of GBP7m.

Asian Operations

The 2005 results for Asian operations are affected in two significant ways for changes of basis or assumption.

For the Singapore life business, under the basis applied previously, liabilities of non-participating business for 2004 were determined on a net premium basis using prescribed interest rates such that a very high degree of prudence resulted. This basis has been replaced under the Singapore Risk Based Capital framework with one that, although still including provisions for adverse deviation, more accurately estimates the liability. This has resulted in a change of estimate and reduction in the liability of GBP73m.

The second item reflects the application of liability adequacy testing for the Taiwan life business which has resulted in a write-off of deferred acquisition costs of GBP21m in 2005. The assumptions for future investment returns are as described in note O. The loss reflects the reduction in 2005 in the expected yields over the trending period to the assumed long-term rate of 5.5% for Taiwanese government bonds.

Q. Asian Fund Management business

Operating profit for the Asian fund management business was GBP12m for 2005. The decrease from the result for 2004 of GBP19m reflects the exceptional cost of GBP16m in Taiwan incurred due to bond fund restructuring required as a result of industry wide regulatory change.

R. Post balance sheet events

In December 2005, the Company announced its intention to acquire the minority interests in Egg representing approximately 21.7% of the existing issued share capital of Egg. Under the terms of the offer, Egg shareholders would receive 0.2237 new ordinary shares in the Company for each Egg share. In January 2006, the Company announced that it had received acceptances in respect of 80.3% of the shares that it did not already own and that it would extend the offer until further notice. In February 2006, the Board of Egg announced the de-listing of Egg shares. Full acceptance of the offer would result in the issue of 41m new ordinary shares in the Company representing 1.7% of its issued ordinary share capital as enlarged by this acquisition.

SUPPLEMENTARY IFRS BASIS RESULTS

Additional IFRS basis information to enable consistent comparison of results for Prudential's insurance operations

This information does not form part of the IFRS basis results to be reported in the statutory financial statements.

The statutory basis results included in this announcement are for the years 2005 and 2004. These results reflect significant changes of accounting policies from those previously applied under UK GAAP. For all except three IFRS standards these changes have been applied consistently in preparing the results for both years. However, as permitted by the IFRS transition rules, 2005 results include the effects of adoption of the standards IAS 32, IAS 39 and IFRS 4 for the Group's insurance and other operations from 1 January 2005. The 2004 comparative results in those statements are therefore prepared on an inconsistent basis.

The "Pro forma IFRS basis" comparative results shown below for 2004 reflect the estimated effect on the Group's 2004 results if IAS 32, IAS 39 and IFRS 4 had been applied from 1 January 2004 to the Group's insurance operations.

The main purpose of providing this pro forma information is to present the operating results for the UK insurance business and short-term fluctuations in investment returns for Jackson National Life (JNL) on a consistent basis. Under IAS 39 and IFRS 4, the assets and liabilities of certain unit-linked and similar contracts of the UK insurance business are subject to re-measurement. For JNL, derivatives held for economic hedging purposes are fair valued under IAS 39 with value movements recorded in the income statement giving rise to significant levels of volatility. In addition debt securities of JNL are fair valued with value movements taken directly to shareholders reserves through the statement of changes in equity.

                                Based on        Pro forma 
                          statutory IFRS             IFRS
                           basis results    basis results
Summary results                     2005             2004
                                    GBPm             GBPm
Operating profit from                957              699
continuing operations
based on longer-term
investment returns (note
1)
Goodwill impairment                (120)                -
charge
Short-term fluctuations              211              293
in investment returns on
shareholder-backed
business (note 2)
Shareholders' share of              (50)              (7)
actuarial and other gains
and losses on defined
benefit pension schemes
Profit from continuing               998              985
operations before tax
attributable to
shareholders (including
actual investment
returns)
Tax attributable to                (241)            (290)
shareholders' profits
Profit from continuing               757              695
operations after tax
Discontinued operations                3             (94)
(net of tax)
Profit for the year                  760              601

Attributable to:
Equity holders of the                748              602
Company
Minority interests                    12              (1)
Profit for the year                  760              601

Earnings per share
Continuing operations
From operating profit,
based on longer-term
investment returns after
related tax
and minority interests of          32.2p            22.7p
GBP761m (GBP481m)
Adjustment for goodwill           (5.1)p                -
impairment charge
Adjustment from post-tax            5.9p             9.0p
longer-term investment
returns to post-tax
actual investment returns
(after related minority
interests)
Adjustment for post-tax           (1.5)p           (0.2)p
shareholders' share of
actuarial and other gains
and losses on defined
benefit pension schemes
Based on profit from               31.5p            31.5p
continuing operations
after tax and minority
interests of GBP745m
(GBP669m)
Discontinued operations
Based on post-tax profit            0.1p           (3.1)p
(loss) from discontinued
operations (after
minority interests)
Based on profit for the            31.6p            28.4p
year after minority
interests of GBP748m
(GBP602m)

SUPPLEMENTARY IFRS BASIS RESULTS

Additional IFRS basis information to enable consistent comparison of results for Prudential's insurance operations

This information does not form part of the IFRS basis results to be reported in the statutory financial statements.

