Contents 1 Group overview 02 02 Chairman’s statement 04 Group Chief Executive’s report 2 Strategic report 09 10 At a glance 12 Our business model 14 Our distribution 16 Our performance 18 Our businesses and their performance 37 Chief Financial Officer’s report on the 2016 financial performance 50 Group Chief Risk Officer’s report of the risks facing our business and how these are managed 62 Corporate responsibility review 76 Chairman’s introduction 77 Board of Directors 82 How we operate 89 Further information on Directors 90 Risk management and internal control 92 Committee reports 106 Statutory and regulatory disclosures 107 Additional information 108 Index to principal Directors’ report disclosures 4 Directors’ remuneration report 109 110 Annual statement from the Chairman of the Remuneration Committee 112 Our Executive Directors’ remuneration at a glance 114 Summary of the current Directors’ remuneration policy 118 Annual report on remuneration 135 New Directors’ remuneration policy 153 Supplementary information 5 Financial statements 159 6 European Embedded Value (EEV) basis results 323 7 Additional information 363 365 Additional unaudited financial information 392 Risk factors 398 Glossary 402 Shareholder information 405 How to contact us
4 Excluding UK bulk annuities from 2015 comparative results as Prudential has withdrawn from this market.
Performance and dividend Despite the challenging global environment, Prudential has delivered another strong operating and financial performance, driven in particular by our Asian operations.
As in previous years, we comment on our performance in local currency terms (expressed on a constant exchange rate basis) to show the underlying business trends in a period of significant currency movements.
Prudential supports the family in achieving their goals, and creates investment opportunities through various loans and bonds. Prudential has been able to help the family prepare for a peaceful future, and receive protection from terminal illnesses once they reach retirement age.
Notes 1 Embedded value reporting provides investors with a measure of the future profit streams of the Group. The EEV basis results have been prepared in accordance with EEV principles discussed in note 1 of EEV basis results. A reconciliation between IFRS and the EEV shareholder funds is included in note C of the Additional EEV financial information.
10 Source: Asia asset management September 2016 (Ranked according to participating regional players only). Based on assets sourced from the region, excluding Japan, Australia and New Zealand as at June 2016.
Life insurance Asset management 24m+ £383bn life customers worldwide total funds under management
Prudential Corporation Asia Prudential Corporation Asia has leading insurance and asset management operations across 14 markets and serves the families of the region’s high-potential economies. We have been operating in Asia for over 90 years and have built high-performing businesses with multichannel distribution, a product portfolio centred on regular savings and protection, award-winning customer services and a widely recognised brand.
Free surplus generation £3,588m +10%3 on 2015 (CER) +18% on 2015 (AER)
4 Embedded value reporting provides investors with a measure of the future profit streams of the Group. The EEV basis results have been prepared in accordance with EEV principles discussed in note 1 of the EEV basis results. A reconciliation between IFRS and the EEV shareholder funds is included in note C of the Additional EEV financial information.
Insurance—penetration—remains—low—and— prospects—for—protection-oriented— insurance—products—remain—high.— Penetration—rates—vary—by—market—in—the— region,—which—includes—under-served— markets—such—as—Indonesia,—the—Philippines,— Vietnam—and—Thailand,—and—better-served— ones—like—Singapore—and—Malaysia.—While— customer—needs—vary—in—each—market,—our— product—solutions—are—manufactured—to— serve—the—bespoke—needs—of—each—market— and—are—distributed—by—our—multi-channel— distribution—network.
United States 2015’, May 2016. 4 Cerulli Associates – Advisor Metrics 2016. 5 Social Security Administration, Annual Performance Plan for
Investment in technology is also enabling customers to engage more flexibly with us digitally and online. Easier access to product information for customers is provided by the My Pru app, while our Retirement Ready Guide App was created to provide clear and easy-to-understand information for those coming up to retirement. Technology has also helped us improve online services for advisers and enhance our tele-underwriting service for the Prudential Investment Plan, reducing the amount of time advisers spend on administration and freeing up time to spend with their clients.
All our customers benefit from our conviction-led, long-term approach to asset management, applied across the full range of asset types: cash, equities, bonds, property and alternatives. We are constantly developing our capabilities to offer our customers strategies that meet their needs, whatever the market conditions.
Patrick’s story M&G ‘I’ve enjoyed a long and very varied working life, adapting my skills to several industries including the Civil Service, banking and even managing funeral homes in my later career, all while working for 40 years as a minister with my local Congregational church.
M&G provides market insights to clients, intermediaries and others through a number of channels, including a programme of roadshows and events. The M&G Client Council offers customers who invest directly with M&G an opportunity to help shape our products and services, in line with their needs.
New SICAV platform in Luxembourg 58 billion held in equity investments 138 roadshows in 2016 from our retail fund managers reaching 42,000 clients in 16 countries
— M&G operating profit was 4 per cent lower at £425 million. The impact of recent asset outflows from retail funds on overall funds under management has been partially offset by the benefit of positive market movements.
Total tax contribution The Group continues to make significant tax contributions in the countries in which it operates, with £2,890 million remitted to tax authorities in 2016. This was lower than the equivalent amount of £3,004 million in 2015, reflecting lower corporation tax payments, partly offset by increases in other taxes borne and taxes collected. In the US a change of basis for taxing derivatives which affects the timing but not the quantum of tax payable accelerated tax payments from 2016 into 2015.
Chief Financial Officer’s report on the 2016 financial performance – Nic Nicandrou Continued operations set out above, the Group also has access to funding via the money markets and has in place an unlimited global commercial paper programme. As at 31 December 2016, we had issued commercial paper under this programme totalling £70 million and US$1,213 million, to finance non-core borrowings.
