Contents 01 Group overview 02–10 02 Chairman’s statement 04 Group Chief Executive’s report 02 Strategic report 11–68 12 Our world 14 Our strategy 15 How our business works 16 Measuring our performance 18 Our businesses and their performance 36 Chief Financial Officer’s report on our 2015 financial performance 49 Group Chief Risk Officer’s report on the risks facing our business and how these are managed 57 Corporate responsibility review 03 Governance 69–100 70 Chairman’s introduction 71 Board of Directors 76 How we operate 82 Further information on Directors 84 Risk management and internal control 86 Committees 98 Statutory and regulatory disclosures 99 Compliance with corporate governance codes 99 Additional information 100 Index to principal Directors’
I am pleased to introduce Prudential’s 2015 Annual Report. The Company has again produced an impressive set of results, which are all the more striking given recent economic conditions. As ever, our performance is rooted in the quality of the products and services which our first-rate staff and agents provide to our customers. It is this which ultimately drives the returns we provide to our shareholders and underpins the role we play in our communities.
— US life IFRS operating profit of £1,691 million was up 10 per cent, driven by growth in fee income earned on separate account assets that have continued to benefit from robust net inflows.
A track record of innovation in the institutional market has enabled M&G to be at the forefront of a number of specialist fixed-income markets, including leveraged finance and infrastructure investment. Net institutional inflows were £3.9 billion, compared with £0.4 billion in 2014. The M&G Alpha Opportunities Fund has been particularly popular with institutional investors, attracting £2.0 billion of net inflows during 2015.
7 Source: based on Life Insurance Association, Singapore data as at December 2015.
24m life customers worldwide stock exchange listings £509bn assets under management 167 years of providing financial security
Capabilities Strong capabilities in attractive m arkets, product innovation, custom er retention, attract/retain talent and focus on efficiency, automation and risk m anagem ent
+11% — Underlying free surplus in 2015 increased by 15 per cent, on a constant exchange rate basis (18 per cent on an actual exchange rate basis), compared to 2014, driven by growth of the in-force portfolio, and continued discipline in the investment made to support new business growth.
Reported actuals 924 1,075 1,140 1,324 Constant exchange rate9 901 1,075 1,260 1,468 >£1,858 million Constant exchange rate change % (year-on-year) 19 17 17 18 >15% CAGR
Group objective for cumulative period 1 January 2014 to 31 December 2017 Cumulative Group underlying free surplus generation from 2014 onwards £5.6bn > £10bn
Asia’s economic transformation continues to generate material increases in personal wealth and drives significant demand for solutions to individuals’ financial planning needs. During 2015, macroeconomic and geopolitical turbulence continued to create some challenges but the long-term potential remains compelling.
— Successful partnership with Standard Chartered Bank now in 18th year
Social welfare provisions vary by market in Asia but generally fall well below the levels people need to sustain their families’ lifestyle 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.
Shane from the Philippines has been a Prudential customer for five years, and holds a PRULink Exact Protector policy, with the additional optional riders Life Care Benefit, Personal Accident, Hospitalisation Income and Waiver of Total and Permanent Disability.
However, as a group, baby boomers are under-saved and, in addition, their life expectancies continue to rise. They are in need of insurance products that offer the opportunity to grow their assets and to provide with guaranteed lifetime income to support them through these challenges.
The US retirement market continues to offer significant opportunities for profitable growth by providing solutions to the millions of baby boomers and to the future generations that will follow.
Long-term perspective Jackson’s long-term strategy is focused on profitable growth opportunities created by the demand for retirement income and accumulation products in the world’s largest retirement market.
— Launch of PruFund range within ISA wrapper drives further strong performance of with-profits offering
Importantly for customers, our PruFund range provides smoothing in a volatile and uncertain investment environment. The strength of the proposition is reflected in the consistent growth we have experienced, both in terms of the number of customers invested and the assets under management.
PruFund comprises a range of different funds, with or without explicit guarantees, and a range of ‘risk-rated’ fund options. We meet a wide range of customer needs by providing access to PruFund through a variety of tax or product wrappers, namely ISAs, bonds, pensions and drawdown.
M&G operates a range of UK-domiciled retail funds which are now distributed in 15 markets across Europe and Asia. At the end of 2015 clients outside the UK account for 41 per cent of our retail assets under management.
