Report disclosures 4 Directors’ remuneration report 94 Annual statement from the Chairman of the Remuneration Committee 96 Our executive remuneration at a glance 98 Summary of Directors’ remuneration policy 101 Annual report on remuneration 116 Supplementary information 5 Financial statements 6 European Embedded Value (EEV) basis results 275-309 7 Additional information 313 Additional unaudited financial information 338 Risk factors 344 Glossary 348 Shareholder information 351 How to contact us www.prudential.co.uk
Prudential delivered a strong, broad-based performance in 2014. Our core strategy of focusing on the three main opportunities available to us in Asia, the US and the UK – serving the protection and investment needs of the growing middle class in Asia, providing income in retirement to American baby boomers and meeting the financial needs of an ageing British population – is unchanged. It continues to serve us well.
In focus – find out more about what we do and how we do it
Central to good governance is an experienced and skilled Board that is able both to support the executive and provide appropriate challenge, and we have continued to meet our commitment to implement changes that strengthen our Board.
Our balance sheet continues to be defensively positioned and at the end of the period our Insurance Groups Directive (IGD) surplus6 was estimated at £4.7 billion, equating to coverage of 2.4 times.
In our product portfolio, the proportion of protection business has remained consistent with prior years at 28 per cent of APE sales. Within the savings products, we have seen an increase in participating business, driven mainly by strong demand for our established with-profits products in Hong Kong. We continue to innovate with new benefits and features, with more than 25 per cent of APE sales in 2014 from products that were launched in the past two years.
In 2014 we produced £1,162 million of new business profit, 13 per cent higher than 2013, reflecting our continued progress in Asia.
In Hong Kong, APE sales grew 39 per cent, driven mainly by increases in agency headcount as well as increases in productivity. Hong Kong also directly benefited from significantly improved second-half sales following the renewal of the Standard Chartered Bank partnership. We have been working for a few years on increasing the proportion of protection sales in Hong Kong and this has paid off in 2014, contributing to a strong sales increase of 50 per cent. The Hong Kong branch of the Prudential Assurance Company was successfully domesticated with effect from 1 January 2014.
Onshore bonds APE sales of £232 million increased by 32 per cent, reflecting the strength of our investment proposition. APE sales from with-profits bonds of £214 million were 34 per cent higher, due to continuing demand for our non-guaranteed bond. We expect significant ongoing demand for our with-profits bond, with customers attracted by the benefit of a smoothed return to help manage market volatility and a strong track record of investment growth.
In the wholesale market we wrote seven new bulk annuity deals in 2014 (2013: three), generating APE sales of £171 million (2013: £28 million) and new business profit3 of £105 million (2013: £24 million). Our approach to bulk transactions in the UK will continue to be one of selective participation, where we can bring both significant value to our customers and meet our shareholder return requirements. Through our longstanding presence in this segment of the life and pensions market, we have developed considerable longevity experience, operational scale and a good investment track record, which together represent expertise and capabilities that are increasingly in demand.
Our strategy is underpinned by a set of key operating principles
Notes 1 The comparative results shown above have been prepared using actual exchange rates (AER) basis except where otherwise stated. Comparative results on a constant exchange rate (CER) basis are also shown in financial tables in the Chief Financial Officers’ report on our 2014 financial performance. CAGR is Compound Annual Growth Rate.
Asia life and asset management IFRS operating profit 924 1,075 1,140 >£1,858m Asia underlying free surplus generation8 484 573 592 £0.9 – £1.1bn
Our other Asia markets Our world page 16 13m life customers 90%+ life customer retention rate
Life insurance distribution Prudential—Corporation—Asia—is—well— positioned—in—terms—of—its—scale—and— diversity—of—distribution.—Over—500,000— agents—produce—around—60—per—cent—of— sales,—with—the—remainder—mainly—coming— from—bancassurance—that—includes—exclusive— agreements—with—Standard—Chartered— Bank,—UOB—and—Thanachart.—At—the—core— of—our—distribution—model—is—face-to-face— interaction—with—customers—that—delivers— high-quality,—needs-based—advice.
u r bu sin esses an d th eir p erfo rm an ce 29 Prudential plc Annual Report 2014
Jackson’s Elite Access is a new style of variable annuity that enhances traditional investing through diverse investment options, access to portfolios previously unavailable to retail investors, and tax advantages which help customers seek opportunities and manage risk throughout the economic cycle. — Elite—Access—is—a—logical—extension— of—Jackson’s—variable—annuity—investment— freedom—philosophy,—which—provides— customers—with—a—large—set—of—investment— options—and—the—ability—to—tailor—the— portfolio—as—they—desire.
* One-off release of excess surplus. * After the effect of completing the domestication of the Hong Kong branch of the PAC with-profits fund.
Net cash remittances £m IFRS operating profit1 £m www.mandg.com Measuring our performance page 20
Chief Financial Officer’s report on our 2014 financial performance continued fluctuations—is—not—recognised.—Therefore,— in—the—remainder—of—my—report,—my— comments—on—the—Group’s—operating— performance—exclude—these—short-term,— market-driven—effects.
