New business profit was up 16 per cent to £2,843 million (2012: £2,452 million), mainly led by 15 per cent growth in Asia, with strong contributions from both agency and bancassurance channels and 24 per cent growth from the US, reflecting the positive impact of pricing and product actions as well as the beneficial impact of rising interest rates.
We had already achieved five of the six objectives early. To recap: — At full year 2012, we more than doubled Asia’s 2009 IFRS operating profit from £465 million to £988 million12 (2013 objective: £930 million), achieving this objective a year earlier than planned; — We also exceeded Asia’s 2013 cash objective of £300 million, delivering £341 million at full year 2012, again achieving this objective a year earlier than planned; — At the half year stage in 2013, we achieved two further objectives: delivering cumulative net cash remittances to the Group of almost £4.1 billion over the three and a half year period from 2010 against our end-2013 target level of £3.8 billion; — Also at the half year stage in 2013, our US business remitted £294 million to Group, exceeding its 2013 cash remittance objective of £260 million; and
Group Chief Executive’s report continued 17 per cent higher at £400 million (2012: £341 million).
Eastspring Investments saw net third-party inflows of £1.6 billion5, down on the half year mainly due to market volatility in the second half. Total funds under management (including money market funds) were up 3 per cent on the prior year (10 per cent on a constant currency basis) with net inflows and positive market movements being offset by currency weakness relative to UK sterling. IFRS profits were up 7 per cent and reflect discipline in cost management in challenging market conditions.
In September 2013, Jackie Hunt joined as Chief Executive, Prudential UK and Europe, and became a member of the Board of Prudential plc. Jackie was previously Chief Financial Officer at Standard Life plc. Jackie is focused on delivering the strategic priorities for the business as outlined at the December 2013 investor conference.
The Asian middle class population is forecast to double by 2020 and will then represent over half of the global middle class. This group is getting wealthier and will have significant and growing needs for protection against illness and accident.
Net business unit remittances increased by 12 per cent in 2013 when compared to 2012, with all business units completing their 2013 cash remittance objective.
‘Prudential’s Asian strategy has proved very effective. Its success is attributable to our disciplined focus on execution together with a passion to innovate and improve the services we provide to our distributors and customers. We aim to attract, develop and retain the best people in the industry who are highly motivated by the vital role we play in our communities. We are very much an organisation that does well by doing good.’
Prudential’s strategy ‘to accelerate’ in Asia is well established and continues to prioritise: B Opportunities for profitable growth over the long term; B Products that provide effective solutions to customers’ savings and protection needs; B High quality, multichannel distribution; and
Social welfare provisions vary by market but generally fall well below the levels people need to sustain their lifestyles in the event of a personal tragedy such as the diagnosis of a critical illness. Also, while basic medical services may be provided by the state, there can be a high level of out-of-pocket expenses, creating demand for financial solutions to significantly improve an individual’s experience through access to private medical services. Therefore, critical illness and medical riders are popular additions to life insurance policies.
Although Prudential has been operating in Asia for almost 90 years, we began building our business in earnest in 1994 with the establishment of Prudential Corporation Asia. Since then Prudential Corporation Asia has entered new markets, added considerable agency scale and launched bank distribution, developed product capabilities – particularly unit-linked – and built a customer-centric brand anchored on the tag line ‘Always Listening, Always Understanding’.
B Developed with world-leading experts (Dr Alice Wilder PhD and Turner Broadcasting)
‘Jackson’s strategy remains focused on providing value to its customers and driving shareholder value while operating within a conservative risk management framework. This approach has enabled us to successfully navigate the significant macroeconomic and financial market challenges of the last six years and ensured a continuation of our strong performance in 2013.’
5, 10 and 15 year gross cumulative return to end 20137
IFRS short-term fluctuations IFRS operating profit is based on longerterm investment return assumptions. The difference between actual investment returns recorded in the income statement and these longer-term returns is reported within short-term fluctuations in investment returns. In 2013 for our insurance operations these total negative £1,083 million, comprising negative £204 million for Asia, negative £625 million in the US and negative £254 million in the UK.
By 31 December 2013 cumulative net remittances of £4.6 billion have been delivered by business operations since the beginning of 2010, exceeding the cumulative 2010 to 2013 net remittance objective of £3.8 billion. These remittances have been supported by strong underlying free surplus generated across all four business operations, totalling in excess of £8.2 billion over the same period since the start of 2010.