Investment expertise M&G’s investment expertise spans all the principal asset classes – equities, fixed income, multi-asset and real estate – so that we can always offer investment solutions to our clients as market conditions and investor sentiment change.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 37
Note 1a: Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver page 333
The increase in free surplus generated by our life insurance businesses reflects our growing scale and the highly capitalgenerative nature of our business model. We drive this metric by targeting markets and products that have low-strain, high-return and fast payback profiles and by delivering both good service and value to improve customer retention. Our ability to generate both growth and cash is a distinctive feature of Prudential in our industry. In line with this approach, the closing value of free surplus in our life and asset management operations increased to £6,766 million at 31 December 2015 (31 December 2014: £5,059 million, on an actual exchange rate basis), after financing reinvestment in new business and funding cash remittances from the business units to Group.
Other capital movements Subordinated debt issuance 0.6 Foreign currency translation impacts 0.2 Final 2014 and 2015 first interim dividend paid (1.0)
Shareholders’ borrowings in holding company 4,567 353 4,920 3,869 579 4,448
The Board has decided to increase the full-year ordinary dividend by 5 per cent to 38.78 pence per share, reflecting the continued strong financial performance of the Group in 2015. In line with this, the directors have approved a second interim ordinary dividend of 26.47 pence per share (2014: final dividend of 25.74 pence) which brings the total ordinary dividend for the year to 38.78 pence (2014: 36.93 pence). In addition, the Board has decided to award a special dividend of 10 pence per share, reflecting the additional contribution to earnings from the specific management actions taken to position the balance sheet more efficiently under the new Solvency II regime.
Uncertainty around investment returns can arise through credit risk via the potential of defaults, and market risks resulting from the volatility of asset values as a result of fluctuations in equity prices, interest rates, foreign exchange and property prices. Liquidity risk is also a key area of focus. Regular stress testing is undertaken to ensure the Group is able to generate sufficient cash resources to meet financial obligations as they fall due in business as usual and in stress scenarios.
— Business environment and strategic risks closely monitored and assessed for consideration in the business plans where appropriate
— Recovery Plan which covers the Group’s corporate and risk governance for managing a distressed environment, a range of credible recovery options, and scenarios to assess the effectiveness of these recovery options
Manage and control (Unaudited) The control procedures and systems established within the Group are designed to manage the risk of failing to meet business objectives. This can of course only provide reasonable and not absolute assurance against material misstatement or loss. They focus on aligning the levels of risk-taking with the achievement of business objectives.
Prudential provides solutions that address the biggest financial dilemmas people face. Whether it’s the need for income in old age, support for children’s education or for protection in case the main household earner becomes ill, we offer solutions targeting each of these potentially lifechanging events, based on our long-term approach to our customers and our business.
Our Group approach to corporate responsibility is underpinned by four global principles: — Serving our customers; — Valuing our people; — Supporting local communities; and
We want our customers to stay with us for the long term. This means we must proactively listen to them to understand and respond to their changing needs, and maintain their trust in us with fair, transparent products and service. We achieve this by not only delivering consistent performance from all our businesses, year in and year out, but also by ensuring that performance is sustained over the long term.
Prudential Singapore’s PRUCover Total Refund is designed to provide much-needed security and reassurance for customers during times of crisis. In the event of critical illness, customers can focus on improving their health while being assured that they have the financial support to see them through this stressful time. The affected customer will receive a lump sum payout as well as a waiver of future premiums, while also continuing to receive coverage for death and terminal illness. In the event of accidental death, family members of the policyholder will receive a payout of three times the sum assured. PRUCover Total Refund also rewards those who have remained in good health. If customers do not have claims on the Critical Illness Benefit, they will receive a refund on the total premiums paid at the end of the policy term.
We foster an environment in which our people find value and meaning in their work, and deliver outstanding performance for our customers, shareholders and communities. This is achieved through our continued focus on diversity and inclusion, talent development, employee engagement, and performance and reward.
Jackson has launched a new tool to support Elite Access, the Elite Access 1:1 Video Presenter. This is an interactive and personalised multi-media experience created to enable Jackson wholesalers to engage key audiences and help advisers grow their business. The tool features adviser-facing and client-facing versions.
A third cohort of colleagues based in the UK have joined The Pearls Programme, a UK-based development initiative designed to support women in middle- to seniormanagement positions in building confidence, capabilities and contacts.