10 Defined as movements in policyholder liabilities arising from premiums (net of charges), surrenders/withdrawals, maturities and deaths.
14 For our asset management business the level of funds managed on behalf of third parties, which are not therefore recorded on the balance sheet, is a driver of profitability. We therefore analyse the movement in the funds under management each period, focusing between those which are external to the Group and those held by the insurance business and included on the Group balance sheet. This is analysed in note II(b) of the Additional IFRS financial information.
Our Risk Management Framework is designed to ensure the business remains strong through stress events so we can continue to deliver on our long-term commitments to our customers and shareholders. 2016 has been a year of extraordinary global uncertainty and the financial strength of our Group has remained robust throughout.
Risk committees and governance structure Our Risk governance structure is led by the Group’s Risk Committee, supported by independent non-executives on risk committees of major subsidiaries. These committees monitor the development of the risk management framework, and the Group’s risk appetites, limits, and policies as well as its risk culture. We have in place a comprehensive risk management cycle to identify, measure, manage and monitor our risk exposures.
Risk policies These set out the specific requirements which cover the fundamental principles for risk management within the Group Risk Framework. Policies are designed to give some flexibility so that business users can determine how best to comply with policies based on their local expertise.
Risks from our business operations Operational risk Operational risk is the risk of loss (or unintended gain or profit) arising from inadequate or failed internal processes, personnel and systems, or from external events. This includes employee error, model error, system failures, fraud or some other event which disrupts business processes.
In 2016, Jackson launched Perspective Advisory, the company’s first fee-based variable annuity. Perspective Advisory offers the same investments and optional benefits, for an additional charge, as Perspective II®, Jackson’s flagship commission-based variable annuity. The introduction of the new product was designed to meet increased market demand for products compatible with fee-based accounts and platforms as a result of the 2016 US Department of Labor Fiduciary Rules. The addition of Perspective Advisory to Jackson’s suite of products also allows the business to expand into advisory distribution channels where insurance products historically have not been widely utilised.
Asset management M&G, Prudential’s UK and European asset management business, is a long-term investor that takes seriously its responsibilities as a steward of clients’ assets, often working closely with the management of the companies in which we invest. M&G’s investment teams incorporate environmental, social and governance (ESG) factors into investment analysis and decision-making processes, wherever they have a meaningful impact on risk or return: www.mandg.com/en/ corporate/about-mg/responsibleinvestment /
Teen Zone at the Boys & Girls Club In�September�2016,�the�Boys�&�Girls�Club� of�Lansing�opened�the�Jackson�Teen�Zone.� This�renovation�and�4,680-square-foot� expansion�was�funded�by�support�from�the� business�and�individual�employees.�The� new�Jackson�Teen�Zone�allowed�the�Boys�&� Girls�Club�to�repurpose�the�previous�Teen� Rooms�into�innovative�tutoring�and� educational�spaces,�providing�muchneeded �quiet�space�for�homework,�college� prep�and�financial�literacy�support.�The� Boys�&�Girls�Club�of�Lansing�annually� serves�more�than�5,200�at-risk�youths,� aged�seven�to�18.
Volunteering to build disasterresilient homes Prudence Foundation continues to provide support to major emergency relief efforts across the region. In 2016, support was provided in Cambodia to emergency drought response efforts. The long-term commitment of the business to the Typhoon Haiyan recovery efforts in Bantayan Island was demonstrated by sending a team of volunteers to continue the building of new houses for the community. The first 64 houses have been completed and families have now moved in. Around 80 volunteers in June supported the construction of the final 62 houses, which were due to be completed by the end of the first quarter in 2017. In September, over 50 regional volunteers spent time in Vietnam to support the construction of a new school in Quang Binh province. This formed part of Prudential Vietnam’s partnership with Plan International and the Vietnamese government, which are collaborating together to build new disaster-resilient schools in poor regions throughout the country.
Social inclusion Prudential RideLondon – social inclusion in the UK In the past four years Prudential RideLondon has raised £41 million for charity and become one of the UK’s largest fundraising events. In 2016 alone, more than 740 charities benefited from riders’ fundraising. We have renewed our sponsorship for a further three years to 2018.
Our policies and plans support an inclusive culture sensitive to the needs of all employees. We protect all our employees against discrimination and provide opportunities for our people regardless of their age, caring responsibilities, disability status, ethnicity, gender, religion or sexual orientation. We make appropriate disability adjustments as required, and provide training and career development opportunities for all. We give full and fair consideration and encouragement to all applicants with suitable aptitude and abilities.
We recognise and reward high performance while operating a fair and transparent system of reward. Reward is linked to the delivery of business goals and expected behaviours and we ensure that rewards for our people are consistent with our values and do not incentivise inappropriate risk taking. To enable this, employees are not only regularly assessed on ‘what’ they have achieved, but also on ‘how’ they did so.
Assurance Deloitte LLP has provided limited assurance over selected environmental metrics in accordance with the International Auditing and Assurance Standards Board’s (ISAE3000 (Revised)) international standard. www.prudential.co.uk/responsibility/performance/external-assurance-of-responsibilityreporting
Emission factor data source We have used the UK DEFRA 2016 GHG Conversion Factors for Scope 1 and 3 reporting and the IEA GHG 2016 conversion factors for global Scope 2 reporting.
Scope 1 and Scope 2 (tonnes CO2-e) Occupied Estate 72,568 71,104 70,036 71,749
However, we need to remain vigilant not only to our internal needs but also to external factors that may require decisions from the Board. It remains critical for the Board to have an understanding of and respond to policy debates in all markets in which we operate.