£358—million),—higher—performance-related— fees—at—£33—million—(2013:—£25—million)—and— £13—million—from—earnings—from—associates— (2013:—£12—million).—The—increase—in— underlying—profit—was—principally—driven— by—higher—average—levels—of—funds—under— management,—following—a—period—of— strong—net—inflows—and—positive—market— movements.—The—increasing—proportion— of—higher-margin—external—retail—business— improved—M&G’s—average—fee—income—to— 38—basis—points—(2013:—37—basis—points).— Higher—income—more—than—matched—the—rise— in—operating—costs—driven—by—increased— headcount—and—infrastructure—investment.— Reflecting—this,—the—underlying—cost—income— ratio,—which—excludes—revenue—from— performance-related—payments—and— earnings—from—associates,—improved—to— 58—per—cent—(2013:—59—per—cent).—
The—Board—has—decided—to—rebase—the— full-year—dividend—upwards—by—10—per—cent,— reflecting—the—2014—financial—performance— of—the—Group.—In—line—with—this,—the—directors— recommend—a—final—dividend—of—25.74—pence— per—share—(2013:—23.84—pence),—which— brings—the—total—dividend—for—the—year—to— 36.93—pence—(2013:—33.57—pence).—This— rebase—has—been—made—possible—by—the— continued—exceptionally—strong— performance—of—the—Group.
9 Free surplus generation represents ‘underlying free surplus’ based on operating movements, including the general insurance commission earned during the period, and excludes market movements, foreign exchange, capital movements, shareholders’ other income and expenditure and centrally arising restructuring and Solvency II implementation costs. In addition, following its reclassification as held for sale during 2013, operating results exclude the result of the Japan life insurance business.
11 Payback period, measured on an undiscounted basis, is the time in which the initial ‘cash’ outflow of investment is expected to be recovered from the ‘cash’ inflows generated by the investment. The ‘cash’ outflow is measured by our investment of free surplus in new business sales. The payback period equals the time taken for new business sales to generate free surplus to cover this investment.
Principles and objective (Unaudited) Risk—is—defined—as—the—uncertainty— that—Prudential—faces—in—successfully— implementing—its—strategies—and—objectives.— This—includes—all—internal—or—external—events,— acts—or—omissions—that—have—the—potential—to— threaten—the—success—and—survival—of— Prudential.
Key Board-level committees Executive personnel Exec/Management committees GHO functions Direct reporting line Regular communication and escalation
Risk culture (Unaudited) We—work—to—promote—a—responsible—risk— culture—in—three—main—ways: a.— —by—the—leadership—and—behaviours— demonstrated—by—management; b.— —by—building—skills—and—capabilities—to— support—management;—and c.— —by—including—risk—management—(through— the—balance—of—risk—with—profitability—and— growth)—in—the—performance—evaluation— of—individuals.
Our—persistency—assumptions—reflect— recent—experience—for—each—relevant—line—of— business,—and—any—expectations—of—future— persistency.—Persistency—risk—is—mitigated—by— appropriate—training—and—sales—processes— and—managed—locally—post-sale—through— regular—experience—monitoring—and—the— identification—of—common—characteristics— of—poor—persistency—business.—Where— appropriate,—allowance—is—also—made—for—the— relationship—–—either—assumed—or—historically— observed—–—between—persistency—and— investment—returns,—and—for—the—resulting— additional—risk.
The—Dodd-Frank—Act—represents—a— comprehensive—overhaul—of—the—financial— services—industry—within—the—US—that,— among—other—reforms—to—financial—services— entities,—products—and—markets,—may— subject—financial—institutions—designated— as—systemically—important—to—heightened— prudential—and—other—requirements— intended—to—prevent—or—mitigate—the—impact— of—future—disruptions—in—the—US—financial— system.—The—full—impact—of—the—Dodd-Frank— Act—on—our—businesses—is—not—currently—clear,— as—many—of—its—provisions—have—a—delayed— effectiveness—and/or—require—rulemaking—or— other—actions—by—various—US—regulators—over— the—coming—years.
Risk mitigation and hedging (Unaudited) We—manage—our—actual—risk—profile—against— our—tolerance—of—risk.—To—do—this,—we— maintain—risk—registers—that—include—details— of—the—risks—we—have—identified—and—of—the— controls—and—mitigating—actions—we—employ— in—managing—them.—Any—mitigation— strategies—involving—large—transactions,— such—as—a—material—derivative—transaction— involving—shareholder—business,—are— subject—to—review—at—Group—level—before— implementation.
Regulatory capital (IGD) (Audited) Prudential—is—subject—to—the—capital— adequacy—requirements—of—the—European— Union—Insurance—Groups—Directive—(IGD)—as— implemented—by—the—Prudential—Regulation— Authority—in—the—UK.—The—IGD—capital— surplus—represents—the—aggregated—surplus— capital—(on—a—Prudential—Regulation— Authority—consistent—basis)—of—the—Group’s— regulated—subsidiaries—less—the—Group’s— borrowings.—No—diversification—benefit—is— recognised.—We—estimate—that—our—IGD— capital—surplus—is—£4.7—billion—at— 31—December—2014—(before—taking—into— account—2014—final—dividend),—with—available— capital—covering—our—capital—requirements— 2.4—times.—This—compares—to—a—capital— surplus—of—£5.1—billion—at—the—end—of—2013— (before—taking—into—account—the—2013— final—dividend).