This period does not correspond with the Directors’ report period (January 2015 to December 2015). The reporting period was brought forward by three months to improve the availability of invoice data (which often lags by one month or more after the usage period) and reduce the reliance on estimated data. Prudential owns assets, which are held on its balance sheet in the financial statements, over which it does not have operational control. These are excluded from the data below. Assets not included on the balance sheet but held under an operating lease and where we have operational control are included.
Assessment methodology The Greenhouse Gas Protocol Revised ‘A Corporate Accounting and Reporting Standard (Revised Edition)’ 2004
The Board has terms of reference which specifically set out matters reserved for its decision. These include matters such as approving 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 that requires all business units to seek authority from the Board to carry out actions exceeding pre-determined limits.
The appointment of two further Non-executive Directors to the Board ensures the composition of the Board remains balanced between Executive and Non-executive Directors.
Board papers remained subject to continuous improvement throughout the year to provide relevant, high-quality information and strike the right balance between detail and overview.
The system of internal control complies with the UK Code and the HK Code, as required by the Group’s primary listings in London and Hong Kong, as well as the relevant provisions required by the Company’s secondary listings in New York and Singapore.
Mr Law and Lord Turner were identified through this process. Mr Law has excellent knowledge and in-depth experience of the issues in the financial services industry gained throughout his lengthy career at PwC which included five years as Global Leader of their insurance practice. He also has extensive experience working with clients in an industry regulated by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
– Executive Directors The Committee also led searches for the executive Board vacancies which arose during the year. During 2015, the appointments of the Group Chief Executive, the Group Chief Risk Officer and the Chief Executives of the Northern American, Asian and UK & Europe businesses were recommended by the Committee.
Mr Wilkey was selected as Chief Executive, Prudential Corporation Asia. He has 28 years of experience in life insurance. Prior to joining Prudential in 2006 as Chief Executive, Insurance, at Prudential Corporation Asia, Mr Wilkey was Deputy President and Chief Operating Officer of American International Assurance (AIA), responsible for AIA’s life companies in South East Asia.
In addition, in relation to the Group’s supplementary reporting on the EEV basis, the Committee considered the appropriateness of the economic assumptions underpinning the projected rates of return and risk discount rates, and of changes to EEV operating assumptions and the level of operating experience variances. It also reviewed the impact of changes to the Group’s EEV as a result of changes to the UK corporation tax rate enacted in the last quarter of 2015. The Committee was satisfied that the assumptions adopted by the Group were appropriate.
Risk management The Committee received deep dive reports on areas of interest from across the Group and carried out post-transaction reviews of certain of the Group’s transactions.
The Group Chief Risk Officer’s reports also provided the Committee with regulatory updates, particularly regarding Solvency II and submission of the Group’s Internal Model to the PRA, 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.
Company law requires the Directors to prepare financial statements for each financial year which give a true and fair view of the financial affairs of the Company and of the Group. The criteria applied in the preparation of the financial statements are set out in the statement of Directors’ responsibilities on page 292 and page 329.
During the year, I wrote to our major shareholders, and the shareholder representative bodies, ISS and the Investment Association, seeking their views on the decisions which the Committee took in 2015 and its proposals for 2016. We had a number of useful meetings where shareholders expressed their views and I am grateful for this feedback. On behalf of the Committee, I would like to thank shareholders for their engagement. We are firmly committed to continuing the Committee’s policy of engaging with our shareholders and we look forward to your continued support for the Company’s remuneration arrangements.
of salary; — CEO JNL: 460% of salary; and — Other PLTIP awards were 250%
At Prudential, remuneration packages are designed to ensure a strong alignment between pay and performance. As you can see from the charts on page 103, sustained growth across all our key performance metrics has delivered substantial value to our shareholders. This has been reflected in both the annual bonuses paid and the release of long-term incentive awards, as set out in the annual report on remuneration.
Director but no bonus was paid. 2 Jackie Hunt stepped down from the Board on 3 November 2015. The maximum bonus opportunity shown represents her annual opportunity as an Executive
2 Pierre-Olivier Bouée, Jackie Hunt and Tidjane Thiam left the Board during 2015. For details of arrangements in respect of their long-term incentive awards, please see the ‘Payments to Past Directors’ section. 3 This does not include the vesting of Michael McLintock’s M&G Executive Long-Term Incentive Plan award. 4 Tony Wilkey’s awards include an award which vested on 14 September 2015 (the share price on that date was £13.85) in addition to the awards which vest in 2016. 5 The number of shares vesting include accrued dividend shares.