During his leadership of Jackson, Mike was responsible for the establishment of the broker-dealer network National Planning Holdings and the development of Jackson’s market-leading range of variable annuities. He was also part of the Jackson teams that purchased and successfully integrated a savings institute, three broker-dealers and two life companies.
Group Chief Risk Officer, Group Investment Director and, since 2015, Chief Executive of Prudential UK & Europe. John first joined the Board of Prudential plc in 2011 and was reappointed in January 2016, having stepped down during his time as Group Investment Director.
Relevant skills and experience Anne became an analyst for Alliance Capital in 1992 and then moved into portfolio management roles at JP Morgan Investment Management and Mercury Asset Management. She joined the Board of Edinburgh Fund Managers plc as Chief Investment Officer and Joint Managing Director in 2002 and continued in this role following Aberdeen Asset Management PLC’s acquisition of Edinburgh Fund
Stanley. Alice was also an independent board member of the Cetera Financial Group.
Paul Manduca — Overall responsibility for leadership of the Board and ensuring its effectiveness
— Paul meets regularly with the independent chairs of the Group’s material subsidiaries
— The Committee Chairs worked closely with the Company Secretary and management to ensure Committee governance continued to be effective throughout the year
— Each Committee Chair provided a written update of Committee business to the Board, followed by a verbal update after each Committee meeting
Ann Godbehere — Responsible for the integrity of the Group’s financial reporting, including scrutinising accounting policies
2 Nomination and Governance Committee. 3 Remuneration Committee. 4 Risk Committee. 5 Including meeting with regulators.
Executive Directors Mike Wells 10 – – – – 1 Nic Nicandrou 10 – – – – 1 Penny James 10 – – – – 1 John Foley 10 – – – – 1 Michael McLintock1 4/4 – – – – 1 Anne Richards2 6/6 – – – – – Barry Stowe 10 – – – – 1 Tony Wilkey 10 – – – – 1
2016 review and actions for 2017 The performance evaluation of the Board and its principal Committees for 2016 was conducted internally at the end of 2016 and beginning of 2017, through a questionnaire. The findings were presented to the Board in February 2017 and an action plan agreed to address areas of focus identified by the evaluation.
Directors’ development The Chairman is responsible for ensuring that induction programmes are provided for all new Directors. These are tailored to reflect the experience of each Director and their position as either Executive or Non-executive Directors. Anne Richards’ induction was carried out by both Group and M&G, and included updates on the Group’s results, the role of the Board and its Committees, the Group’s key risks and the risk management framework, as well as the compliance environment in which the Group operates. M&G provided a detailed briefing on product range, the markets in which it operates and the overall competitive environment.
— These indemnities were in force during 2016 and remain so.
The Board has delegated authority to the Audit Committee to review the framework and effectiveness of the Group’s systems of internal control. The Audit Committee is supported in this responsibility by the assurance work carried out by Group-wide Internal Audit and the work of the business unit audit committees, which oversee the effectiveness of controls in each respective business unit. Details of how the Audit Committee oversees the framework of controls and their effectiveness on an ongoing basis, is set out more fully in the report on pages 95 to 102.
The Committee kept succession plans for executive and non-executive Board roles under continuous review. This review takes account of the size, structure and composition of the Board and its Committees, including the overall knowledge, experience and diversity of the Board. The Committee makes recommendations to the Board based on its review as necessary.
The Committee received details of the succession plans in place for Executive Directors and other senior management positions. The development and renewal of these plans was led by the Group HR Director, who was supported by Egon Zehnder in identifying candidates who could be considered successors for key roles.
Independence The Committee considered the independence of the Non-executive Directors against relevant requirements as outlined on page 89.
We approved all non-audit services, as well as audit services, to ensure our auditor remains independent. We continued with our annual process of monitoring auditor effectiveness through a Group-wide questionnaire of senior finance personnel. We meet privately with both the internal and external auditors to ensure they are able to operate effectively and to satisfy ourselves that management are responsive to their findings and recommendations.
We continued to monitor second and third line of defence functions to ensure their effectiveness. During 2016, the Audit Committee commissioned an external review to provide an independent assessment of compliance monitoring and internal audit reviews. Recommendations from this work have been approved and integrated into the respective functional plans going forward. The focus of the compliance plan is on strengthening the Compliance framework and further enhancing monitoring arrangements and mitigation of key risks. The internal audit plan provides risk-based coverage of financial, business change, regulatory and operational risk drivers and of customer outcomes.
Of the £2.8 million of non-audit services, the principal types of non-audit engagements approved for 2016 were other assurance services of £2.7 million (of which £1.5 million related to Solvency II reporting and disclosures) and other non-audit services of £0.6 million.
The Committee assists the Board in providing leadership, direction and oversight of the Group’s overall risk appetite and limits, risk strategy and risk culture. We also oversee and advise the Board on current and future risk exposures of the Group, including those which have the potential to impact on the delivery of the Group’s business plan. The Committee reviews and approves the Group Risk Framework and monitors its appropriateness in identifying and managing the risks faced by the Group.
The Risk Committee approved a number of deep dives to be undertaken during 2016. These focused on risks embedded within the existing portfolio of products in our US, Asia and UK businesses.
The Group Chief Risk Officer’s reports also provided the Committee with regulatory updates, particularly regarding Solvency II, the Group’s Internal Model, development of the Group’s global capital standards and the deliverables required as a result of the Group’s designation as a Global Systemically Important Insurer.
