With-Profits PlanSharing in the profits of Prudential’s With-Profits Fund by means of bonuses

This document is a highly simplified description of With-Profits Plans and the

operation of a With-Profits Fund. The document must be read together with

specific terms and conditions and other associated documents, including our

product brochures. Actuarial and management discretion in the management

of our With-Profits Fund and discretion afforded to Prudential directors, such

as whether to declare bonuses, or to alter the investment strategies, are an

important feature of the prudent and effective management of the With-Profits

Fund to achieve our key objectives.

Introducing Prudential’s With-Profits Plan

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- can share in the profits of a With-Profits Fund from bonuses that may be added;- invests in our With-Profits Fund;- gives you the advantages of a balanced mix of investments with some smoothing of

investment returns.

What is a With-Profits Plan?

• Your With-Profits Plan is a medium to long-term insurance plan that:

• Our With-Profits Plan aims to achieve 3 key objectives:

to give returns which reflect the investment

performance of the underlying assets

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over the longer term, to produce a more stable investment return to

policyholders through the application of smoothing

2to ensure all

policyholders respective rights and reasonable

expectations are protected

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Our aim is to achieve the highest possible returns (allowing for taxation and investment expenses) for policyholders while maintaining an acceptable level of risk, in a broad mix of suitable investments aimed at protecting the respective rights and reasonable expectations of all groups and generations of With-Profits policyholders.

• Management of Assets

With-Profits Plans share in the profits and losses of the With-Profits Fund. As such, the return of your policy may go up or down and there may be times that you may not get back the full amount of your paid premium. Your With-Profits Policy may, however, have the benefit of a guaranteed return. Owing to the different product features and risk profiles, the underlying investment strategy of different products may not be the same and hence leading to different levels of investment return. The return of a With-Profits Plan depends on the share of profit made by the Fund that is attributable to the Plan, and whether we decide to distribute some of it. If we elect to distribute profits this is added to your policy by way of bonuses.

How does our With-Profits Fund work?

The With-Profits Fund aims to grow your money steadily over the medium to long term. At the same time, the Fund also aims to protect your investment from some of the extreme ups and downs that may be experienced in direct stock market investments by using:

• Our philosophy

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a multi-asset approach as the With-Profits Fund invests in a range of assets to spread risk

a smoothing process, which we describe in more detail further on in this document

Money from all policyholders is invested in our With-Profits Fund, which is composed of a wide range of assets. Investment performance of the With-Profits Fund usually contributes most to the value of your Plan. You can invest in the Fund until the policy terminates, however, a redemption charge may be applied if you surrender or withdraw early, and you may receive an amount considerably less than the premiums you paid. Our With-Profits Fund also takes on other business risks and policyholders share in the profits and losses from these risks.

Policy values are based on the “asset shares”, or in the case of early surrender or withdrawal from the Policy a proportion of asset shares to reflect redemption charge. The asset share of a policy is the value of the assets backing the policy, and is calculated by accumulating the premiums paid (less allowance for expenses and charges) at the actual rates of investment return earned on the policy’s underlying assets over the lifetime of the policy (allowing for the effect of tax on the investment returns and of tax relief on expenses for life business), making appropriate allowance for miscellaneous profits and losses. Asset shares serve only as a guide to determine the amount distributed to policyholders through bonuses. Bonus declarations will be described in more detail further on in this document.

• How does the With-Profits Fund Work?

Prudential’s With-Profits Fund invests in many different types of asset, such as equities, property, corporate bonds and cash which helps to diversify investment risk. This multi-asset approach seeks to ensure that the returns (losses and profits) are likely to be more balanced over the longer term as the With-Profits Fund is not fully exposed to dramatic gains and falls in one particular market or investment area.

• What are the ingredients of the With-Profits Fund?

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What are the characteristics of different investment vehicles?

Different policyholders have different investment objectives and risk appetites. The commonly used investment vehicles are discussed below. In normal circumstances the sequence of description below is based on the riskiness of the vehicles.

Policyholders can gain smoothed returns with the potential for competitive returns over the longer term. A combination of factors such as the pooling of assets, our investment strategy and smoothing allow With-Profits policyholders to benefit from certain exposure to asset classes that are expected, in normal circumstances, to generate higher returns but without the level of investment risk associated with higher risk investment vehicles.