And the Committee considers it appropriate, taking account of the extent of the participants’ responsibility for the relevant restatement or breach, that clawback be applied to the relevant participant.
‡ The percentage of award released for achieving maximum targets is 100 per cent.
Group total shareholder return (TSR) performance will be measured on a ranked basis. 25 per cent of the award will vest for TSR performance at the median of the peer group, increasing to full vesting for performance at the upper quartile. The peer group for 2015 awards is the same for 2013 awards as detailed on page 114.
Notes 1 David Law was appointed to the Board on 15 September 2015. 2 Lord Turnbull retired from the Board on 14 May 2015. 3 Lord Turner was appointed to the Board on 15 September 2015.
01/01/2015 (or on date of appointment) During 2015 31/12/2015 (or on date of retirement) Share ownership guideline
Tidjane's deferred bonus awards will be released in accordance with the plan rules and remain subject to malus provisions. In line with market practice, the Group paid the professional legal fees incurred by him in respect of finalising his termination arrangements, which amounted to £14,121. In addition, in consideration of agreeing to a confidentiality clause, Tidjane received £1,000.
This resolution received a significant vote in favour by shareholders and the Committee is grateful for this support and endorsement by our shareholders. The votes received were: Resolution Votes for % of votes cast Votes against % of votes cast Total votes cast Votes withheld
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 127
Deferred 2011 annual incentive award 2012 101,314 101,314 – 31 Dec 14 30 Mar 15 750 1,697
Profit before tax (being tax attributable to shareholders’ and policyholders’ returns)* 3,321 3,154 Less tax charge attributable to policyholders’ returns (173) (540)
Profit before tax attributable to shareholders B1.1 3,148 2,614 Total tax charge attributable to policyholders and shareholders B5 (742) (938) Adjustment to remove tax charge attributable to policyholders’ returns 173 540 Tax charge attributable to shareholders’ returns B5 (569) (398)
Related change in amortisation of deferred acquisition costs C5.1(b) 337 (87) Related tax 339 (304)
Total comprehensive income for the year – – 2,206 220 565 2,991 – 2,991
Prudential plc (the Company) together with its subsidiaries (collectively, the Group or Prudential) is an international financial services group with its principal operations in Asia, the US and the UK. Prudential offers a wide range of retail financial products and services and asset management services throughout these territories. The retail financial products and services principally include life insurance, pensions and annuities as well as collective investment schemes.
— The Group has the current ability to join together with other partners to direct the activities of the partnership.
Asia insurance operations For those territories applying US GAAP to insurance assets and liabilities, as permitted by the ABI SORP, principles similar to those set out in the US insurance operations paragraph below are applied to the deferral and amortisation of acquisition costs. For other territories in Asia, the general principles of the ABI SORP are applied with, as described above, deferral of acquisition costs being either explicit or implicit through the reserving basis.
A3.1 Accounting policies and use of estimates and judgements continued US insurance operations Under IFRS 4, the Group applies ‘grandfathered’ US GAAP for measuring the insurance assets and liabilities of US insurance operations. The Group applies FAS ASU 2010-26 on ‘Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts’ and capitalises only those incremental costs directly relating to successfully acquiring a contract.
— Loans and receivables – except for those designated as at fair value through profit or loss or available-for-sale, these instruments comprise non-quoted investments that have fixed or determinable payments. These instruments include loans collateralised by mortgages, deposits, loans to policyholders and other unsecured loans and receivables. These investments are initially recognised at fair value plus transaction costs. Subsequently, these instruments are carried at amortised cost using the effective interest method.
Amortisation of acquisition accounting adjustments (8) (68) – – – – – (76) – (76)
Notes (i) The segmental analysis of interest income is as follows: £m
Notes (i) The segment revenue of the Group’s asset management operations includes: NPH broker-dealer fees which represent commissions received that are then paid on to the writing brokers on sales of investment products. To reflect their
The revenue for M&G of £961 million (2014: £987 million), comprising the amounts for asset management fee income, other income and performance-related fees shown above, is different to the amount of £1,237 million shown in the main table of this note. This is because the £961 million (2014: £987 million) is after deducting commissions which would have been included as charges in the main table. The difference in the presentation of commission is aligned with how management reviews the business.