Charitable arts sponsorships Prudential—has—a—proud—tradition—as—a— supporter—of—the—arts.—In—the—UK,—we— support—a—number—of—charitable—institutions— including—the—Royal—Opera—House,—the— National—Theatre,—Barbican—Centre,—the— National—Gallery—and—the—British—Museum.— With—each—of—these—institutions—we—seek—to— focus—our—partnerships—on—education—and— access—to—the—arts—for—the—wider—community.—
Director. Nic started his career at PricewaterhouseCoopers where he worked in both London and Paris. In December 2014 Nic was appointed Chairman of the European Insurance CFO Forum. Age 49.
Current external appointments Michael has been a Trustee of the Grosvenor Estate since October 2008 and was appointed as a non-executive director of
Current external appointments Ann is a non-executive director of British American Tobacco p.l.c., Rio Tinto plc, Rio Tinto Limited, UBS Group AG and UBS AG. Age 59.
Alistair acted as a non-executive director of the Foreign & Commonwealth Office from 2005 to 2010 and chaired the Audit Committee until 2009.
The Chairman is also responsible for ensuring that all directors continually update their skills, knowledge and familiarity with the Company. Directors regularly receive reports facilitating greater awareness and understanding of the Group’s businesses and the regulatory and industry-specific environments in which it operates. The Board’s overseas visit enabled the directors to develop a fuller understanding of the Group’s operations and provided the opportunity to meet with the local senior management teams.
The role and responsibilities of the Committee are set out in its terms of reference, which are reviewed by the Committee and approved by the Board on an annual basis. The terms of reference can be found on the Company’s website. In overview, the Committee’s oversight responsibilities fall into the following principal areas: financial reporting, the effectiveness of internal control and risk management, external audit, compliance, financial crime and whistleblowing, internal audit and the Group governance framework.
Effectiveness To—assess—the—effectiveness—of—the—auditor,— the—Committee—reviewed—the—audit— approach—and—strategy—and—received—a— report—on—their—performance.—The—evaluation— was—conducted—using—a—questionnaire— which—was—circulated—to—the—Committee,— the—Chief—Financial—Officer—and—the—Group’s— senior—finance—leadership—for—completion.— The—feedback—provided—was—reviewed—and— compiled—into—a—report—for—the—Committee— which—covered—areas—such—as—the—knowledge— and—expertise—of—the—partners—and—team— members,—their—understanding—of—the— Group,—the—resourcing—applied—to—the—audit— and—continuity—of—the—team,—liaison—with— Group-wide—internal—audit—and—approach—to— resolution—of—issues,—as—well—as—factors—such— as—their—coordination—across—the—Group’s— multiple—jurisdictions—and—quality—of—their— written—and—oral—communication.—The— degree—of—challenge—and—robustness— of—approach—to—the—audit—were—key— components—of—the—evaluation.—Audit—fees— and—the—FRC—Audit—Quality—review—findings— were—also—considered.
B o ard co m m ittee rep o rts C
positions—and—their—sensitivities—are—referred— to—in—the—Strategic—report—on—pages—51—to—60.— Specifically,—the—Group’s—borrowings—are— detailed—in—note—C6—on—pages—225—to—226,— the—market—risk—and—liquidity—analysis— associated—with—the—Group’s—assets—and— liabilities—can—be—found—in—note—C3.5(a)—on— pages—199—to—200,—policyholder—liability— maturity—profile—by—business—units—in—notes— C4.1(b),—(c)—and—(d)—on—pages—207,—209—and— 210—respectively,—cash—flow—details—in—the— consolidated—statement—of—cash—flows—and— provisions—and—contingencies—in—note—C12— on—page—254—.—The—directors—therefore—have— continued—to—adopt—the—going—concern—basis— of—accounting—in—preparing—the—financial— statements—for—the—year—ended— 31—December—2014.—
Statu to ry an d regu lato ry d isclo su res
In determining executive directors’ packages for 2015, the Committee was conscious to balance restraint with the need to recognise particular changes in the scope of some roles. All executive directors received a 2015 salary increase of 3 per cent. These increases are in line with those awarded to other Group employees. The exception was the Chief Executive of PCA, who received a 5 per cent increase to reflect inflation and employee salary increases in the Asian market. Changes were made to the maximum bonus opportunities and long-term incentive awards of the Chief Executives of PCA and of UK & Europe, as described in the Annual Report on Remuneration. These changes reflect the growing scale and strategic impact of these roles, and the personal contribution made by the incumbents. A number of the Company’s largest shareholders were consulted on these changes.
For business unit CEOs, awards vest based on TSR and business unit IFRS profit. For other executives, awards are subject to TSR and Group IFRS profit targets.
The Committee keeps the performance conditions under review to ensure that future awards remain aligned with strategy.