For eligible policyholders, flexibility of bonus encashment and policy loan also allows policyholders access to cash from their plan. These objectives can be achieved via the sophisticated asset management mechanism.

Investors may be highly rewarded when investing in individual stocks or specific sectors; however, they have to take specific company risk along with the stock market risk and sector risk.

Mutual funds that invest principally in stocks. Through diversifying the portfolio, specific company or country risk can be reduced.

Corporate bonds are loans made to corporate firms. Corporate bonds usually receive a higher yield than government bonds, but the associated credit risk is higher.

Investors can enjoy fixed-income return from government issued debts/ bonds. The default risk is usually lower than that of corporate bonds.

Unless the bank defaults, the principal is guaranteed. Interest on bank deposits are likely to under-perform compared to other asset-backed investments in the long run.

Mutual funds or exchange-traded funds that invest the majority of its assets in the financial markets of developing countries. A developing country is characterised as being vulnerable to political and economic instability. Though such vehicles allow investors to be rewarded with potentially high return, the risk is relatively high.

The diagram is only intended to be a general indicator of relative risk and return, and may vary in certain circumstances.

Risk / Rewards Pyramid

Pote

ntia

l Rew

ards

Direct Investment

in Stock Markets

EmergingMarket Funds

Corporate Bonds

Government Bonds

Bank Deposits

Equity Funds

With-Profits Plans

Higher Risk

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Prudential provides a wide range of With-Profits Plans for policyholders to choose from. In normal circumstances, our risk management and investment experts allocate a lower proportion of riskier assets (e.g. equity) to plans with a higher guarantee, or vice versa, the purpose of which is to fit the different risk profiles of the products. With-Profits Plans with guarantees will have less risky asset types (such as fixed income vehicles) so that the guaranteed obligation can be met despite changes through the economic cycle.

The rationale for backing high guarantee With-Profits Plans with a higher proportion of fixed income investment vehicles (for example, bonds) is to provide a more stable return to policyholders, balancing the risk for Prudential of having to pay this guaranteed amount when overall investment returns are lower than the value of the guarantee. On the other hand, offering a lower guarantee for products provides an opportunity (in normal conditions) to invest a higher proportion in equities with the aim of providing policyholders with the potential for a greater upside return.

• High Guarantee vs Low Guarantee

The proportion of equities investment is also adjusted with reference to market interest rates. The proportion of equity is generally lower when the interest rates are low.

Prudential provides policyholders a wide range of products to choose from. For details of associated risks and benefits, please contact our financial consultants.

• Interest Rates Conditions

How do products and investment strategies interact?

In normal circumstances the lower the guarantee,the higher the allocation to equity.

Equity Proportion

0High guarantee

Low guarantee

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How does With-Profits Fund perform and how do we distribute the profits?

Policyholders can share in the profit of the With-Profits Fund through the declaration of bonuses. Different types of plans receive different bonus rates. The bonus rates relevant to the Plans are included in the anniversary statements.

To retain flexibility in our investment policy and to protect the long term fund, for most types of With-Profits Plans we aim to keep a substantial portion of pay-out values in the form of final bonus and determine regular bonus accordingly.

There are two types of bonus:

Regular bonus1: Depending on the type of plan, a bonus can be added and accumulated to allow the policy value to grow, or paid as cash dividends throughout the term of the plan. We do not guarantee the declaration of the regular bonus, but once declared and added to the plan, the face value of the regular bonus will be guaranteed upon policy termination2 on death or maturity. Our current practice is to declare regular bonuses annually but subject to applicable policy terms this could change if the Board decides to do so.

Final bonus3: This is an additional bonus we may pay when the plan terminates on death, surrender or maturity. The amount of the final bonus may vary depending on when the plan terminates and the variations in the actual performance of the Fund. The amount of the final bonus is not guaranteed and may vary at subsequent declarations.

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The purpose of the final bonus is to bring your plan’s payment in line with the With-Profits Fund’s performance over the lifetime of your plan.

The things that affect the value of the With-Profits Plan include:

- Investment performance- Operating expense - Business risk- Tax- Cost of guarantees and smoothing

Notes:1. Depending on the type of plan, a regular bonus may be referred to as reversionary bonus, cash dividend or

income bonus.

