E: Asset management (including US
broker-dealer) and other operations

The Group’s asset management operations are based in the UK, Asia and the US where they operate different models and under different brands tailored to their markets.

Asset management in the UK is undertaken through M&G which is made up of three distinct businesses, being Retail, Wholesale and Finance, and whose operations include retail asset management, institutional fixed income, pooled life and pension funds, property and private finance.

Asset management in Asia serves both the life companies in Asia by managing the life funds and funds underlying the investment linked products and third-party customers through mutual fund business. Asia offers mutual fund investment products in a number of countries within the region, allowing customers to participate in debt, equity and money market investments.

Asset management in the US is undertaken through PPM America which manages assets for the Group’s US, UK and Asian affiliates plus also provides investment services to other affiliated and unaffiliated institutional clients including CDOs, private investment funds, institutional accounts and mutual funds. In addition, broker-dealer activities are undertaken in the US where trades in securities are carried out for both third-party customers and for its own account.

Other operations covers unallocated corporate activities and includes the head office functions.

a The profit included in the income statement in respect of asset management operations for the year is as follows:

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  2011 £m 2010 £m
  M&G US Eastspring
Investments
note (iii)
Total Total

Notes

  1. Under IFRS 8, disclosure details are required of segment revenue. The segment revenue of the Group’s asset management operations is required to include two items that are for amounts which, reflecting their commercial nature, are also wholly reflected as charges within the income statement. After allowing for these charges, there is no effect on profit from these two items which are:
    1. Investment funds which are managed on behalf of third parties and are consolidated under IFRS in recognition of the control arrangements for the funds. The gains and losses of these funds are non-recourse to M&G and the Group, and
    2. NPH broker-dealer fees which represent commissions received, which are then paid on to the writing brokers on sales of investment products. The presentation in the table above shows the amounts attributable to these two items so that the underlying revenue and charges can be seen.

  2. Short-term fluctuations in investment returns for M&G are primarily in respect of unrealised value movements on Prudential Capital’s bond portfolio.
  3. Included within Eastspring Investments revenue and charges are £44 million of commissions (2010: £60 million).
Revenue, (excluding revenue of consolidated investment funds and NPH broker-dealer fees) 1,042 249 292 1,583 1,423
Revenue of consolidated investment fundsnote (i) 9 9 11
NPH broker-dealer feesnote (i) 405 405 369
Gross revenue 1,051 654 292 1,997 1,803
Charges, (excluding charges of consolidated investment funds and NPH broker-dealer fees) (710) (225) (212) (1,147) (1,003)
Charges of consolidated investment fundsnote (i) (9) (9) (11)
NPH broker-dealer feesnote (i) (405) (405) (369)
Gross charges (719) (630) (212) (1,561) (1,383)
Profit before tax 332 24 80 436 420
Comprising:          
Operating profit based on longer-term investment returns 357 24 80 461 378
Short-term fluctuations in investment returnsnote (ii) (29) (29) 47
Shareholder’s share of actuarial gains and losses on defined benefit pension schemes 4 4 (5)
Profit before tax 332 24 80 436 420

b M&G operating profit based on longer-term investment returns:

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  2011 £m 2010 £m
Asset management fee income 702 612
Other income 4 3
Staff costs (285) (263)
Other costs (141) (123)
Underlying profit before performance-related fees 280 229
Performance-related fees 21 17
Operating profit from asset management operations 301 246
Operating profit from Prudential Capital 56 38
Total M&G operating profit based on longer-term investment returns 357 284

The difference between the fees and other income shown above in respect of asset management operations, and the revenue figure for M&G shown (excluding consolidated investment funds) in the main table primarily relates to total revenue of Prudential Capital (including short-term fluctuations) of £96 million (2010: £136 million) and commissions which have been netted off in arriving at the fee income of £702 million (2010: £612 million) in the table above. The difference in the presentation of commission is aligned with how management reviews the business.