The operation of the Committee Members Lord Turnbull (Chairman) Anthony Nightingale Kai Nargolwala Philip Remnant
June 2014 Review the remuneration of senior executives across the Group, senior risk staff and of employees with a remuneration opportunity over £1 million per annum; and review progress towards share ownership guidelines by the Chairman, executive directors and Group Executive Committee members.
Notes 1 Pierre-Olivier Bouée was appointed to the Board on 1 April 2014. The bonus shown above was paid in respect of his services as an Executive director. 2 John Foley stepped down from the Board on 1 April 2014. The bonus shown above was paid in respect of his services as an Executive director. Please see the
Group Performance Share Plan (GPSP) and UK BUPP awards In 2012, all executive directors were made awards under the GPSP. The line chart below compares Prudential’s TSR during the performance period (1 January 2012 to 31 December 2014) with that of the peer group index TSR. Identical performance conditions apply to the PLTIP award made to Jackie Hunt on her recruitment which replaced a 2012 award made by her previous employer. As a result of Prudential’s excellent TSR performance, which was in excess of 120 per cent of the index, these awards will be released in full: Dec 2011 Dec 2012 Dec 2013 Dec 2014
Prudential TSR v FTSE 100 and International Insurers – total return over six years to December 2014
Group Chief Executive 3.0% 7.3% 3.2% All UK employees 3.1% 10.4% 11.2%
– Chief Executive, UK & Europe; increase in maximum AIP and LTIP awards to 175 per cent and 250 per cent of salary respectively. The scope of the incumbent’s role has increased due to the Group’s expansion into Africa. Additionally, to reflect the ambition of the UK & Europe business as it relates to the Group’s growth and cash ambitions. The incumbent has also demonstrated considerable personal performance and contribution to the Group.
Mike Wells 1,3 JNL PSP 2010 141,000 568.5 113,890 – 31 Dec 13
Deferred 2012 Group deferred bonus plan award 2013 8,106 199 8,305 31 Dec 15 1,055
Deferred 2013 annual incentive award 2014 14,667 362 15,029 31 Dec 16 1,317
S u p p lem en tary in fo rm atio n
Details of executive directors’ rights under the SAYE scheme are set out in the ‘Statement of directors’ shareholdings‘.
Interest income and expense and dividend income included in result before tax (8,315) (8,345) Other non-cash itemsnote (ii) 174 81 Operating cash items: Interest receipts 7,155 6,961 Dividend receipts 1,559 1,738 Tax paid B5 (721) (418)
(iv) Structural borrowings of shareholder-financed operations exclude borrowings to support short-term fixed income securities programmes, non-recourse borrowings of investment subsidiaries of shareholder-financed operations and other borrowings of shareholder-financed operations. Cash flows in respect of these borrowings are included within cash flows from operating activities.
The limited partnerships consolidated by the Group include Qualifying Partnerships as defined under the UK Partnerships (Accounts) Regulations 2008 (the ‘Partnerships Act’). Certain of these limited partnerships have taken advantage of the exemption under regulation 7 of the Partnerships Act from the financial statements requirements under regulations 4 to 6, on the basis that these limited partnerships are dealt with on a consolidated basis in these financial statements.
The Group generates returns and retains the ownership risks in investment vehicles commensurate to its participation and does not have any further exposure to the residual risks of the OEICs and UTs. For these OEICs and UTs, the Group is not deemed to control the entities but to be acting as an agent.
The impact of the duration of the security on the calculation of the revised estimated cash flows
ack gro u n d an d acco u n tin g p o licies 139 Prudential plc Annual Report 2014 embedded derivatives are not closely related to the economic characteristics and risks of the host instrument, and where the hybrid instrument is not measured at fair value with the changes in fair value recognised in the income statement, the embedded derivative is bifurcated and carried at fair value as a derivative in accordance with IAS 39. For Jackson’s ‘not for life’ Guaranteed Minimum Withdrawal Benefit and Fixed Index Annuity reserves the determination of fair value requires assumptions regarding future mix of Separate Account assets, equity volatility levels, and policyholder behaviour.
z Earnings per share Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year, excluding those held in employee share trusts and consolidated unit trusts and OEICs, which are treated as cancelled.
The Group is assessing the impact of this standard but it is not expected to have a significant impact on the Group’s financial statements.
(iii) Other derivative value movements The principal example of non-equity based derivatives (for example interest rate swaps and swaptions) whose value movements are excluded from operating profit arises in Jackson. Non-equity based derivatives are primarily held by Jackson as part of a broadly-based hedging programme for features of Jackson’s bond portfolio (for which value movements are booked in the statement of comprehensive income rather than the income statement), product liabilities (for which US GAAP accounting as ‘grandfathered’ under IFRS 4 does not fully reflect the economic features being hedged), and the interest rate exposure attaching to equity-based embedded derivatives.