Furthermore, on a statutory (Pillar 1) basis the total credit default reserve for the UK shareholder annuity funds also contributes to protecting our capital position in excess of the IGD surplus. Notwithstanding the absence of defaults in the period, at 31 December 2013 we have maintained sizeable credit default reserves at £1.9 billion (31 December 2012: £2.1 billion), representing 47 per cent of
During 2013 most equity markets recorded strong positive movements, although volatility increased through the period on speculation about the timing of the slowdown in the US Federal Reserve’s quantitative easing programme. This also led to a sharp rise in US yields to 3.1 per cent at 31 December 2013, compared to 1.8 per cent at the end of 2012, with yields in many other global markets following higher. Higher yields generate adverse value movements on our holdings of fixed-income securities, which have given rise to negative short-term investment variances in some of our operations. However, these higher yields are also expected to generate higher investment returns going forward, whose estimated positive future value is also included within the non-operating results on the EEV basis of reporting and offsets the effect of the negative short-term investment variances.
Corporate transactions Agreement to sell Japan life business On 16 July 2013 the Group reached an agreement to sell its closed book life insurance business in Japan, PCA Life Insurance Company Limited, to SBI Holdings Inc. for US$85 million (£51 million at 31 December 2013 closing exchange rate). The transaction is subject to regulatory approval and is expected to complete in the second quarter of 2014. Consistent with the classification of the business as held for sale, the IFRS and EEV carrying values have been set to £48 million, representing the estimated proceeds, net of related expenses of £3 million. The IFRS loss of £102 million (2012: profit of £17 million) and EEV loss of £35 million (2012: profit of £21 million) comprises the 2013 reduction on re-measuring the carrying value of the business and its trading results.
The Jackson IFRS shareholders’ equity and US statutory capital are sensitive to the effects of policyholder behaviour on the valuation of GMWB guarantees. Jackson hedges the guarantees on its variable annuity book on an economic basis, and thus accepts variability in its accounting results in the short term in order to achieve the appropriate economic result. In particular, under Prudential’s Group IFRS reporting, the measurement of the Jackson variable annuity guarantees is typically less sensitive to market movements than the corresponding hedging derivatives, which are held at market value. However, depending on the level of hedging conducted regarding a particular risk type, certain market movements can drive volatility in the economic result which may be less significant under IFRS reporting.
The shareholder-owned debt and loan portfolio of the Group’s asset management operations of £2.0 billion as at 31 December 2013 is principally related to Prudential Capital operations. Prudential Capital generates revenue by providing bridging finance, managing investments and operating a securities lending and cash management business for the Prudential Group and our clients.
All over-the-counter derivative transactions, with the exception of some Asian transactions, are conducted under standardised International Swaps and Derivatives Association Inc. master agreements and we have collateral agreements between the individual Group entities and relevant counterparties in place under each of these master agreements.
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 proactively post sale. 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.
IGD surplus represents the accumulation of surpluses across all of our operations based on local regulatory minimum capital requirements with some adjustments, pursuant to the requirements of Solvency I.
Vehicle fleet UK�Occupied 1,421 0.0182 UK�Investments 0 0.0000 Continental�Europe�Occupied 94 0.0083 Continental�Europe�Investments 0 0.0000 US�Occupied 39 �0.0004 North�America�Investments 0 0.0000 Asia�Occupied 1,004 0.0030 Asia�Investments 0 0.0000
Anthony is also a commissioner of Astra International, a nonexecutive director of Schindler Holding AG and China Xintiandi Limited, and a senior adviser to Academic Partnerships International and Dickson Concepts. He is a Hong Kong representative to the APEC Business Advisory Council and Chairman of The Hong Kong-APEC Trade Policy Study Group. He is also a member of the Securities and Futures Commission Committee on Real Estate Investment Trusts, a council member of the Employers’ Federation of Hong Kong, a member of the UK-ASEAN Business Council Advisory Panel, a non-official member of the Commission on Strategic Development in Hong Kong and Chairman of the Mission to Seamen in Hong Kong. Anthony is a past chairman of the Hong Kong General Chamber of Commerce. Age 66.
The Board has terms of reference which specifically set out matters reserved for its decision. These include matters such as setting the Group’s strategy and monitoring its implementation, the approval of annual budgets and business plans, as well as the risk appetite of the Group and its capital and liquidity positions. The Board has approved a governance framework, and under these procedures all business units are required to seek approval from the Board for matters exceeding pre-determined authority limits.
Prudential is one of the UK’s largest institutional investors and the Board does not believe that this compromises the independence of those non-executive directors who are on the boards of companies in which the Group has a shareholding. The Board also believes that such shareholdings should not preclude the Company from having the most appropriate and highest calibre non-executive directors.
Table 1 (overleaf) details the number of Board and Committee meetings attended by each director during the year.
The Board, or the members in a general meeting, may appoint directors up to a maximum total number of 20 as set out in the Company’s Articles of Association. The removal and resignation of the directors is governed by the relevant provisions of the Companies Act 2006, the UK and HK Codes and the Company’s Articles of Association.