The Directors are further required to confirm that the Strategic report includes a fair review of the development and performance of the business, with a description of the principal risks and uncertainties. Such confirmation is included in the statement of Directors’ responsibilities on page 318 and page 361.
The Committee’s report is presented in the following sections: — An ‘at a glance’ summary of the Group’s remuneration arrangements on pages 112 and 113; — Our Directors’ remuneration policy on pages 114 to 117 which describes how we pay Directors currently. This policy was approved by shareholders at the 2014 AGM; — Our Annual report on remuneration on pages 118 to 134 and 151 to 152 which describes how the Committee applied the Directors’ remuneration policy in 2016 and the decisions it has made in respect of 2017; — Our new Directors’ remuneration policy on pages 135 to 150 which describes how we propose paying Directors from 18 May 2017. This will be subject to an ordinary resolution of shareholders at the 2017 AGM; and
The total 2016 ‘single figure’ for the Group Chief Executive is lower than the total 2015 ‘single figure’, despite continuing strong business performance. This is chiefly a result of a lower level of vesting of the 2014 PLTIP award. Mike Wells’s 2016 ‘single figure’ is 30 per cent less than his 2015 ‘single figure’, notwithstanding his exceptional leadership and personal performance.
Prudential’s primary measure of profitability and a key driver of shareholder value
A measure of the future profitability of the new business sold during the year and indicates the profitable growth of the Group
For business unit CEOs, awards vest based on TSR and business unit IFRS profit. For other Executive Directors, awards are subject to TSR and Group IFRS profit
Penny James Group Chief Risk Officer £606,000 £235,000 £962,000 £347,000 – £2,150,000 £958,000 Nic Nicandrou Chief Financial Officer £711,000 £539,000 £1,236,000 £1,518,000 – £4,004,000 £4,278,000
2 Anne Richards was appointed to the Board on 7 June 2016. The remuneration above was paid in respect of her service as an Executive Director. 3 NABU is an abbreviation of North American Business Unit.
The Company’s Directors’ remuneration policy was approved by shareholders at the 2014 AGM. This policy came into effect following the AGM on 15 May 2014 and will apply until the 2017 AGM, when shareholders will be asked to approve a revised Directors’ remuneration policy. Details of the revised policy can be found on pages 135 to 150.
Jackson’s Defined Contribution Retirement Plan has a guaranteed element (6 per cent of pensionable salary) and additional contributions (up to a further 6 per cent of pensionable salary) based on the profitability of Jackson.
June 2016 Consider performance for outstanding long-term incentive awards, based on the half-year results; review the remuneration of senior executives across the Group, employees with a remuneration opportunity over £1 million per annum and employees within the scope of the Solvency II remuneration rules; consider proposals for new Directors’ remuneration architecture and policy; and review progress towards share ownership guidelines by the Chairman, Executive Directors and other Group Executive Committee members.
November 2016 Finalise the proposed new Directors’ remuneration architecture and policy and the approach to the shareholder consultation.
Richards’s award was granted on 23 June 2016 following her appointment to the Board (based on an average share price of £13.07).
Notes 1 Paul Manduca was appointed as Chairman on 2 July 2012. 2 Ann Godbehere was reappointed in 2016 for one year.
Michael’s deferred bonus awards will be released in accordance with the plan rules and remain subject to malus and, for the 2015 award, clawback provisions.
Recognising his contribution to the Company’s success, the Committee determined that Michael should be awarded a bonus in respect of the 2016 performance year which was calculated in the usual way and pro-rated for service to 31 July 2016. 60 per cent of this bonus will be paid in 2017 and 40 per cent will be deferred for three years, subject to malus and clawback provisions.
Total remuneration for our Executive Directors is made up of a number of elements.
Provision for an income in retirement Pension benefits provide executives with opportunities to save for an income in retirement.
Executives have the option to: — Receive payments into a defined contribution scheme; and/or
Form and timing of payment All Executive Directors are required to defer a percentage of their total annual bonus into Prudential shares. Currently all Executive Directors defer 40 per cent of their bonus for three years, with the remaining 60 per cent of their bonus paid in cash following the end of the performance year.
The Committee has the authority to apply clawback and/or a malus adjustment to all, or a portion of, the cash and deferred award elements of the bonus. More details about clawback and malus are set out below. See the Policy on corporate transactions section for details of the Committee’s powers in the case of corporate transactions.
Following the end of the performance period, a two-year holding period applies, further aligning the experience of executives and shareholders.
Performance against the measures in the scorecard of sustainability measures is assessed at the end of the three-year performance period. The four measures have an equal weighting. 100 per cent of each measure in this portion of the award will vest for full achievement of that measure and no portion will vest if the measure is not achieved in full. The scorecard measures for each award are disclosed in the relevant Annual report on remuneration for the year of grant.
The Committee may approve payments in excess of, in a different form to, or calculated or delivered other than as described above, where the Committee considers such changes necessary to meet regulatory requirements. If these changes are considered by the Committee to be material, the Company will seek to consult with its major shareholders.
— From 2017, a balanced scorecard of measures was selected to ensure an alignment with the Group’s strategic objectives, which are approved by the Board each year, and reflect Prudential’s cultural values.
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 on a routine basis but reserves the right to do so in an exceptional circumstance. For example, this rule may be required if, for any reason, like-forlike replacement awards on recruitment could not be made under existing plans.
Statement of consideration of shareholder views The Remuneration Committee and the Company undertake regular consultation with key institutional investors on the Directors’ remuneration policy and implementation. This engagement is led by the Remuneration Committee Chairman and is an integral part of the Company’s investor relations programme. The Committee is grateful to shareholders for the feedback that is provided and takes this into account when determining executive remuneration.