Operating profit (loss) based on longer-term investment returns 1,050 1,431 776 488 12 90 3,847 (661) 3,186
Short-term fluctuations in investment returns on shareholder-backed business B1.2 (1,110) 318 (792) (31.1)p (31.0)p
Deferred acquisition costs and other intangible assets C5.2(b) 54 – 7 61 – – – 61
(iii) Cash and cash equivalents consist of cash at bank and in hand, deposits held at call with banks, treasury bills and other short-term highly liquid investments with less than 90 days’ maturity from the date of acquisition. The component breakdown is as follows: Cash equivalents 1,243 1,180
alan ce sh eet n o tes 171 Prudential plc Annual Report 2014
Assets Intangible assets attributable to shareholders: Deferred acquisition costs and other intangible assets – – 1,911 1,911 1,026
Core structural borrowings of shareholder-financed operations – 160 160 150 Operational borrowings attributable to shareholder-financed operations – 179 179 142 Deferred tax liabilities – 2,308 2,308 1,948 Other non-insurance liabilities note (v) – 5,079 5,079 4,659
(iii) Equity securities and portfolio holdings in unit trusts include investments in mutual funds, the majority of which are equity-based. (iv) Included within other non-investment and non-cash assets of £6,617 million (2013: £6,710 million) were balances of £5,979 million (2013: £6,065 million) for reinsurers’ share of insurance contract liabilities. Of the £5,979 million as at 31 December 2014, £5,174 million related to the reinsurance ceded by the REALIC business (2013: £5,410 million). Jackson holds collateral for certain of these reinsurance arrangements with a corresponding funds withheld liability. As of 31 December 2014, the funds withheld liability of £2,201 million (2013: £2,051 million) was recorded within other non-insurance liabilities.
Net increase (decrease) in equity 621 (897) Shareholders’ equity at beginning of year 3,446 4,343
Notes (i) The M&G statement of financial position includes the assets and liabilities in respect of Prudential Capital. (ii) Intra-group debt represented by operational borrowings at Group level, which are in respect of Prudential Capital’s short-term fixed income security programme and comprise: Commercial paper 1,704 1,634 Medium Term Notes 300 299
Investment properties 11,477 – – 11,477 11,477 Investments accounted for using the equity method – – 809 809 Loans note (iv) 2,137 – 10,429 12,566 12,995 Equity securities and portfolio holdings in unit trusts 120,222 – – 120,222 120,222 Debt securities note (v) 102,700 30,205 – 132,905 132,905 Other investments note (vi) 6,265 – – 6,265 6,265 Deposits – – 12,213 12,213 12,213
(vii) Assets and liabilities held for sale are valued at fair value less costs to sell.
Equity securities and portfolio holdings in unit trusts 649 118 2 26 (50) – – – 2 – 747
(b) A net asset of £144 million (2013: £76 million) was held to support non-linked shareholder-backed business. If the value of all the level 3 instruments held to support non-linked shareholder-backed business valued internally was varied downwards by 10 per cent, the change in valuation would be £14 million (2013: £8 million), which would reduce shareholders’ equity by this amount before tax. Of this amount, a decrease of £13 million (2013: a decrease of £6 million) would pass through the income statement substantially as part of short-term fluctuations in investment returns outside of operating profit and a £1 million decrease (2013: a decrease of £2 million) would be included as part of other comprehensive income, being unrealised movements on assets classified as available-for-sale.
The following table analyses debt securities of ‘Other business’ which are not externally rated by S&P, Moody’s or Fitch.
Debt securities classified as available-for-sale in an unrealised loss position a Fair value of securities as a percentage of book value The following table shows the fair value of the debt securities in a gross unrealised loss position for various percentages of book value: Fair value
d Asset management operations The debt securities are all held by M&G (including Prudential Capital).
C3: Assets and liabilities – Classification and Measurement continued b US insurance operations The loans of the Group’s US insurance operations comprise: Loans backing liabilities for
Net asset value attributable to unit holders of consolidated unit trusts and similar funds 7,357 7,357 – – – – – – 7,357 2013 £m
The amount of exchange gain recognised in the income statement in 2014, except for those arising on financial instruments measured at fair value through profit or loss, is £89 million (2013: £284 million loss). This constitutes £1 million loss (2013: £1 million gain) on Medium Term Notes liabilities and £90 million of net gain (2013: £285 million net loss), mainly arising on investments of the PAC with-profits fund. The gains/losses on Medium Term Notes liabilities are fully offset by value movements on cross-currency swaps, which are measured at fair value through profit or loss.
The total fair value balances of derivative assets and liabilities as at 31 December 2014 were as follows: 2014 £m
The following tables present the gross and net information about the Group’s financial instruments subject to master netting arrangements: Gross amount presented in the consolidated statement of financial position note (i)
For 2014, the amount of gross unrealised losses for fixed maturity securities classified as available-for-sale under IFRS in an unrealised loss position was £180 million (2013: £849 million). Notes B1.2 and C3.3 provide further details on the impairment charges and unrealised losses of Jackson’s available-for-sale securities.
§ The policyholder liabilities of the Asia insurance operations of £38,705 million, shown in the table above, is after deducting the intra-group reinsurance liabilities ceded by the UK insurance operations of £1,363 million to the Hong Kong with-profits business. Including this amount total Asia policyholder liabilities are £40,068 million.