The effectiveness of the committees is considered annually as part of the overall performance review of the Board. Details of the evaluation process are set out more fully on page 70.
As part of its remit, the Committee periodically meets with the head of Group-wide Internal Audit without the presence of management.
Group Compliance The Committee received regular reports from Group Compliance, who is responsible for assessing the risks posed to the Group as a result of non-compliance with relevant regulations, including those in respect of anti-money laundering and sanctions. Each business unit has its own compliance function, and the role of Group Compliance is to assess the effectiveness of these functions, as well as to provide oversight and support in the identification, mitigation and reporting of regulatory risks arising from both current business activities and from changes in the regulatory environment.
Appointment of non-executive directors Alice Schroeder and Anthony Nightingale were appointed as non-executive directors during the course of the year, following the scheduled retirement of Keki Dadiseth and Michael Garrett as part of the continuous refreshment of the Board.
The Board confirms that it has complied with all relevant provisions set out in the UK and HK Codes throughout the accounting period. With respect to Code Provision
B.1.2(d) of the HK Code, the responsibilities of the Remuneration Committee do not include making recommendations to the Board on the remuneration of non-executive directors. In line with the principles of the UK Code, fees for non-executive directors are determined by the Board.
Restrictions on transfer In accordance with English company law, shares may be transferred by an instrument of transfer or through an electronic system (currently CREST) and transfer is not restricted except that the directors may, in certain circumstances, refuse to register transfers of shares but only if such refusal does not prevent dealings in the shares from taking place on an open and proper basis. If the directors make use of that power, they must send the transferee notice of the refusal within two months.
In d ex to p rin cip al d irecto rs’ rep o rt d isclo su res
Aligning 2014 pay to performance In 2014, the Remuneration Committee granted salary increases to all executive directors in line with the budget for the wider work force. As stated above, no changes have been made to the remuneration architecture approved by shareholders at the 2013 AGM. Remuneration packages remain strongly aligned with performance over both the short and the long term.
Notes 1 The bonus opportunity for the CEO, M&G remains at the lower of 0.75 per cent of M&G’s IFRS profit or six times salary. As with 2013, he will receive awards under the Prudential LTIP and the M&G Executive LTIP, which are both included in the above LTI award. 2 The CEO, JNL will also continue to have a 10 per cent share of the Jackson Senior Management Bonus Pool. 40 per cent of this is deferred in shares.
The AIP awards for all executive directors are subject to the achievement of financial and personal objectives. Business unit chief executives either have measures of their business unit’s financial performance in the AIP or they may participate in a business unit specific bonus plan. For example, the President and CEO, JNL currently participates in the Jackson Senior Management Bonus Pool, as well as in the AIP.
The PLTIP has a three-year performance period (although the Committee has the discretion to apply shorter or longer performance periods when the PLTIP is used for buy-out awards on recruitment).
— Barry Stowe and Mike Wells are paid in HK$ and US$ respectively and have been converted to GBP for the purposes of this chart.
If a newly appointed executive director forfeits one or more bonuses (including outstanding deferred bonuses) on leaving a previous employer, these payments or awards may be replaced in either cash or Prudential shares with an award of an equivalent value. Replacement awards will be released on the same schedule as the foregone awards.
Potential variations The Committee may consider compensating a newly appointed executive for other relevant contractual rights forfeited when leaving their previous employer.
The use of Listing Rule 9.4.2 to facilitate the recruitment of an executive director is now only relevant in ‘unusual circumstances’. The Committee does not anticipate using this Rule but reserves the right to do so in an exceptional circumstance. For example, this rule may be required if, for any reason, like-for-like replacement awards on recruitment could not be made under existing plans.
Any executive leaving the Group other than by way of their death or disablement would have a duty to mitigate their loss.
Potential variations If an executive director is dismissed for cause, their contract would be terminated with immediate effect and they would not receive any payments in relation to their notice period.
Principles The payment of a bonus for the final year of service will be decided by the Committee giving full consideration to the circumstances of the departure including the performance of the director.
All non-executive directors receive a basic fee for their duties as a Board member. Additional fees are paid for added responsibilities such as chairmanship and membership of committees, or acting as the Senior Independent Director. Fees are paid to non-executives in cash, subject to the appropriate deductions.
December 2013 Review the level of participation in the Company’s all-employee share plans; approve executive directors’ 2014 salaries and incentive opportunities; consider the annual bonus and long-term incentive measures and targets to be used in 2014; review an initial draft of the 2013 directors’ remuneration report; review the Committee’s terms of reference; and approve the Committee’s 2014 work plan.