Bond spread over swap rates note (i) 171 – 171 143 – 143
Total allowance for credit risk at 31 December 2014 58 46 Credit rating changes 2 1 Asset trading (2) (2) Other effects (including for new business) (3) (2)
Based on operating profit based on longer-term investment returns 4,007 (796) 3,211 125.8p 125.6p
Cumulative exchange loss on the sold Japan life business recycled from other comprehensive income D1 (46) – (46) (1.8)p (1.8)p
Liabilities Policyholder liabilities and unallocated surplus of with-profits funds: Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4) 107,907 125,819 88,792 – – – 322,518 309,539
Total intra-group debt represented by operational borrowings at Group level 1,705 2,004
(ii) Other non-insurance liabilities consist primarily of intra-group balances, derivative liabilities and other creditors.
Other non-investment and non-cash assets: Property, plant and equipment – – 978 978 Reinsurers’ share of insurance contract liabilities – – 7,167 7,167 Deferred tax assets – – 2,765 2,765 Current tax recoverable – – 117 117 Accrued investment income – – 2,667 2,667 2,667
C3.2 Group assets and liabilities – measurement a Determination of fair value The fair values of the assets and liabilities of the Group as shown in this note have been determined on the following bases. The fair values of the financial instruments for which fair valuation is required under IFRS are determined by the use of current market bid prices for exchange-quoted investments or by using quotations from independent third parties such as brokers and pricing services or by using appropriate valuation techniques.
Total financial investments, net of derivative liabilities 55,728 43,296 4,450 103,474
Equity securities and portfolio holdings in unit trusts 1,303 116 32 1,451
Liabilities Investment contract liabilities without discretionary participation features – – (2,657) (2,657) Core structural borrowings of shareholder-financed operations – (4,926) – (4,926) Operational borrowings attributable to shareholder-financed operations – (2,241) (22) (2,263) Borrowings attributable to the with-profits funds – (1,050) (58) (1,108) Obligations under funding, securities lending and sale and repurchase
At 31 December 2015, the Group held £4,108 million (2014: £3,760 million) of net financial instruments at fair value within level 3. This represents 1 per cent (2014: 1 per cent) of the total fair valued financial assets net of fair valued financial liabilities.
Except for certain assets covering liabilities that are measured at fair value, the debt securities of the US insurance operations are classified as available-for-sale. Unless impaired, fair value movements are recognised in other comprehensive income. Realised gains and losses, including impairments, recorded in the income statement are as shown in note B1.2 of this report.
Moody’s – Aaa 963 84 Moody’s – Aa1 to Aa3 41 29 Moody’s – A1 to A3 49 27 Moody’s – Baa1 to Baa3 88 72 Moody’s – Other 13 8
At 31 December 2015, Jackson had mortgage loans with a carrying value of £nil (2014: £13 million) where the contractual terms of the agreements had been restructured.
Total UK insurance operations loans 3,571 4,254 * The mortgage loans are collateralised by properties. By carrying value, 78 per cent of the £1,508 million held for shareholder-backed business relates to lifetime (equity release) mortgage business which has an average loan to property value of 30 per cent.
† Other loans held by the PAC with-profits fund are all commercial loans and comprise mainly syndicated loans.
Net asset value attributable to unit holders of consolidated unit trusts and similar funds 7,873 7,873 – – – – – – 7,873
Of these financial liabilities, 40 per cent (2014: 47 per cent) are held by the PAC with-profits fund, mainly relating to foreign currency borrowings.
The analysis includes the impact of premiums, claims and investment movements on policyholders’ liabilities. The impact does not represent premiums, claims and investment movements as reported in the income statement. For example, the premiums shown above will exclude any deductions for fees/charges and claims represent the policyholder liabilities provision released rather than the claim amount paid to the policyholder.
‡ Averages have been based on opening and closing balances and adjusted for acquisitions and disposals in the year and exclude unallocated surplus of with-profits funds.
C4.1 Movement and duration of liabilities continued C4.1(c) US insurance operations i Analysis of movements in policyholder liabilities A reconciliation of the total policyholder liabilities of US insurance operations from the beginning of the year to the end of the year is as follows: US insurance operations
ii Duration of liabilities The table below shows the carrying value of policyholder liabilities and maturity profile of the cash flows on a discounted basis for 2015 and 2014: Fixed annuity and other
Subject to local market circumstances and regulatory requirements, the guarantee features described in note C4.2(c) in respect of UK business broadly apply to similar types of participating contracts written in Hong Kong, Singapore and Malaysia. Participating products have both guaranteed and non-guaranteed elements.