                                             Based on        Pro 
                                            statutory      forma
                                           IFRS basis IFRS basis   
                                              results    results
CHANGES IN EQUITY (NET OF MINORITY               2005       2004
INTERESTS)                                       GBPm       GBPm
Other Reserves
Profit for the year                               748        602

Items recognised directly in equity:
Exchange movements                                268      (191)
Movement on cash flow hedges                      (4)          -
Unrealised valuation movements on
securities classified as
available-for-sale:
Unrealised investment losses, net               (751)      (106)
Related change in amortisation of                 307         74
deferred income and acquisition costs
Related tax                                       218         23

Total items recognised directly in                 38      (200)
equity

Total income and expense for the year             786        402
Cumulative effect of changes in
accounting principles on adoption of
IAS 32, IAS 39 and IFRS 4, net of
applicable taxes, at 1 January 2005
Statutory IFRS basis                              226          -
less: Pro forma adjustment reflected in         (251)          -
adjusted shareholders' equity at 1
January 2005 (as reflected in statement
of changes in equity - see below) for
impact of adoption of IAS 32, IAS 39
and IFRS 4 for insurance operations
Pro forma IFRS basis (i.e. transition adjustment in
respect of banking and other non-insurance
operations)                                      (25)          -
Dividends                                       (380)      (323)
Reserve movements in respect of                    15         10
share-based payments

Share capital and share premium

Proceeds from Rights Issue, net of                  -      1,021
expenses
Other new share capital subscribed                 55        119
Treasury shares
Movement in own shares purchased in                 0        (2)
respect of share-based payment plans
Movement on Prudential plc shares                   3         14
purchased by unit trusts newly
consolidated under IFRS
Net increase in shareholders' equity              454      1,241

Shareholders' equity at beginning of
year
As previously reported under UK GAAP            4,281      3,240
Changes arising from adoption of                  208         53
statutory IFRS
Statutory IFRS basis                            4,489      3,293
Pro forma basis adjustments for                   251        206
estimated impact if IAS 32, IAS 39, and
IFRS 4 had been adopted from 1 January
2004 for insurance operations
Pro forma IFRS basis                            4,740      3,499

Shareholders' equity at end of year             5,194      4,740

SUPPLEMENTARY IFRS BASIS RESULTS

Additional IFRS basis information to enable consistent comparison of results for Prudential's insurance operations

This information does not form part of the IFRS basis results to be reported in the statutory financial statements

NOTES ON THE SUPPLEMENTARY IFRS BASIS RESULTS

1. Operating profit from continuing operations based on longer-term investment returns*

                                           Based on  Pro forma
                                     statutory IFRS IFRS basis
                                      basis results    results
Results analysis by business area              2005       2004
                                               GBPm       GBPm
UK Operations
UK Insurance Operations                         400        296
M&G                                             163        136
Egg                                              44         61
Total                                           607        493
US Operations
Jackson National Life                           348        296
Broker-dealer and fund management                14       (14)
(including Curian losses of GBP10m
and (GBP29m))
Total                                           362        282
Asian Operations
Long-term business                              195        117
Fund management                                  12         19
Development expenses                           (20)       (15)
Total                                           187        121
Other income and expenditure
Investment return and other income               87         44
Interest payable on core structural           (175)      (154)
borrowings
Corporate expenditure:
Group Head Office                              (70)       (51)
Asia Regional Head Office                      (30)       (29)
Charge for share-based payments for            (11)        (7)
Prudential schemes
Total                                         (199)      (197)
Operating profit from continuing                957        699
operations based on longer-term
investment returns

* IFRS basis operating profit from continuing operations based on longer-term investment returns excludes goodwill impairment charges, short-term fluctuations in investment returns, and the shareholders' actuarial and other gains and losses on defined benefit pension schemes. The amounts for these items are included in total IFRS profit as shown elsewhere in this announcement.

2. Short-term fluctuations in investment returns

                                           Based on  Pro forma
                                     statutory IFRS IFRS basis
                                      basis results    results
                                               2005       2004 
                                               GBPm       GBPm
US Operations:
Movement in market value of                     122        144
derivatives used for economic
hedging purposes
Actual less longer-term investment               56         61
returns for other items
Asian Operations                                 32         37
Other Operations                                  1         51
                                                211        293




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