Asia BUPP In 2011, Barry Stowe received an award under the Asia BUPP. This award vests based on the new business profit, IFRS profit and cash remittances of the Asia business. The chart below illustrates the achievement against performance ranges for the 2011 Asia award: Measure Threshold Mid Maximum Overall 2013 vesting 1/3 cumulative new business pro�t 1/3 cumulative IFRS pro�t 1/3 cumulative cash remittances
M&G Executive Long-Term Incentive Plan The phantom share price at vesting for the 2011 M&G Executive Long-Term Incentive award is determined by the increase or decrease in M&G’s profitability over the three-year performance period, with adjustments for the investment performance of its funds. M&G performance and the resulting phantom share price for Michael McLintock is shown below: Award Three-year profit growth of M&G Three-year investment performance 2013 phantom share price 2011 M&G Executive LTIP 61% Second quartile £2.30
Mike Wells Matching contributions of 6 per cent of base salary capped at US$255,000.
2 Keki Dadiseth retired from the Board on 1 May 2013. In 2013, he was paid an allowance of £2,999 in respect of his accommodation expenses in London while on Company business during the period he served as a non-executive director. In 2012 this totalled £8,997. This is included in the fees shown above. 3 Michael Garrett retired from the Board on 31 August 2013. 4 Anthony Nightingale, Philip Remnant and Alice Schroeder did not serve as non-executive directors during 2012.
* Awards for executive directors are calculated based on the average share price over the three dealing days prior to the awards being granted (22 May 2013). † The percentage of award released for achieving maximum targets is 100 per cent.
3 Rob Devey also received a long-term incentive award in 2013. Please see the section on ‘Payments to past directors’ for details of the award and the performance conditions attached to it.
Non-executive directors’ letters of appointment The remuneration policy report contains further details on non-executive directors’ letters of appointment. Details of their individual appointments are outlined below: Non-executive director Appointment by the Board Initial election by shareholders at AGM Notice period Expiration of current term of appointment
In order for Ms Hunt to take up the position with Prudential she was required to relocate. To facilitate this, the Committee approved the reimbursement of reasonable removal charges for the transport of household items and of legal fees for the sale and purchase of properties. A one-off payment of £188,679 was made to cover additional expenses, such as stamp duty and estate agent fees.
Profit before tax attributable to shareholders B1.1 1,635 2,747 Total tax charge attributable to policyholders and shareholders B5 (736) (954) Adjustment to remove tax charge attributable to policyholders’ returns 447 370 Tax charge attributable to shareholders’ returns B5 (289) (584)
† This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders. This is principally because the corporate taxes of the Group include those on the income of consolidated with-profits and unit-linked funds that, through adjustments to benefits, are borne by policyholders. These amounts are required to be included in the tax charge of the Company under IAS 12. Consequently, the profit before all taxes measure (which is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of the PAC with-profits fund after adjusting for taxes borne by policyholders) is not representative of pre-tax profits attributable to shareholders.
Other comprehensive (loss) income for the year, net of related tax (1,337) 205
Issue of subordinated debt, net of costs 1,124 – Bank loan – 25 Interest paid (291) (270) With-profits operations:note (v) C6.2
(ii) the equal and opposite liability or noncontrolling interest for the external parties’ interests in the funds.
(iii) Enhanced disclosures, specifically on risks arising from defined benefit plans.
Following this adoption, the Group presents actuarial gains and losses in ‘other comprehensive income’ instead of the ‘income statement’.
b Basis of consolidation The Group consolidates those investees it is deemed to control. The Group has control over an investee if all three of the following are met: (1) it has power over an investee; (2) it is exposed to, or has rights, to variable returns from its involvement with the investee; (3) it has ability to use its power over the investee to affect its own returns.
i Subsidiaries Subsidiaries are those investees in which the Group controls. The vast majority of Group’s subsidiaries are corporate entities where the Group holds the majority of voting rights and are consolidated. The consolidation of other vehicles held by the Group is discussed below:
Asia — With-profits contracts — Non-participating term contracts — Whole life contracts — Unit-linked policies — Accident and health policies
i Insurance contracts Asia insurance operations The policyholder liabilities for businesses in Asia are determined in accordance with methods prescribed by local GAAP adjusted to comply, where necessary, with the MSB. Refinements to the local reserving methodology are generally treated as change in estimates, dependent on the nature of the change.
The deferral and amortisation of acquisition costs is of most relevance to the Group’s results for Asia and US insurance operations. The deferred acquisition costs for US and some Asia operations is determined with reference to US GAAP principles.