(c) The policyholder liabilities of the Asia insurance operations of £38,705 million as shown in the table above is after deducting the intra-group reinsurance liabilities ceded by the UK insurance operations of £1,363 million to the Hong Kong with-profits business. Including this amount total Asia policyholder liabilities is £40,068 million.
On 1 January 2014, following consultation with the policyholders of PAC and regulators and court approval, the Hong Kong branch of PAC was transferred to separate subsidiaries established in Hong Kong. From this date the unallocated surplus of the Hong Kong with-profits business is reported within the Asia insurance operations segment.
A Risk-Based Capital framework applying the gross premium valuation method is adopted by Singapore, Malaysia, Thailand and from 2013, Indonesia. In applying this approach, an overlay constraint to the method is applied such that no negative reserves are derived at an individual policyholder level.
The primary differences between variable annuities and fixed interest rate or fixed index annuities are investment risk and return. If a policyholder chooses a variable annuity, the rate of return depends upon the performance of the selected fund portfolio. Policyholders may allocate their investment to either the fixed account or a selection of variable accounts. Investment risk on the variable account is borne by the policyholder, while investment risk on the fixed account is borne by Jackson through guaranteed minimum fixed rates of return. At 31 December 2014, 5 per cent (2013: 6 per cent) of variable annuity funds were in fixed accounts. Jackson had variable annuity funds in fixed accounts totalling £4.4 billion (2013: £4.2 billion ) with minimum guaranteed rates ranging from 1.0 per cent to 3.0 per cent and a 1.81 per cent average guaranteed rate (2013: 1.0 per cent to 3.0 per cent and a 1.85 per cent average guaranteed rate).
v Aggregate account values The table below shows the distribution of account values for fixed annuities (fixed interest rate and fixed index), the fixed account portion of variable annuities, and interest sensitive life business within the range of minimum guaranteed interest rates as described in notes (i) to (iii) above as at 31 December 2014 and 2013: Fixed annuities and the fixed account portion of variable annuities £m
Further details on the determination of the two types of the bonuses: ‘regular’ and ‘final’ are provided below.
When target bonus levels change the PAC Board of directors has regard to the overall strength of the long-term fund when determining the length of time over which it will seek to achieve the amended prudent target bonus level.
alan ce sh eet n o tes 219 Prudential plc Annual Report 2014 ii WPSF and SAIF The policyholder liabilities reported for the WPSF are primarily for two broad types of business. These are accumulating and conventional with-profits contracts. The policyholder liabilities of the WPSF are accounted for under FRS 27.
alan ce sh eet n o tes 227 Prudential plc Annual Report 2014
The effect of Group diversification across the Group’s life businesses is to significantly reduce the aggregate standalone volatility risk to IFRS operating profit based on longer-term investment returns. The effect is almost wholly explained by the correlations across risk types, in particular mortality and longevity risk.
Profit before tax attributable to shareholders (187) (93) (114) (57) Related deferred tax (where applicable) 23 11 24 12
C7: Risk and sensitivity analysis continued i Sensitivity to equity risk At 31 December 2014 and 2013, Jackson had variable annuity contracts with guarantees, for which the net amount at risk (‘NAR’) is defined as the amount of guaranteed benefit in excess of current account value, as follows: Minimum return
alan ce sh eet n o tes 233 Prudential plc Annual Report 2014
Account balances of contracts with guarantees were invested in variable separate accounts as follows: Mutual fund type: Money market 675 703
Except to the extent of any asset/liability duration mismatch which is reviewed regularly, and exposure to credit risk, the sensitivity of the Group’s results to market risk for movements in the carrying value of the liabilities and covering assets is broadly neutral on a net basis.
In summary, profits from shareholder-backed annuity business are most sensitive to: — The extent to which the duration of the assets held closely matches the expected duration of the liabilities under the contracts; — Actual versus expected default rates on assets held; — The difference between long-term rates of return on corporate bonds and risk-free rates; — The variance between actual and expected mortality experience; — The extent to which changes to the assumed rate of improvements in mortality give rise to changes in the measurement of liabilities; and
IAS 19 pension asset (liability) on the Group statement of financial position note (iv) 130 (144) (72) (1) (87) 124 (115) (78) (1) (70)
(ii) The deficit of SASPS has been allocated approximately 50 per cent to the PAC with-profits fund and 50 per cent to the shareholders’ fund. (iii) The underlying position on an economic basis reflects the assets (including investments in Prudential insurance policies that are offset against liabilities to policyholders on the Group consolidation) and the liabilities of the schemes. (iv) At 31 December 2014, the PSPS pension asset of £130 million (2013: £124 million) and the other schemes’ pension liabilities of £217 million (2013: £194 million)
Rate of increase of pensions in payment for inflation: Guaranteed (maximum 5%) 3.0 Guaranteed (maximum 2.5%) 2.5 Discretionary Nil
Changes in management policy (100) – – – (100) Other factors (including new business)note (v) (611) 536 238 3,081 3,244
Arising on acquisitions of subsidiaries – 1 1 1 77 78
Contingent rent is that portion of the lease payments that is not fixed in amount but is based on the future value of a factor that changes other than with the passage of time. There was no contingent rent recognised as income or expense in 2014 and 2013.