The updates to the policy are intended to clarify how it would be applied should the number or remit of Committees of the Board change.
Deferred 2013 annual incentive award 2014 32,731 1,237 33,968 31 Dec 16 1,317
2 The awards for Barry Stowe were made in ADRs (1 ADR = 2 ordinary shares). The figures in the table are represented in terms of ordinary shares. 3 The awards for Mike Wells in 2013, 2014 and 2015 were made in ADRs (1 ADR = 2 ordinary shares). The award made in 2016 was made in ordinary shares. The figures in the table are represented in terms of ordinary shares.
Section C: Balance sheet notes 201 C1 Analysis of Group statement of financial position by segment C2 Analysis of segment statement of financial position by business type 206 C2.1 Asia insurance operations 207 C2.2 US insurance operations 208 C2.3 UK insurance operations C3 Assets and liabilities – classification and measurement 209 C3.1 Group assets and liabilities 217 C3.2 Debt securities 223 C3.3 Loans portfolio C3.4 Financial instruments – additional information 224 C3.4(a) Financial risk 226 C3.4(b) Derivatives and hedging 227 C3.4(c) Derecognition, collateral and offsetting
Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance (59,366) (29,656)
Net unrealised valuation movements on securities of US insurance operations classified as available-for-sale: Net unrealised holding gains (losses) arising during the year 241 (1,256) Deduct net gains included in the income statement on disposal and impairment (269) (49)
Items that will not be reclassified to profit or loss Shareholders’ share of actuarial gains and losses on defined benefit pension schemes: Related tax 14 (5)
For the purposes of local regulations, segregated accounts are established for linked business for which policyholder benefits are wholly or partly determined by reference to specific investments or to an investment-related index.
Financial investments measured at fair value are classified into a three level hierarchy as described in note C3.1(b).
expenses for Prudential-branded general insurance products as part of this arrangement, which terminated at the end of 2016. (ii) Corporate expenditure as shown above is for Group Head Office and Asia Regional Head Office. (iii) Restructuring costs are incurred in the UK and Asia and represent one-off business development expenses. (iv) Amortisation of acquisition accounting adjustments principally relate to the acquired REALIC business of Jackson. (v) On 5 February 2015, the Group completed the sale of its closed book life insurance business in Japan. (vi) For definitions of AER and CER refer to note A1.
Short-term fluctuations relating to debt securities (Charges) credits in the year: Losses on sales of impaired and deteriorating bonds (94) (54) Defaults (4) – Bond write-downs (35) (37) Recoveries/reversals 15 18
The Group’s operating segments are also its reportable segments for the purposes of internal management reporting.
However, some types of business movements in liabilities do require bifurcation to ensure that at the net level (ie after allocated investment return and charge for policyholder benefits) the operating result reflects longer-term market returns.
Pension costs: Defined benefit schemes* 213 (63) Defined contribution schemes 79 67 * The charge (credit) incorporates the effect of actuarial gains and losses.
B4 Effect of changes and other accounting features on insurance assets and liabilities
in relation to prior years 1 (81) (7) 5 (82) (82) Movements in provisions for
in relation to prior years 5 (65) (7) – (67) (67) Movements in provisions for
Deferred acquisition costs and other intangible assets 25 – 82 82 107 91
Reinsurers’ share of insurance contract liabilities 1,352 134 1,104 1,238 2,590 2,156
Equity securities and portfolio holdings in unit trusts 193,784 4,046 722 198,552
Excluding the loans and funds withheld liability under REALIC’s reinsurance arrangements as described above, which amounted to a net liability of £(179) million (2015: £(164) million), the level 3 fair valued financial assets net of financial liabilities were £4,772 million (2015: £4,272 million). Of this amount, a net asset of £72 million (2015: net liability of £(77) million) was internally valued, representing less than 0.1 per cent of the total fair valued financial assets net of financial liabilities (2015: less than 0.1 per cent). Internal valuations are inherently more subjective than external valuations. Included within the internally valued net asset/liability were: (a) Debt securities of £422 million (2015: £381 million), which were either valued on a discounted cash flow method with an internally developed discount rate or on external prices adjusted to reflect the specific known conditions relating to these securities (eg distressed securities or securities which were being restructured).
Fair value (as included in the footnote above in the overview table and the statement of financial position) 40,645 33,984
With-profits funds * Including bonds guaranteed by the federal government. † The exposure to the United States sovereign debt comprises holdings of the US, UK and Asia insurance operations.
The vast majority of the Group’s financial assets are held to back the Group’s policyholder liabilities. Although asset/liability matching is an important component of managing policyholder liabilities (both those classified as insurance and those classified as investments), this profile is mainly relevant for managing market risk rather than liquidity risk. Within each business unit this asset/liability matching is performed on a portfolio-by-portfolio basis.
Of these financial liabilities, 28 per cent (2015: 40 per cent) are held by the PAC with-profits fund, mainly relating to foreign currency borrowings.
Collateral and pledges under derivative transactions At 31 December 2016, the Group had pledged £1,853 million (2015: £1,622 million) for liabilities and held collateral of £2,788 million (2015: £1,865 million) in respect of over-the-counter derivative transactions.
Shareholders’ transfers post-tax (44) – – (44) Investment-related items and other movements note (d) 889 621 495 2,005 Foreign exchange translation differences note (a) 4,458 2,458 2,159 9,075
§ The policyholder liabilities of the with-profits business of £27,266 million, shown in the table above, is after deducting the intra-group reinsurance liabilities ceded by the UK insurance operations of £1,302 million to the Hong Kong with-profits business (2015: £1,261 million). Including this amount, the Asia with-profits policyholder liabilities are £28,568 million.