A3: Accounting policies continued i Investment return Investment return included in the income statement principally comprises interest income, dividends, investment appreciation/depreciation (realised and unrealised gains and losses) on investments designated as fair value through profit and loss, and realised gains and losses (including impairment losses) on Jackson’s debt securities designated as available-for-sale. Movements in unrealised appreciation/depreciation of Jackson’s debt securities designated as available-for-sale are recorded in other comprehensive income. Interest income is recognised as it accrues, taking into account the effective yield on investments. Dividends on equity securities are recognised on the ex-dividend date and rental income is recognised on an accrual basis.
The asset management operations, M&G, Eastspring Investments and US asset management provide services to the Group insurance operations for which fees are charged at appropriate arm’s length prices. Intra-group fees included within asset management revenue were earned by the following asset management segment: Intra-group revenue generated by: US broker-dealer and asset management (including Curian) 98 77 Eastspring Investments 86 84
Due to the nature of the business of the Group, there is no reliance on any major customers.
Expected option life (years) – 3.46 – – 3.24 – Weighted average exercise price (£) – 9.01 – – 6.29 –
c UK insurance operations Annuity business: allowance for credit risk For IFRS reporting, the results for UK shareholder-backed annuity business are particularly sensitive to the allowances made for credit risk. The allowance is reflected in the deduction from the valuation rate of interest for discounting projected future annuity payments to policyholders that would have otherwise applied. Credit risk allowance comprises (i) an amount for long-term best estimate defaults, and (ii) additional provisions for credit risk premium, downgrade resilience and short-term defaults.
The principal reason for the increase in the tax charge attributable to policyholders’ returns is an increase in deferred tax on net unrealised gains on investments in UK insurance operations. The credit of £69 million on unrealised gains and losses on investments shown in the table below reflects a credit on unrealised losses on investments in US insurance operations which exceeds the charge on UK insurance operations.
Profit before tax attributable to shareholders 977 855 872 43 2,747
Gain on dilution of holdings in PPMSA 42 – 42 1.7p 1.7p Amortisation of acquisition accounting adjustments arising on the purchase of REALIC (19) 7 (12) (0.5)p (0.5)p
Earnings per share are calculated based on earnings attributable to ordinary shareholders, after related tax and non-controlling interests.
(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 1,180 1,430
To show the statement of financial position by reference to the differing degrees of policyholder and shareholder economic interest of the different types of business, the analysis below is structured to show separately assets and liabilities of each segment by business type.
Intangible assets attributable to with-profits funds: Deferred acquisition costs and other intangible assets 66 – – 66 72
Liabilities Policyholder liabilities: Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4) note (v) 65,681 41,730 107,411 92,261
Assets held for sale 916 – – 916 916 Cash and cash equivalents – – 6,785 6,785 6,785
(ii) Realised gains and losses on the Group’s investments for 2013 recognised in the income statement amounted to a net gain of £2.5 billion (2012: £6.8 billion). (iii) The carrying value of investment contracts with discretionary participation features is on IFRS 4 basis. It is impractical to determine the fair value of these contracts due to the lack of a reliable basis to measure participation features.
Equity securities and portfolio holdings in unit trusts 116,573 3,000 649 120,222
Total investment return recorded in the income statement represents interest and dividend income, realised gains and losses, unrealised gains and losses on the assets classified at fair value through profit and loss and foreign exchange movements on an individual entity’s overseas investments.
M&G AAA to A- by Standard & Poor’s or Aaa to A3 rated by Moody’s 1,690 1,529
iii Foreign exchange risk As at 31 December 2013, the Group held 20 per cent (2012: 19 per cent) and 7 per cent (2012: 7 per cent) of its financial assets and financial liabilities respectively, in currencies, mainly US dollar and Euro, other than the functional currency of the relevant business unit.
For 2013, the amount of gross unrealised losses for fixed maturity securities classified as available-for-sale under IFRS in an unrealised loss position was £849 million (2012: £178 million). Notes B1.2 and C3.3 provide further details on the impairment charges and unrealised losses of Jackson’s available-for-sale securities.
(d) The amounts shown for the acquisition of REALIC represents the liabilities, before reduction for reinsurance ceded, acquired at the date of acquisition.
Determining contract liabilities For the with-profits business, the total value of the with-profits funds is driven by the underlying asset valuation with movements reflected principally in the accounting value of policyholder liabilities and unallocated surplus. Similarly, for the unit-linked business, the attaching liabilities reflect the unit value obligation driven by the value of the investments of the unit fund.
alan ce sh eet n o tes 221 Prudential plc Annual Report 2013
alan ce sh eet n o tes 223 Prudential plc Annual Report 2013 v Institutional products Jackson’s institutional products consist of guaranteed investment contracts (‘GICs’), funding agreements (including agreements issued in conjunction with Jackson’s participation in the US Federal Home Loan Bank programme) and medium-term note funding agreements. At 31 December 2013, institutional products accounted for 3 per cent of policy and contract liabilities (2012: 3 per cent). Under a traditional GIC, the policyholder makes a lump sum deposit. The interest rate paid is fixed and established when the contract is issued. If deposited funds are withdrawn earlier than the specified term of the contract, an adjustment is made that approximates a market value adjustment.