Interest rate guarantees It is common in Asia for regulations or market-driven demand and competition to provide some form of capital value protection and minimum crediting interest rate guarantees. This would be reflected within the guaranteed maturity and surrender values.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 229
In accordance with US GAAP, the Guaranteed Minimum Death Benefit and the ‘for life’ portion of Guaranteed Minimum Withdrawal Benefit liabilities are determined each period end by estimating the expected value of benefits in excess of the projected account balance and recognising the excess ratably over the life of the contract based on total expected assessments. At 31 December 2015, these liabilities were valued using a series of stochastic investment performance scenarios, a mean investment return of 7.4 per cent (2014: 7.4 per cent) net of external fund management fees, and assumptions for lapse, mortality and expense that are similar to those used in amortising the capitalised acquisition costs.
Mortality assumptions are set based on the results of the most recent experience analysis looking at the experience over recent years of the relevant business. For non-profit business, a margin for adverse deviation is added. Different assumptions are applied for different product groups. For annuitant mortality, assumptions for current mortality rates are based on recent experience investigations and expected future improvements in mortality. The expected future improvements are based on recent experience and projections of the business and industry experience generally.
Comprising: Notes (i) All of the PVIF balances relate to insurance contracts. The PVIF attaching to investment contracts have been fully amortised. Amortisation is charged over
adjustment and costs, were £590 million. (v) These borrowings can be converted, in whole or in part, at the Company’s option and subject to certain conditions, on any interest payment date, into one
C6.2 Other borrowings continued Notes (i) In addition to the debt listed above, £200 million Floating Rate Notes were issued by Prudential plc in October 2015 which will mature in October 2016.
The effect of diversification across the Group’s life businesses is to significantly reduce the aggregate standalone volatility risk to IFRS operating profit based on longer-term investment returns. The effect is almost wholly explained by the correlations across risk types, in particular mortality and longevity risk.
For the sensitivity analysis as shown in the table below, the reasonably possible interest rate movement used is 1.0 per cent for all territories.
Equity price risk The non-linked shareholder business has limited exposure to equity and property investment (31 December 2015: £840 million). Generally changes in equity and property investment values are not directly offset by movements in policyholder liabilities.
The estimated sensitivity to a 10 per cent and 20 per cent change in equity and property prices for shareholder-backed Asia other business, which would be reflected in the short-term fluctuations component of the Group’s segmental analysis of profit before tax, at 31 December 2015 and 2014 would be as follows: Decrease Decrease of 20% of 10% of 20% of 10%
The reduction in the UK corporation tax rate to 19 per cent from 1 April 2017 and a further reduction to 18 per cent from 1 April 2020 was substantively enacted on 26 October 2015 which has had the effect of reducing the UK with-profits and shareholder-backed business element of the deferred tax balances as at 31 December 2015 by £17 million and the effects of these changes are reflected in the financial statements for the year ended 31 December 2015.
C8.2 Current tax Of the £477 million (2014: £117 million) current tax recoverable, the majority is expected to be recovered in one year or less.
f Intra-group arrangements in respect of the Scottish Amicable Insurance Fund Should the assets of the Scottish Amicable Insurance Fund be inadequate to meet the guaranteed benefit obligations of the policyholders of the Scottish Amicable Insurance Fund, the PAC long-term fund would be liable to cover any such deficiency in the first instance.