2. Instead of the face value of regular bonus, non-guaranteed cash value of regular bonus is payable upon termination on surrender.

3. Depending on the type of plan, a final bonus may be referred to as a special bonus, terminal dividend or growth bonus.

• How are final bonuses determined?

When regular bonus rates are determined, the main consideration is the future expected investment return. Some of this return is held back with the aim of paying a proportion of the proceeds as final bonus.

• How are regular bonuses determined?

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Since smoothing is an activity that aims over the longer term to produce a stable return to policyholders as a whole, policyholders will benefit differently from the effect of smoothing depending on when the plan started and when it matures accordingly. To achieve fairness between policyholders, final bonus rates depend on the issue year of the plan and hence its relative position in relation to other generations of policyholders to benefit from smoothing.

Terms for smoothing:

In describing the smoothing process and how we work out final bonuses, we use the terms, ”unsmoothed” and “smoothed” when referring to plan values:

• the unsmoothed value is the value of the investments underlying a plan, based upon our With-Profits Fund’s actual performance.

• the smoothed value is the amount that may be paid out, after smoothing has been applied.

We aim to smooth the peaks and troughs of the investment performance of the With-Profits Fund in order to provide a more stable return to policyholders. Over the longer term, we achieve this by holding back some of the investment returns in good years with the aim of using this to boost bonus rates in the years where the investment return has not been so good.

A With-Profits Fund can only achieve this if it has a sensible investment approach and the resources and financial strength to commit over the longer term.

The graph below illustrates how smoothing works. This chart does not represent any of our funds, plan options or any specific time period. Its sole aim is to illustrate the general principle of smoothing.

How does the smoothing process work?

Value

Time

Smoothed Value Unsmoothed Value

Payout some of the held back gains

Some gains held back

Payout some of the held back gains

Some gains held back

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How is fairness between different parties implemented?

In managing a With-Profits Fund conflicts of interest may arise between the various groups and generations of policyholders or between policyholders and shareholders. The company seeks to resolve any conflicts of interest fairly if they arise.

By participating in our With-Profits Fund through the With-Profits Plans, policyholders can receive their share of distributable profits, if any, from our With-Profits Fund in the form of non-guaranteed bonuses. No less than 90% of the distributable profit from our With-Profits Fund will be allocated to With-Profits policyholders. The calculation of the distributable profit of With-Profits Fund is performed separately and is not the same as that of the total profits of Prudential Hong Kong Limited.

Policyholders will receive a fair individual policy value based on asset share determined in line with our philosophy regardless of when they invest, surrender or reach maturity – the aim is to treat everyone fairly. When considering fairness between different groups of policyholders, the company will consider, for example:

- different products- plans with different policy terms (including any guarantees)- plans with different start dates or maturity dates- age of the policyholder when the policy was issued- the extent and nature of claims being made by policyholders (e.g. maturity, death,

surrender)

• Equity between With-Profits policyholders and shareholders

• Equity between different groups of With-Profits policyholders

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What is an Inherited Estate?

As a long established life insurance company, our With-Profits Fund contains an amount of money in excess of the amount we expect to pay out to existing policyholders. This is known as the inherited estate. It has been built up over many years from a number of sources and it provides working capital to support current and future business. The working capital of the With-Profits Fund supports the writing of new business and it generally provides the financial strength needed to support the current business. The inherited estate is legally and beneficially owned by the company.

This capital allows policyholders to benefit from guarantees and allows us greater flexibility to invest in a wider range of assets.

The company hold a substantial amount of capital in the inherited estate. This allows us to demonstrate that our Fund is solvent and is able to meet its obligations to all policyholders in a range of significant adverse economic circumstances. Benefit security is significantly enhanced with this capital buffer.

• Benefits from inherited estate

There are no plans to distribute our With-Profits Fund's inherited estate to policyholders or Prudential shareholders, other than as required as part of the normal smoothing process or to meet guarantees. There is no intention to close our With-Profits Fund for new business, however if it does close for new business, the inherited estate may still be needed to support existing business. Accordingly, in managing the With-Profits Fund, the company is not required, and does not, take account of the prospect of a distribution (or greater distribution) from the inherited estate.