Capitalised acquisition costs and deferred income for these contracts are amortised over the life of the book of contracts.
SAIF with-profits SAIF is a ring-fenced withprofits sub-fund of PAC. No new business is written in SAIF, although regular premiums are still being paid on in-force policies. The fund is solely for the benefit of policyholders of SAIF. Shareholders have no interest in the profits of this fund although they are entitled to asset management fees on this business. The process for determining policyholder bonuses of SAIF with-profits policies, is similar to that for the with-profits policies of the WPSF. However, in addition, the surplus assets in SAIF are allocated to policies in an orderly and equitable distribution over time as enhancements to policyholder benefits.
For annuities in payment, the tables and range of percentages used are set out in C4.1(d)(iii).
Operation of the UK with-profits sub-funds The WPSF mainly contains with-profits business but it also contains some non-profit business (unit-linked, term assurances and annuities). The WPSF’s profits, apportioned 90 per cent to its policyholders and 10 per cent to shareholders as surplus for distribution, are determined via the annual actuarial valuation.
Net book amount at end of year 1,475 153 1,628 1,648
Net neutral direct exposure (indirect exposure only) Investment performance through asset management fees
The estimated sensitivity to the decrease and increase in interest rates at 31 December 2016 and 2015 is as follows: Decrease
Jackson enters into financial derivative transactions, including those noted below to reduce and manage business risks. These transactions manage the risk of a change in the value, yield, price, cash flows or quantity of, or a degree of exposure with respect to assets, liabilities or future cash flows, which Jackson has acquired or incurred.
Triennial actuarial valuations Defined benefit pension schemes in the UK are generally required to be subject to full actuarial valuations every three years in order to assess the appropriate level of funding for schemes in relation to their commitments. These valuations include assessments of the likely rate of return on the assets held within the separate trustee administered funds.
The PSPS scheme has entered into a derivatives-based strategy to match the duration and inflation profile of its liabilities. This involved a reallocation from other investments to other assets with an interest and inflation swap overlay. As at 31 December 2016, the nominal value of the interest and inflation-linked swaps amounted to £0.8 billion (2015: £0.7 billion) and £5.0 billion (2015: £3.4 billion) respectively. The SASPS and M&GGPS use very limited or no derivatives to manage their risks.
(b) Assumptions The actuarial assumptions used in determining benefit obligations and the net periodic benefit costs for the years ended 31 December were as follows: Discount rate* 2.6 3.8 Rate of increase in salaries 3.2 3.0 Rate of inflation†
Movements on the pension scheme deficit determined on the economic basis are as follows, with the effect of the application of IFRIC 14 being shown separately: 2016 £m
(ii) The adjustments for investments in Prudential insurance policies are consolidation adjustments for intra-group assets and liabilities with no impact to operating results. (iii) Total employer contributions expected to be paid into the Group defined benefit schemes for the year ending 31 December 2017 amount to £45 million (2016: £45 million). (iv) The actuarial gains and losses attributable to policyholders and shareholders as shown in the table above are analysed as follows: Actuarial gains and losses Return on the scheme assets less amount included in interest income 1,203 (278) Losses on changes in demographic assumptions (18) (3) (Losses)/gains on changes in financial assumptions (1,733) 371 Experience gains on scheme liabilities 106 25
Effect of derecognition of PSPS surplus 274 (64) Consolidation adjustment for investments in Prudential insurance policies and other adjustments (13) 6
At 31 December 2016, there were options outstanding under save as you earn schemes to subscribe for shares as follows: Number of shares to subscribe for
Stochastic modelling of assets and liabilities is undertaken in the UK, US and Asia to assess the economic capital requirements. A stochastic approach models the inter-relationship between asset and liability movements, taking into account asset correlation, management actions and policyholder behaviour under a large number of alternative economic scenarios.
Singapore A risk-based capital framework applies in Singapore. A registered insurer incorporated in Singapore is required at all times to maintain a minimum level of paid-up ordinary share capital and to ensure that its financial resources are not less than the greater of (i) the total risk requirement arising from the assets and liabilities of the insurer, calculated in accordance with the Singapore Insurance Act; or (ii) a minimum amount of 5 million Singapore Dollars. The regulator also has the authority to direct that the insurer satisfy additional capital adequacy requirements in addition to those set forth under the Singapore Insurance Act if it considers such additional requirements appropriate.
At 31 December 2016, Jackson had a permitted practice in effect as granted by the local regulator allowing Jackson to carry certain interest rate swaps at book value, as if statutory hedge accounting were in place, instead of at fair value as would have been otherwise required. Jackson is required to demonstrate the effectiveness of its interest rate swap programme pursuant to the Michigan Insurance Code. The total effect of this permitted practice, net of tax, was to decrease statutory surplus by £334 million at 31 December 2016.
Guarantees Guarantee funds in both the UK and the US provide for payments to be made to policyholders on behalf of insolvent life insurance companies and are financed by payments assessed on solvent insurance companies based on location, volume and types of business. The estimated reserve for future guarantee fund assessments is not significant. The directors believe that the reserve is adequate for all anticipated payments for known insolvencies.
Executive officers and directors of the Company may from time to time purchase insurance, asset management or annuity products marketed by Group companies in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with other persons.
In 2016 and 2015, 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.