In 2014 and 2013, other transactions with directors were not deemed to be significant both by virtue of their size and in the context of the directors’ financial positions. All of these transactions are on terms broadly equivalent to those that prevail in arm’s length transactions.
Share-based payment The Group offers share award and option plans for certain key employees and a Save As You Earn (‘SAYE’) plan for all UK and certain overseas employees. The share-based payment plans operated by the Group are mainly equity-settled plans with a few cash-settled plans.
In February 2014, the Company dissolved part of the Group’s corporate structure relating to central finance subsidiaries, resulting in a reduction of £12,791 million in the cost of shares in subsidiary undertakings. This dissolution was accompanied by an increase of £6,326 million in loans to subsidiary undertakings and a reduction of £6,114 million in amounts owed to subsidiary undertakings falling due after more than one year. The balance of £1,113 million owed to subsidiary undertakings was offset against loans to subsidiary undertakings.
The principal subsidiary undertakings of the Company at 31 December 2014 were: Main activity Country of incorporation
Equities 269 3.9 145 2.4 123 1.9 210 3.3 548 10.3 Bonds 6,206 88.7 5,048 83.5 5,247 82.0 5,547 86.2 3,864 72.2 Properties 93 1.3 71 1.2 167 2.6 297 4.6 199 3.7 Other assets 429 6.1 778 12.9 863 13.5 378 5.9 740 13.8
A summary of the ordinary shares in issue and the options outstanding to subscribe for the Company’s shares at 31 December 2014 is set out in note C10 of the Group financial statements.
Independent auditor’s report to the members of Prudential plc only continued
Based on EEV basis shareholders’ equity of £29,161 million (2013: £24,856 million) (in pence) 1,136p 971p Number of issued shares at year end (millions) 2,568 2,560
A detailed description of the EEV methodology and accounting presentation is provided in note 16.
Based on post-tax operating profit including longer-term investment returns 160.7p 165.0p 154.4p (3%) 4%
Notes (a) The decrease in unwind of discount and other expected returns of £(20) million from £668 million for 2013 to £648 million for 2014 is impacted by the effect of lower interest rates of £(55) million, and a £(61) million adverse foreign currency translation effect, partially offset by £96 million mainly for the increase in the opening in-force value.
(f) The positive persistency and withdrawals experience variance in 2014 of £44 million (2013: £36 million) reflects favourable experience principally in Hong Kong across all product groups.
Short-term fluctuations in investment returns included in profit for the year arise as follows: (i) Group summary 2014 £m 2013* £m
(iii) US operations The short-term fluctuations in investment returns for US operations comprise: 2014 £m 2013* £m
On 10 November 2014, the Prudential Assurance Company Limited announced an agreement to sell its 25 per cent equity stake in the PruHealth and PruProtect businesses to Discovery Group Europe Limited. The sale was completed on 14 November 2014. This transaction gave rise to a gain on disposal of £44 million.
Underlying movement: Investment in new businessnotes (a), (g) (606) – (606) (637) Business in force: Expected in-force cash flows (including expected return on net assets) 2,382 489 2,871 2,621
Net increase in shareholders’ equity 2,047 1,413 1,062 4,522 (206) 4,316 Shareholders' equity at 1 January: Effect of domestication of Hong Kong branch
Group Shareholders’ equity at 1 January: Effect of domestication of Hong Kong branch on
New business contributionnotes (ii) and 3 (73) 107 34 236 270 Existing business – transfer to net worth 565 (83) 482 (482) – Expected return on existing businessnote 4 14 33 47 363 410 Changes in operating assumptions and experience variancesnote 4 86 (12) 74 (8) 66 Solvency II and restructuring costs (20) – (20) – (20)
Value of in-force business before deduction of cost of capital and time value of guarantees 10,168 5,914 5,756 21,838 8,540 4,769 5,135 18,444
Net value of in-force business 9,638 5,253 5,484 20,375 8,143 4,403 4,893 17,439
Covered business comprises the Group’s long-term business operations, with two exceptions: — The closed Scottish Amicable Insurance Fund (SAIF) which is excluded from covered business. SAIF is a ring-fenced sub-fund of the Prudential Assurance Company (PAC) long-term fund, established by a Court Approved Scheme of Arrangement in October 1997. SAIF is closed to new business and the assets and liabilities of the fund are wholly attributable to the policyholders of the fund; and
With-profits products provide returns to policyholders through bonuses that are smoothed. There are two types of bonuses – annual and final. Annual bonuses are declared once a year and, once credited, are guaranteed in accordance with the terms of the particular product. Unlike annual bonuses, final bonuses are guaranteed only until the next bonus declaration. The with-profits fund also held a provision on the Pillar I Peak 2 basis of £50 million at 31 December 2014 (31 December 2013: £36 million) to honour guarantees on a small number of guaranteed annuity option products.
For the purposes of presentation in the EEV results, the results on this basis are reconfigured. Under this approach, the projected earned rate of return on the debt securities held is determined after allowing for expected long-term defaults and, where necessary, an additional allowance for an element of short-term downgrades and defaults to bring the allowance in the earned rate up to best estimate levels. The allowances for credit risk premium, 1-notch downgrade and the remaining element of short-term downgrade and default allowances are incorporated into the risk margin included in the discount rate, as shown in note 17(iii)(b).