Assets, liabilities and shareholders’ funds included in the Group consolidated statement of financial position in respect of asset management operations are as follows:

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  2011 £m 2010 £m
  M&G
note (iii)
US Eastspring
Investments
Total Total
Assets          
Intangible assets:          
Goodwillnote (iii) 1,153 16 61 1,230 1,230
Deferred acquisition costs and other intangibles assets 12 1 3 16 13
Total 1,165 17 64 1,246 1,243
Other non-investment and non-cash assets 868 179 82 1,129 1,118
Financial investments:          
Loansnote (i) 1,256 1,256 1,418
Equity securities and portfolio holdings in unit trusts 587 7 594 151
Debt securitiesnote (ii) 1,834 8 1,842 1,574
Other investments 72 1 5 78 59
Deposits 30 28 31 89 80
Total financial investmentsnote (iii) 3,779 29 51 3,859 3,282
Cash and cash equivalents 1,533 45 157 1,735 1,436
Total assets 7,345 270 354 7,969 7,079
Equity and liabilities          
Equity          
Shareholders’ equity 1,382 129 272 1,783 1,787
Non-controlling interests 5 5 4
Total equity 1,387 129 272 1,788 1,791
Liabilities          
Core structural borrowing of shareholder-financed operations 250 250 250
Intra-group debt represented by operational borrowings at Group levelnote (iv) 2,956 2,956 2,560
Net asset value attributable to external holders of consolidated unit trusts and similar fundsnote (v) 678 678 458
Other non-insurance liabilitiesnote (vi) 2,074 141 82 2,297 2,020
Total liabilities 5,958 141 82 6,181 5,288
Total equity and liabilities 7,345 270 354 7,969 7,079

Notes

  1. Loans

    The M&G loans relate to loans and receivables managed by Prudential Capital. These assets are generally secured but have no external credit ratings. Internal ratings prepared by the Group’s asset management operations, as part of the risk management process, are:

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      2011 £m 2010 £m
    Loans and receivables internal ratings:    
    A+ to A- 129 213
    BBB+ to BBB- 1,000 873
    BB+ to BB- 89 219
    B+ to B- 38 113
    Total M&G loans 1,256 1,418

    All loans in the portfolio are currently paying interest on scheduled coupon dates and no interest has been capitalised or deferred. All loans are in compliance with their covenants at 31 December 2011. The loans in the portfolio generally have ratchet mechanisms included within the loan agreements at inception so that margins increase over time to encourage early repayment or have had margins increased to reflect revised commercial terms.

  2. Debt securities

    Of the total debt securities at 31 December 2011 of £1,842 million, the following amounts were held by M&G.

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      2011 £m 2010 £m
    M&G    
    AAA to A- by Standard and Poor's or Aaa rated by Moody’s 1,547 1,468
    Other 287 92
    Total M&G debt securities 1,834 1,560
  3. The M&G statement of financial position includes the assets and liabilities in respect of Prudential Capital.
  4. Intragroup debt represented by operational borrowings at Group level

    Operational borrowings for M&G are in respect of Prudential Capital’s short-term fixed income security programme and comprise:

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      2011 £m 2010 £m
    Commercial paper 2,706 2,311
    Medium-term notes 250 249
    Total intragroup debt represented by operational borrowings at Group level 2,956 2,560
  5. Consolidated investment funds

    The M&G statement of financial position shown above includes investment funds which are managed on behalf of third parties.

    In respect of these funds, the statement of financial position includes the following, which are non-recourse to M&G and the Group:

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      2011 £m 2010 £m
    Cash and cash equivalents 348 304
    Total investments 415 167
    Other net assets and liabilities (85) (13)
    Net asset value attributable to external unit holders (678) (458)
    Shareholders' equity
  6. Other non-insurance liabilities consists primarily of intragroup balances, derivatives, liabilities and other creditors.