The investments in these joint ventures have the same accounting year end as the Group. The Group’s associates, which are also accounted for under the equity method, include PPM South Africa and from September 2016 the Indian insurance entity, see below. In addition, the Group has investments in Open-Ended Investment Companies (OEICs), unit trusts, funds holding collateralised debt obligations, property unit trusts and venture capital investments of the PAC with-profits funds where the Group has significant influence. As allowed under IAS 28, these investments are accounted for on a fair value through profit or loss basis. The aggregate fair value of associates accounted for at fair value through profit or loss, where there are published price quotations, is approximately £3.5 billion at 31 December 2016 (2015: £1.4 billion).
Brooke Life Insurance Company Ordinary shares 100.00% 1 Corporate Way, Lansing, Michigan 48951, USA
Carraway Guildford Limited Partnership Limited partnership interest 100.00% Lloyds Chambers, 1 Portsoken Street, London E1 8HZ, UK
Cribbs Mall Nominee (1) Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
Eastspring Investments – Pan European Fund Ordinary shares 79.06% 10 Marina Boulevard, #32-01, Marina Bay Financial Centre, Singapore 018983
Innisfree M&G PPP LLP Limited partnership interest 35.00% Boundary House, 91-93 Charterhouse Street, London EC1M 6HR, UK
M&G Real Estate Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
M&G RED Employee Feeder GP Limited Ordinary shares 100.00% 50 Lothian Road, Festival Square, Edinburgh EH3 9WJ, UK
Manchester JV Limited Ordinary shares 50.00% 40 Broadway, London SW1H 0BU, UK
MCF S.r.l. Ordinary shares 45.00% Via Romagnosi 18/a, 00196 Roma, Italy
Prudential Investment (Luxembourg) 2 S.à r.l. Ordinary shares 100.00% 34-38, Avenue de la Liberté, L-1930 Luxembourg
Prudential Staff Pensions Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
Scotts Spazio Pte. Ltd. Ordinary shares 45.00% 152 Beach Road, #27-01, Gateway East, Singapore 189721
In addition to the critical accounting policies presented in note A3.1, the following detailed accounting policies are adopted by the Group to prepare the consolidated financial statements. These accounting policies are applied consistently for all years presented and normally are not subject to change unless new accounting standards, interpretations or amendments are introduced by the IASB.
(j) Share-based payments and related movements in own shares The Group offers share award and option plans for certain key employees and a Save As You Earn plan for all UK and certain overseas employees. Shares held in trust relating to these plans are conditionally gifted to employees.
Prudential plc (the Company) is a parent holding company. The Company together with its subsidiaries (collectively, the Group) is an international financial services group with its principal operations in Asia, the US and the UK. In Asia, the Group has operations in Hong Kong, Indonesia, Malaysia, Singapore and other countries. In the US, the Group’s principal subsidiary is Jackson National Life Insurance Company. In the UK, the Group operates through its subsidiaries, primarily The Prudential Assurance Company Limited and M&G Investment Management Limited.
The profit for the financial year of the Company in accordance with IFRS includes dividends received in the year from subsidiary undertakings of £1,318 million and £985 million for the years ended 31 December 2016 and 2015, respectively.
(ii) The actuarial gains attributable to policyholders and shareholders are analysed as follows:
Return on Scheme assets excluding interest income* 949 (248) Actuarial gains (losses)
Experience gains on Scheme liabilities 87 28 Actuarial losses – demographic assumptions (32) (3) Actuarial (losses) gains – financial assumptions (1,281) 287
— Assessment of assumptions of policyholder behaviour, including consideration against relevant company and industry historical data.
— In our opinion, those reports have been prepared in accordance with the Companies Act 2006.
Other income and expenditure note (i) (679) (566) Solvency II and restructuring costs note (ii) (57) (51) Interest received from tax settlement 37 –
Short-term fluctuations in investment returns 6 (507) (1,215) (1,343) 58% 62% Effect of changes in economic assumptions 7 (60) 66 66 (191)% (191)% Mark to market value movements on
Short-term fluctuations in investment returns included in profit for the year arise as follows: (i) Group summary 2016 £m 2015*£m
Total UK insurance operations (175) 96 * The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflected the Solvency I basis being the regime applicable for the year.
Existing business – transfer to net worth 1,157 (92) 1,065 (1,065) – Expected return on existing business note 5 39 54 93 773 866 Changes in operating assumptions and
Required capital note 10 10,296 9,282 Value of in-force business (VIF) note 10 24,937 19,198 Add back: deduction for cost of time value of guarantees note 10 998 1,100 Expected free surplus generation from the sale of Korea life business note 17 (76) – Other items note (1,430) (1,714)
Change representing effect on: * In order to show the Asia long-term business on a comparable basis, the 2015 comparatives for new business contribution have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details).
Fixed annuities provide that, at Jackson’s discretion, it may reset the interest rate credited to policyholders’ accounts, subject to a guaranteed minimum. The guaranteed minimum return varies from 1.0 per cent to 5.5 per cent for both years, depending on the particular product, jurisdiction where issued, and date of issue. For 2016, 87 per cent (2015: 87 per cent) of the account values on fixed annuities are for policies with guarantees of 3 per cent or less. The average guarantee rate is 2.6 per cent (2015: 2.6 per cent).