Application of significant judgement The application of the above method for determining bonuses requires the PAC Board to apply significant judgement in many respects, including in particular the following: — Determining what constitutes fair treatment of customers: Prudential is required by UK law and regulation to consider the fair treatment of its customers in setting bonus levels. The concept of determining what constitutes fair treatment, while established by statute, is not defined; — Smoothing of investment returns: This is an important feature of with-profits products. Determining when particular circumstances, such as a significant rise or fall in market values, warrant variations in the standard bonus smoothing limits that apply in normal circumstances requires the PAC Board to exercise significant judgement; and
ii The assumed growth rate on forecast cash flows beyond the terminal year of the plan. A growth rate of 2.5 per cent (2012: 2.5 per cent) has been used to extrapolate beyond the plan period representing management’s best estimate view of the long-term growth rate of the business after considering the future and past growth rates and external sources of data.
Present value of acquired in-force policies for insurance contracts as classified under IFRS 4 (PVIF) 67 64 Distribution rights and other intangibles 448 237
* The 2012 comparative results have been retrospectively adjusted from those previously published for the application of IFRS 11 described in note A2 whereby equity presentation rather than proportionate consolidation for joint venture operations applies.
In 2013, the DAC amortisation charge for operating profit was determined after including a credit for decelerated amortisation of £82 million (2012: £56 million). The 2013 amount primarily reflects the separate account performance of 20 per cent, which is higher than the assumed level for the year.
Additions (including amounts arising on acquisition of subsidiaries) 21 271 26 318 5 – 32 37
Core structural borrowings Operational borrowings Borrowings * The 2012 comparative results have been adjusted from those previously published for the retrospective application of the new and amended accounting standards described in note A2.
Other business Interest rate risk Excluding its with-profit and unit-linked business, the results of the Asia business are sensitive to the vagaries of routine movements in interest rates.
As a result of this hedging programme, if the equity markets were to increase further in the future, the net effect of Jackson’s free-standing derivatives would decrease in value. However, over time, this movement would be broadly offset by increased separate account fees and reserve decreases, net of the related changes to amortisation of deferred acquisition costs. Due to the nature of the free-standing and embedded derivatives, this hedge, while highly effective on an economic basis, may not completely mute in the financial reporting of the immediate impact of equity market movements as the free-standing derivatives reset immediately while the hedged liabilities reset more slowly and fees are recognised prospectively. The opposite impact would be observed if the equity markets were to decrease.
The IFRS operating profit based on longer-term investment returns for UK insurance operations is sensitive to changes in longevity assumptions affecting the carrying value of liabilities to policyholders for UK shareholder-backed annuity business. At the total IFRS profit level, the result is particularly sensitive to temporary value movements on assets backing the capital of the shareholder-backed annuity business.
Benefit payments (239) 239 – – – Employers’ contributionsnote (iv) 71 71 71 71 Employees’ contributions 2 (2) – – – Actuarial and other gains and
Policyholder liabilities UK regulated with-profits funds: Investment contracts with discretionary participation features 374 34,978 35,352 – – 101 35,453 33,559
Thailand A new risk-based capital framework was adopted from 1 January 2012 to replace the previous framework that used a net premium approach.
Additions: Resulting from acquisitions 1,050 1,025 Resulting from expenditure capitalised 42 118
The Group’s policy is to rent investment properties to tenants through operating leases. Minimum future rentals to be received on non-cancellable operating leases of the Group’s freehold investment properties are receivable in the following periods: Less than 1 year 351 451
Operating profit based on longer-term investment returns 30 40 Short-term fluctuations in investment returns (7) (7) Amortisation of acquisition accounting adjustmentsnote (ii) (3) (4) Profit before tax 20 29
The costs associated with the pension mis-selling review have been met from the inherited estate (see below) and, accordingly have not been charged to the asset shares used in the determination of policyholder bonus rates. Hence policyholders’ pay-out values have been unaffected by pension mis-selling.
Other matters Inherited estate of the PAC long-term fund The assets of the with-profits sub-fund (WPSF) within the long-term insurance fund of PAC comprise the amounts that it expects to pay out to meet its obligations to existing policyholders and an additional amount used as working capital. The amount payable over time to policyholders from the WPSF is equal to the policyholders’ accumulated asset shares plus any additional payments that may be required by way of smoothing or to meet guarantees. The balance of the assets of the WPSF is called the ‘inherited estate’ and has accumulated over many years from various sources.