closure of regional sales centres and branches and staff terminations and other transformation costs to enable streamlining of operations. (ii) Other provisions comprise staff benefits provisions of £384 million (2014: £395 million), provisions for onerous contracts of £31 million (2014: £35 million) and
Scottish Amicable Finance plc Ordinary shares 100.00% United Kingdom Scottish Amicable ISA Managers Limited (in liquidation) Ordinary shares 100.00% United Kingdom Scottish Amicable Life Assurance Society No share capital 100.00% United Kingdom Scottish Amicable PEP and ISA Nominees Limited (in liquidation) Ordinary shares 100.00% United Kingdom Scotts Spazio Pte. Ltd. Ordinary shares 45.00% Singapore Sealand (No 1) Limited Ordinary shares 100.00% Jersey Sealand (No 2) Limited Ordinary shares 100.00% Jersey SES Manager Limited Ordinary shares 50.00% United Kingdom SII Insurance Agency, Inc. (Wisconsin) (in liquidation) Ordinary shares 100.00% USA SII Investments, Inc. Ordinary shares 100.00% USA Smithfield Limited Ordinary shares 100.00% United Kingdom Snushalls Team Limited (in liquidation) Ordinary shares 100.00% United Kingdom Spanish Trail Ownership, LLC Membership interest 100.00% USA Squire Capital I LLC Membership interest 100.00% USA Squire Capital II LLC Membership interest 100.00% USA Squire Reassurance Company LLC Membership interest 100.00% USA Sri Han Suria Sdn. Bhd. Ordinary shares 51.00% Malaysia
The financial statements of the parent company on pages 282 to 291 were approved by the Board of Directors on 8 March 2016 and signed on its behalf.
Transactions with owners, recorded directly in equity New share capital subscribed – 7 – 7 Share-based payment transactions – – 7 7
Dividends Interim dividends are recorded in the period in which they are paid. Final dividends are recorded in the period in which they are approved by shareholders. From 2016, the Company will make all dividend payments as interim payments.
Investment in subsidiary undertakings 7,247 (5,489) Offset against amount owed to subsidiary undertaking (79) – Reclassified as amount owed by subsidiary undertaking – (840) Other movements (27) –
The reduction in the UK corporation tax rate to 19 per cent from 1 April 2017 and a further reduction to 18 per cent from 1 April 2020 was substantively enacted on 26 October 2015 which has had the effect of reducing the deferred tax balances as at 31 December 2015. These changes are reflected in the financial statements for the year ended 31 December 2015.
Current service cost – (21) (21) (21) Negative past service cost – 48 48 48
A summary of the ordinary shares in issue and the options outstanding to subscribe for the Company’s shares at 31 December 2015 is set out in note C10 of the Group financial statements.
Liabilities: amounts falling due within one year Deferred tax liability – (8) (8) Other current liabilities (3,724) – (3,724)
Our response – We used our own actuarial specialists to assist us in performing our procedures in this area, which included: — Consideration of the appropriateness of the assumptions used in the stochastic models for the valuation of the US variable annuity guarantees. We assessed assumptions of policyholder behaviour by reference to relevant company and industry historical data. We assessed assumptions for investment mix and projected investment returns by reference to company- specific and industry data, and for future growth rates by reference to market trends and market volatility; and
For the remaining operations, we performed analyses at an aggregated Group level to re-examine our assessment that there were no significant risks of material misstatement within these operations.
The Senior Statutory Auditor, in conjunction with other senior staff in the Group team, also regularly attended business unit audit committee meetings (at a regional level for Asia) and participated in meetings with local management to obtain additional understanding first-hand of the key risks and audit issues at a component level which may affect the Group financial statements.
The supplementary information on pages 299 to 328 was approved by the Board of Directors on 8 March 2016.
Note The movement in operating profit from business in force of £327 million from £2,048 million for 2014 to £2,375 million for 2015 comprises: Increase in unwind of discount and other expected returns: Effects of changes in: Interest rates 6 Foreign exchange 22 Growth in opening value and other items 241
(f) The positive £20 million for persistency and withdrawals experience in 2015 (2014: £44 million) is driven mainly by favourable experience in Hong Kong. (g) The expense experience variance in 2015 is negative £(32) million (2014: £(27) million). The variance principally arises in operations which are currently
effect for the underlying growth in the in-force book, a £30 million foreign currency translation effect, and a £4 million impact of the 10 basis points increase in US 10-year treasury rates.
(c) The spread assumption for Jackson is determined on a longer-term basis, net of provision for defaults (see note 14 (ii)). The spread experience variance in 2015 of £149 million (2014: £192 million) includes the positive effect of transactions previously undertaken to more closely match the overall asset and liability duration. The reduction compared to the prior year reflects the effects of declining yields in the portfolio caused by the prolonged low interest rate environment.