• Distribution of the inherited estate

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• What are the competitive advantages of Prudential in managing With-Profits Plans?

There are a number of competitive advantages of Prudential. - Robust governance in managing With-Profits Plans. - A well diversified investment and product portfolio. - Highly recognised technical expertise to provide trustworthy protections for our clients,

such that policyholders can fulfil their saving and protection goals. - The inherited estate allows policyholders to benefit from guarantees and allows for greater

flexibility to invest in a wider range of assets. This capital can also act as a cushion to withstand an adverse investment environment and allows us to adopt a more aggressive investment strategy for policyholders targeting higher upside potential.

- The sharing of profits between policyholders and shareholders, with no less than 90% of the distributable profit from our With-Profits Fund will be allocated to With-Profits policyholders. The calculation of the distributable profit of With-Profits Fund is performed separately and is not the same as that of the total profits of Prudential Hong Kong Limited.

Frequently Asked Questions

• What is the profit sharing mechanism between shareholders and policyholders?

With-Profits Plans are typically designed for long-term steady capital appreciation through the addition of bonuses. Bonuses depend on the performance of the fund. After a smoothing process, no less than 90% of the distributable profit from our With-Profits Fund will be allocated to With-Profits policyholders. The calculation of the distributable profit of With-Profits Fund is performed separately and is not the same as that of the total profits of Prudential Hong Kong Limited.

• What is the difference between a With-Profits Plan and a non-participating product?

With-Profits Plans allow policyholders to share in the profits and losses of Prudential’s With-Profits Fund. The benefits of most non-participating products are defined when plans are issued, however, these benefits remain constant during the lifetime of the plans.

• Why does the return deviate among different With-Profits Plans?

Different products offer different levels of guarantee and non-guarantee elements, accordingly, the underlying investment strategy of different products may vary and lead to different levels of investment return. Usually products with higher level of guarantee elements will have a lower upside potential, or vice versa.

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• What is the difference between reversionary bonus and cash dividend?

A reversionary bonus is determined by applying a forward-looking approach, which targets to provide a relatively stable return to policyholders throughout the benefit period. A cash dividend adopts a backward-looking approach by referencing to historical investment performance. In other words, the cash dividend declared is relatively more dependent on the historical fund performance.

• What does a policyholder get when the policy is surrendered early?

The policyholder is paid a surrender value which is based on a proportion of asset shares to reflect the redemption charge which is applied for early termination. The proportion of asset shares to be distributed differs by product and the number of years the policy has been held. This is to minimise the detriment to other policyholders in the With-Profits Fund resulting from early withdrawal from surrendering policyholders. In general, we aim to ensure that surrender values progress towards maturity values as the policy term approaches.

• What is guaranteed? Whether your policy benefits from a guarantee will be specified in your policy terms and

conditions.

• What types of With-Profits Plans are offered by Prudential? The complete list of With-Profits Plans offered by Prudential is available at

www.prudential.com.hk/wpproductlist.

• What is the compounding mechanism of the regular bonus?

The regular bonus rates are declared annually and will accumulate throughout the duration of the policy, allowing policy value to grow with time. The face value of regular bonus is guaranteed once declared for an insured event such as death or maturity. On surrender of the policy, the cash value is payable.

• Why are some of Prudential’s products more competitive than others?

Different products offer different levels of protection and saving elements, and different levels of guarantee and non-guarantee elements. The projected values will vary based on the product features.

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Notes

These details are for reference only. They do not represent a contract between Prudential Hong Kong Limited (“Prudential”) and anyone else. If you would like more details about any of the plans mentioned, please ask Prudential for a sample of the policy document.

This document is for Hong Kong distribution only. It is not an offer to sell or solicitation to buy or provide any insurance product outside Hong Kong. Prudential does not offer or sell any insurance product in any jurisdictions outside Hong Kong where such offering or sale of the insurance product is illegal under the laws of such jurisdictions.

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8/F, Prudential TowerThe Gateway, Harbour City, 21 Canton RoadTsim Sha Tsui, Kowloon, Hong KongCustomer Service Hotline: 2281 1333

Corporate Websitewww.prudential.com.hk