D5: Additional information on the effect of adoption of new and amended accounting standards
The new and amended accounting standards adopted by the Group in 2013 are explained in note A2. The tables below show the quantitative effect of the adoption of these new and amended standards on the Group primary financial statements and supplementary analysis of profit.
Tax charge attributable to shareholders’ returns (287) – 12 (14) (289)
Non-cash movements in operating assets and liabilities reflected in profit before tax and other items (272) (124) (290) (72) (758)
D6: Subsidiary undertakings a Principal subsidiaries The principal subsidiary undertakings of the Group at 31 December 2013 are disclosed in note 5 ‘Investments of the Company’ of the parent Company financial statements.
Transactions between the Company and its subsidiaries are eliminated on consolidation. In addition, the Company has transactions and outstanding balances with certain unit trusts, Open-Ended Investment Companies
Each subsidiary operates mainly in its country of incorporation, except for PRIL, which operates mainly in England and Wales.
The reductions in the UK corporation tax rate to 21 per cent from 1 April 2014 and 20 per cent from 1 April 2015 were substantively enacted on 2 July 2013. Accordingly, the effects of these changes are reflected in the financial statements for the year ended 31 December 2013. The changes have not had a material impact on the Company’s net deferred tax balances as at 31 December 2013.
Fair value of Scheme assets, at 31 December 6,042 6,400 * The contributions include deficit funding, ongoing service contributions and expenses.
Statem en t o f d irecto rs’ resp o n sib ilities
Analysed as profits (losses) from: Business in force* 3 2,798 1,982
(ii) The comparative results have been prepared using previously reported average exchange rates for the year.
Experience variance and other items: Mortality and morbidity note (e) 42 57 Persistency and withdrawals note (f) 44 52 Expense note (g) (26) (30)
Unwind of discount and other expected returns note (a) 547 482 Effect of change in UK corporate tax rate note (b) 122 87 Other items note (c) 67 (16)
Notes (a) Short-term fluctuations in investment returns for shareholder-backed annuity business comprise: (1) gains/losses on surplus assets compared to the expected long-term rate of return reflecting reductions/increases in corporate bond and gilt yields; (2) the difference between actual and expected default experience; and (3) the effect of mismatching for assets and liabilities of different durations and other short-term fluctuations in investment returns.
(vi) Exchange movements, timing differences and other items represent: Long-term business
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes note (v) – – (22) (22) (31) (53) 44 Reserve movements in respect of share-based payments – – – – 98 98 42 Bancassurance agreement and purchase of
Treasury shares movements – – – – (41) (41) 23 New share capital subscribed – – – – 6 6 17 Mark to market value movements on Jackson assets backing surplus and required capital – (97) – (97) – (97) 35
Notes (i) The amounts shown in respect of free surplus and the value of in-force business for UK insurance operations for intra-group dividends (including statutory transfers) include contingent loan funding. Contingent loan funding represents amounts whose repayment to the lender is contingent upon future surpluses emerging from certain contracts specified under the arrangement. If insufficient surplus emerges on those contracts, there is no recourse to other assets of the Group and the liability is not payable to the degree of shortfall.
(iii) Free surplus invested in new business is as follows: Asia operations
The annual result is affected by the movement in this cost from year-to-year which comprises a charge against new business profit and generally a release in respect of the reduction in capital requirements for business in force as this runs off.
Financial options and guarantees Nature of financial options and guarantees in Prudential’s long-term business Asia operations Subject to local market circumstances and regulatory requirements, the guarantee features described below in respect of UK business broadly apply to similar types of participating contracts principally written in the PAC Hong Kong branch, Singapore and Malaysia. Participating products have both guaranteed and non-guaranteed elements.
The Group’s main exposure to guaranteed annuity options in the UK is through the non-covered business of SAIF. A provision on the Pillar I Peak 2 basis of £328 million was held in SAIF at 31 December 2013 (31 December 2012: £371 million) to honour the guarantees. As described in note 15(a) above, the assets and liabilities are wholly attributable to the policyholders of the fund. Therefore the movement in the provision has no direct impact on shareholders.
(b) The allowance for long-term defaults included in projected spread is shown as at the valuation date applied in the cash flow projections of the value of the in-force business. The risk discount rates include an additional allowance for credit risk premium and short-term downgrades and defaults. See note 15(b)(iii) for further details.