(iii) US operations The short-term fluctuations in investment returns for US operations comprise: Investment return related experience on fixed income securities note (a) (17) 31 Investment return related impact due to changed expectation of profits on in-force variable annuity business in future periods based on current period separate account return, net of related hedging activity and other items note (b) (736) (197)
US operations Underlying free surplus generated from in-force life business 1,426 1,191 1,284 20% 11% Investment in new business note (ii)(a) (267) (187) (201) (43)% (33)%
Expected in-force cash flows (including expected return on net assets) 2,730 2,374 2,436 15% 12%
Representing: Statutory IFRS basis shareholders’ equity: Total IFRS basis shareholders’ equity 3,723 4,154 5,118 12,995 (40) 12,955 Additional retained profit (loss) on an EEV
Intra-group dividends (including statutory transfers) and investment in operations note (i) (1,373) – (1,373) 221 (1,152) Other movements note (v) 595 – 595 – 595
Representing: Asia operations Shareholders’ equity at beginning of year 1,347 1,327 2,674 9,638 12,312 New business contribution note (ii) (413) 124 (289) 1,779 1,490 Existing business – transfer to net worth 974 (77) 897 (897) – Expected return on existing business note 4 30 43 73 676 749 Changes in operating assumptions and experience
(b) Sensitivity analysis – non-economic assumptions The tables below show the sensitivity of embedded value as at 31 December and the new business contribution after the effect of required capital for 2015 and 2014 to: — 10 per cent proportionate decrease in maintenance expenses (a 10 per cent sensitivity on a base assumption of £10 per annum would represent an expense assumption of £9 per annum); — 10 per cent proportionate decrease in lapse rates (a 10 per cent sensitivity on a base assumption of 5 per cent would represent a lapse rate of 4.5 per cent per annum); and
In order to show the UK long-term business result on a comparable basis, the presentation of 2014 results has been adjusted to show the results of the sold PruHealth and PruProtect businesses separately.
The total profit that emerges over the lifetime of an individual contract as calculated using the embedded value basis is the same as that calculated under the IFRS basis. Since the embedded value basis reflects discounted future cash flows, under this methodology the profit emergence is advanced, thus more closely aligning the timing of the recognition of profit with the efforts and risks of current management actions, particularly with regard to business sold during the year.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 329
I: IFRS profit and loss information continued a Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver continued note (iii)
South-east Asia operations including Hong Kong 1,018 903 891 13% 14%
roup overview 2 Strategic report 3 G overnance irectors’ rem uneration report 5 Financial statem ents
Prudential Group funds under management note (i) 357.0 341.6 External funds note (ii) 151.6 154.3
These results allow for: — Capital in Jackson in excess of 250 per cent of the US local Risk Based Capital requirement. As agreed with the Prudential Regulation Authority, this is incorporated in the result above as follows: – Own funds: represent Jackson’s local US Risk Based available capital less 100 per cent of the US Risk Based Capital requirement (Company Action Level); and
With-profits fund estate (Solvency I Pillar 1 Peak 2 basis) 7.7 Adjustments to Solvency II: Risk margin (net of transitional) (0.7) Other valuation differences 0.6
The impact of Solvency II which is effective from 1 January 2016 is not reflected in the analysis below in line with the guidance issued by the CFO Forum. The new regulatory regime will not impact the free surplus generation profile of our operations in Asia and the US as Solvency II does not act as the local constraint on the ability to distribute profits to the Group. For these businesses, free surplus generation will continue to be driven by local regulatory and target capital requirements. For the UK insurance operations, Solvency II will alter free surplus generation and an early estimate is provided in section D of the additional unaudited information.
Less: Amounts expected to be realised in the current year (953) – – – – – – (953)
US$ linked note 1 44 38 30 Other Asia currencies 13 12 14
Operating earnings per share (in pence) 125.8p 96.6p 90.9p 76.9p 62.7p
Operating profit based on longer-term investment returns note 2 4,881 4,096 4,204 3,174 2,942
As reported at 31 December 2015 32,777 Opening adjustment at 1 January 2016
Such events could, among other things, harm Prudential’s ability to perform necessary business functions, result in the loss of confidential or proprietary data (exposing it to potential legal claims and regulatory sanctions) and damage its reputation and relationships with its business partners and customers. Similarly, any weakness in administration systems (such as those relating to policyholder records or meeting regulatory requirements) or actuarial reserving processes could have a material adverse effect on its results of operations during the effective period.
Prudential also maintains secondary listings on the Singapore Stock Exchange; and the New York Stock Exchange in the form of American Depositary Receipts which are referenced to ordinary shares on the main UK register.
Rights to dividends under the various schemes are set out in the Directors’ remuneration report on pages 101 to 129.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 371