Jackson issues VA contracts where it contractually guarantees to the contract holder either: a) return of no less than total deposits made to the contract adjusted for any partial withdrawals; b) total deposits made to the contract adjusted for any partial withdrawals plus a minimum return; or c) the highest contract value on a specified anniversary date adjusted for any withdrawals following the specified contract anniversary. These guarantees include benefits that are payable upon depletion of funds (Guaranteed Minimum Withdrawal Benefit (GMWB)), as death benefits (Guaranteed Minimum Death Benefits (GMDB)), or as income benefits (Guaranteed Minimum Income Benefits (GMIB)). These guarantees generally protect the policyholders’ value in the event of poor equity market performance. Jackson hedges the GMWB and GMDB guarantees through the use of equity options and futures contracts, and fully reinsures the GMIB guarantees.
The projected rates of return for holdings of corporate bonds comprise the risk-free rate plus an assessment of long-term spread over the risk-free rate.
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 a best estimate credit risk allowance. The remaining elements of prudence within the Solvency II allowance are incorporated into the risk margin included in the discount rate, shown in note 14(iii).
(vi) Effect of changes in economic assumptions Movements in the value of in-force business at the beginning of the year caused by changes in economic assumptions, net of the related change in the time value of cost of options and guarantees, are recorded in non-operating results. For UK insurance operations, the effect is after allowing for the recalculation of transitional measures on technical provisions.
Institutional business 0.50 0.70 Allowance for long-term defaults included in projected spreadnote 14(a)(viii) 0.21 0.24 Risk discount rate: Variable annuity: Risk discount rate 6.9 6.8 Additional allowance for credit risk included in risk discount ratenote 14(a)(viii) 0.2 0.2
The local standard corporate tax rates applicable for the most significant operations for 2016 and 2015 are as follows: Standard corporate tax rates %
www.prudential.co.uk� Annual�Report�2016 Prudential plc 359 06 European Em bedded V alue (EEV
Analysis of pre-tax IFRS operating profit by source and margin analysis of Group long-term insurance business The following analysis expresses certain of the Group’s sources of operating profit as a margin of policyholder liabilities or other suitable driver. Details on the calculation of the Group’s average policyholder liability balances are given in note (iv) at the end of this section.
— Margin on revenues increased by £98 million on a constant exchange rate basis from £1,821 million to £1,919 million in 2016, primarily reflecting higher regular premium income recognised in the year.
— Margin on revenues represents premium charges for expenses and other sundry net income received by the UK. — Acquisition costs incurred were broadly consistent with 2015 at £89 million, equivalent to 8 per cent of total APE sales in 2016 (2015: 8 per cent). The ratio above expresses the percentage of shareholder acquisition costs as a percentage of total APE sales. The year on year comparison of the ratio is therefore impacted by the level of with-profits business (where acquisition costs are funded by the estate) in the year and the contribution from the bulk annuities transactions in the prior year. Acquisition costs expressed as a percentage of shareholder-backed APE sales (excluding the bulk annuity transactions) were 37 per cent (2015: 36 per cent).
† Cost/income ratio represents cost as a percentage of operating income before performance-related fees. ‡ Institutional includes internal funds.
The effect of these actions on the UK’s long-term IFRS operating profit, underlying free surplus generation and EEV operating profit is shown in the tables below.
In-force business: Other management actions to improve solvency 74 61 135 169 Provision for the review of past annuity sales – (175) (175) –
M&G remittances to the Group 290 302 PruCap remittances to the Group 45 55
Value of shareholder transfers (2.3) (2.1) Risk margin (net of transitional) (0.7) (0.7) Other valuation differences (0.3) (0.1)
In addition to showing the amounts, both discounted and undiscounted, expected to be generated from all in-force business at 31 December 2016, the tables also present the expected future free surplus to be generated from the investment made in new business during 2016 over the same 40-year period.
Effect of Solvency II implementation† 46 55 49 45 43 48 1,350 1,636
Discounted expected generation from all in-force business at 31 December 2016 34,725 Add: Free surplus of life operations held at 31 December 2016 5,351 Less: Time value of guarantees (998) Expected free surplus generation from the sale of Korea life business 76 Other non-modelled items 1,430
Acquisition costs and other expenditure (8,848) (8,208) (6,752) (6,861) (6,032) Finance costs: interest on core structural borrowings of
Earned premiums, net of reinsurance as shown in the IFRS financial statements 36,961 35,506
The Group’s accounts are prepared in accordance with current International Financial Reporting Standards (IFRS) applicable to the insurance industry. The International Accounting Standards Board (IASB) introduced a framework that it described as Phase I, which permitted insurers to continue to use the statutory basis of accounting for insurance assets and liabilities that existed in their jurisdictions prior to January 2005. In July 2010, the IASB published its first Exposure Draft for its Phase II on insurance accounting, which would introduce significant changes to the statutory reporting of insurance entities that prepare accounts according to IFRS. A revised Exposure Draft was issued in June 2013. The IASB is currently re‑deliberating the Exposure Draft proposals in light of comments by the insurance industry and other respondents and is expecting to issue the final standard (IFRS 17, ‘Insurance Contracts’) in the first half of 2017. The standard is expected to apply from 2021.
Available for sale (AFS) Securities that have been acquired neither for short-term sale nor to be held to maturity. AFS securities are measured at fair value on the statement of financial position with unrealised gains and losses being booked in Other Comprehensive Income instead of the income statement.
Guaranteed minimum death benefit (GMDB) (US) The basic death benefit offered under variable annuity contracts, which specifies that if the owner dies before annuity income payments begin, the beneficiary will receive a payment equal to the greater of the contract value or purchase payments less withdrawals.
Risk margin reserve (RMR) charge An RMR charge is included within operating profit based on longer-term investment returns and represents a charge for long-term expected defaults of debt securities, determined by reference to the credit quality of the portfolio.
Rights to dividends under the various schemes are set out on pages 110 to 157.