Post-tax expected long-term nominal rate of return for the PAC with-profits fund: Pension business (where no tax applies) 6.2 5.0 Life business 5.4 4.4
(b) Credit spread treatment For Prudential Retirement Income Limited, which has approximately 90 per cent of UK shareholder-backed annuity business the credit assumptions used in the underlying MCEV calculation (see note 15(b)(iii)) and the residual liquidity premium element of the bond spread over swap rates is as follows: New business* (bps) In-force business (bps)
Dividend per share declared and paid in reporting period (in pence) 30.52p 25.64p 25.19p 20.17p 19.20p * The Group has adopted new accounting standards on consolidated financial statements and joint arrangements, and amendments to the employee benefits accounting standard, from 1 January 2013, as described in note A2. Accordingly, the 2009 to 2012 comparative results and related notes have been adjusted retrospectively from those previously published.
3 Asia comparative APE new business sales prior to 2011 exclude the Japanese insurance operations, which ceased writing new business from 15 February 2010. 4 Funds under management comprise funds of the Group held in the statement of financial position and external funds that are managed by Prudential asset management operations. 5 The surpluses shown are before allowing for the final dividends for each year, which are paid in the following year. The 2013 surplus is estimated.
Expenses: Expected return on shareholder assets 43 – 43 55 107 – 205 Gain on China Life (Taiwan) shares 51 – 51 – – – 51
Analysis of UK operating profit drivers — Spread income has reduced from £266 million in 2012 to £228 million in 2013, principally due to lower annuity sales in the year. — Fee income has increased in line with the increase in unit-linked liabilities. — With-profits income has decreased by £21 million from £272 million in 2012 to £251 million in 2013, principally due to a 50 basis point reduction in annual bonus rates. This has contributed to the reduction in the with-profits margin from 33 basis points in 2012 to 30 basis points in 2013.
Asia net remittances to the Group Asia paid to the Group: Long-term business 454 491 Other operations 56 60
Non-operating and other movements† – 67 117 124 118 91 5,655 6,171 2013 expected free surplus generation for years 2014 to 2053 – 2,165 2,109 2,025 1,911 1,884 33,452 43,546
† The amounts shown above for non-operating and other movements include the effects of a partial hedge of the future shareholder transfers expected to emerge from the UK’s with-profits sub-fund that was transacted in 2013. This hedge reduces the risk arising from equity market declines for the years 2014-2018. However, in rising equity markets as assumed in preparing the EEV results, the hedge reduces the projected free surplus benefit of those higher returns. Consistent with this feature, for 2014 the expected free surplus generation compared to that expected at 31 December 2012 is reduced by £(58) million as a result of this hedge.
These results are based on outputs from our current Solvency II internal model, assessed against a draft set of rules and with a number of key working assumptions. Further explanation of the underlying methodology and assumptions are set out in the sections below. By disclosing economic capital information at this stage, the directors of Prudential plc are seeking to provide an indication of the potential outcome of Solvency II based on the Group’s current interpretation of the draft rules. An update of the capital position will be reported annually going forwards and will evolve to reflect changes to the Solvency II rules, ongoing refinements to our internal model calibrations, and feedback from the Prudential Regulation Authority on Prudential’s approach to implementing this new capital regime. Against this background of uncertainty, it is possible that the final outcome of Solvency II could result in a fall in the Group solvency ratio, relative to the results shown above.
The contribution of Japan to the Group surplus has been set equal to the ‘held for sale’ accounting value of £48 million, pending completion of the sale. The impact of the domestication of the Hong Kong branch, which became effective on 1 January 2014, is not allowed for in these economic capital results, but is estimated to have a negative impact on the Group solvency ratio of -4 percentage points, mainly due to a loss of diversification in the risk margin following separation of the Hong Kong business into a subsidiary. Consistently with evolving Solvency II requirements, the Group calculation also includes all non-insurance entities, including asset management companies, Prudential Capital and holding companies, as follows: — Asset managers are included in line with existing sectoral capital rules, and Prudential Capital is included on a Basel basis, which follows the expected Solvency II treatment; — Defined benefit pension schemes are included using international accounting standards and, in addition, a capital requirement is added; and
Regulators are increasingly interested in the approach that product providers use to select third party distributors and to monitor the appropriateness of sales made by them. In some cases, product providers can be held responsible for the deficiencies of third party distributors.
Another example is the impact of epidemics and other effects that cause a large number of deaths. Significant influenza epidemics have occurred three times in the last century, but the likelihood, timing, or the severity of future epidemics cannot be predicted. The effectiveness of external parties, including governmental and non-governmental organisations, in combating the spread and severity of any epidemics could have a material impact on the Group’s loss experience.
IGD surplus The Prudential Group’s solvency surplus measured in accordance with the EU Insurance Groups Directive.