— Expenditure of the Asia regional head office that is not allocated to the covered business or asset management operations which is charged as incurred. These costs are primarily for corporate-related activities and are included within corporate expenditure.
II. Other information 320 a Holding company cash flow 321 b Funds under management 322 c Development of economic capital 328 d Reconciliation of expected transfer of value of in-force (VIF) and required capital business to free surplus 332 e Foreign currency source of key metrics 332 f Option schemes 335 g Selected historical financial information of Prudential 337 h Results of sold PruHealth and PruProtect businesses
Margin on revenues 1,413 – 187 1,600 Expenses: Expected return on shareholder assets 52 22 134 208
Notes (i) Prudential Group funds under management of £341.6 billion (2013: £299.6 billion) comprise: Total financial investments per the consolidated statement of financial position 337.4 296.4 Less: investments in joint ventures and associates accounted for using the equity method (1.0) (0.8) Investment properties which are held for sale or occupied by the Group (included in other IFRS captions) 0.3 0.3 Internally managed funds held in joint ventures 4.9 3.7
— Holding companies are measured on a Solvency II basis, as if they were insurance companies, in line with Solvency II rules.
A d d itio n al in fo rm atio n 325 Prudential plc Annual Report 2014
Note 1 For UK annuity business, the matching adjustment is intended to significantly reduce the sensitivity of surplus to credit spreads. The UK annuity credit sensitivity is therefore applied as 15 per cent of the portfolio downgrading, combined with an increase in credit spread stress of 88 basis points (which in total is commensurate with a 100 basis point credit spread stress). For Jackson, a 10x increase in expected defaults is applied in line with IGD sensitivities since credit spreads do not directly affect the US RBC result.
2014 expected free surplus generation for years 2015 to 2054* – 953 920 883 846 819 20,156 24,577
The weighted average fair value of options granted under the plan in the year was £11.55.
Profit before tax (being tax attributable to shareholders’ and policyholders’ returns)note 1 3,154 2,082 3,117 1,859 1,890
Profit before tax attributable to shareholders 4,343 4,358 3,769 2,191 2,586
EEV shareholders’ equity, excluding non-controlling interests 29.2 24.9 22.4 19.6 18.2 Insurance Groups Directive capital surplus before final
Prudential is subject to the risk of potential sovereign debt credit deterioration owing to the amounts of sovereign debt obligations held in its investment portfolio Prudential is subject to the risk of potential sovereign debt credit deterioration on the
The resolution of several issues affecting the financial services industry could have a negative impact on Prudential’s reported results or on its relations with current and potential customers Prudential is, and in the future may be, subject to legal and regulatory actions in the ordinary course of its business, both in the UK and internationally. These actions could involve a review of types of business sold in the past under acceptable market practices at the time, such as the requirement in the UK to provide redress to certain past purchasers of pension and mortgage endowment policies, changes to the tax regime affecting products, and regulatory reviews on products sold and industry practices, including, in the latter case, lines of business it has closed.
Litigation, disputes and regulatory investigations may adversely affect Prudential’s profitability and financial condition Prudential is, and may be in the future, subject to legal actions, disputes and regulatory investigations in various contexts, including in the ordinary course of its insurance, investment management and other business operations. These legal
Participating funds Distinct portfolios where the policyholders have a contractual right to receive, at the discretion of the insurer, additional benefits based on factors such as the performance of a pool of assets held within the fund, as a supplement to any guaranteed benefits. The insurer may either have discretion as to the timing of the allocation of those benefits to participating policyholders or may have discretion as to the timing and the amount of the additional benefits. For Prudential, the most significant participating funds are with-profits funds for businesses written in the UK, Hong Kong, Malaysia and Singapore.
Payback period Payback period is the time in which the initial ‘cash’ outflow of investment is expected to be recovered from the ‘cash’ inflows generated by the investment. We measure cash outflow by our investment of free surplus in new business sales. The payback period equals the time taken for this business to generate free surplus to cover this investment. Payback periods are measured on an undiscounted basis.
Total shareholder return (TSR) TSR represents the growth in the value of a share plus the value of dividends paid, assuming that the dividends are reinvested in the Company’s shares on the ex-dividend date.
Details of the 2014 AGM, including the major items discussed at the meeting and the results of the voting, can be found on the Company’s website.
Prudential also maintains secondary listings on the Singapore Stock Exchange, and the New York Stock Exchange in the form of American Depositary Receipts which are referenced to ordinary shares on the main UK register.
In accordance with the terms of a waiver granted by the Hong Kong Stock Exchange, Prudential confirms that it complies with the applicable law and regulation in the UK in relation to the holding of shares in treasury, and with the conditions of the waiver in connection with the purchase of own shares and any treasury shares it may hold.
ADRs J.P. Morgan, the authorised depositary bank, at JPMorgan Chase & Co, PO Box 64504, St. Paul, MN 55164‑0504, USA.