Reconciliation of movement in investments

A reconciliation of the total investments of asset management operations from the beginning of the year to the end of the year is as follows:

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  M&G
£m
US
£m
Eastspring
Investments
£m
Total
£m
At 1 January 2010        
Total investments (including derivative assets) 2,835 15 40 2,890
Less: Derivative liabilitiesnote G3 (49) (49)
Directly held investments, net of derivative liabilities 2,786 15 40 2,841
Net cash inflow from operating activities 310 8 11 329
Realised gains in the year 11 11
Unrealised gains and losses and exchange movements in the year 18 5 23
Movement in the year of directly held investments, net of derivative liabilities 339 8 16 363
At 31 December 2010/1 January 2011        
Total investments (including derivative assets) 3,203 23 56 3,282
Less: Derivative liabilitiesnote G3 (78) (78)
Directly held investments, net of derivative liabilities 3,125 23 56 3,204
Net cash inflow (outflow) from operating activities 538 6 (4) 540
Realised gains in the year 17 17
Unrealised gains and losses and exchange movements in the year (83) (1) (84)
Movement in the year of directly held investments, net of derivative liabilities 472 6 (5) 473
At 31 December 2011        
Total investments (including derivative assets) 3,779 29 51 3,859
Less: Derivative liabilities (182) (182)
Directly held investments, net of derivative liabilities 3,597 29 51 3,677

Certain asset management operations are subject to regulatory requirements. The movement in the year of the surplus regulatory capital position of these operations, combined with the movement in the IFRS basis shareholders’ funds for unregulated asset management operations, is as follows:

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  Asset management operations
  2011 £m 2010 £m
  M&G US Eastspring
Investments
Total Total
Regulatory and other surplus    
Beginning of year 187 122 123 432 322
Gains during the year 252 12 62 326 312
Movement in capital requirement (3) (11) (14) (23)
Capital injection 8 8 1
Distributions made (280) (6) (56) (342) (194)
Exchange movement 1 1 2 14
End of year 156 129 127 412 432

The movement in the year reflects gains driven by profits generated during the year and also changes in regulatory requirements. Distributions consist of dividends paid up to the parent company.

The M&G figures include those for Prudential Capital.

i Currency translation

Consistent with the Group’s accounting policies, the profits of Eastspring Investments and asset management operations are translated at average exchange rates and shareholders’ equity at the closing rate for the reporting period. The rates for the most significant operations are shown in note B4.

A 10 per cent increase in the relevant exchange rates would have reduced reported profit before tax attributable to shareholders and shareholders’ equity, excluding goodwill attributable to Eastspring Investments and US asset management operations, by £9 million (2010: £9 million) and £30 million (2010: £28 million) respectively.

ii Sensitivities to other financial risks for asset management operations

The principal sensitivities to other financial risk of the Group’s asset management operations are credit risk on the bridging loan portfolio as described in note E2 of the Prudential Capital operation and the indirect effect of changes to market values of funds under management. Due to the nature of the asset management operations there is limited direct sensitivity to movements in interest rates. Total debt securities held at 31 December 2011 by asset management operations were £1,842 million (2010: £1,574 million), the majority of which are held by the Prudential Capital operation. Debt securities held by M&G and Prudential Capital are in general variable rate bonds and so market value is limited in sensitivity to interest rate movements and consequently any change in interest rates would not have a material impact on profit or shareholder’s equity. The Group’s asset management operations do not hold significant investments in property or equities.

Other operations consist of unallocated corporate activities relating to Group Head Office and the Asia regional head office, with net expenditure for the year of £483 million (2010: £450 million) as detailed in note B1. An analysis of the assets and liabilities of Other operations is shown in note B5.

The Group holds certain derivatives that are used to manage foreign currency movements and macroeconomic exposures.
The fair value of these derivatives is sensitive to the combined effect of movements in exchange rates, interest rate and inflation rate. The possible permutations cover a wide range of scenarios. For indicative purposes, a reasonably possible range of fair value movements could be plus or minus approximately £75 million.

 
 

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