Derivative�assets,�net�of�derivative�liabilities� – – (12) (941) Other�investments – – 6,512 466 Deposits 11,796 – – – Cash�and�cash�equivalents 12,125 – – –
Financial assets held by the Group’s joint ventures and associates accounted for using the equity method
Adjusted IFRS operating profit based on longer-term investment returns 4,827 4,699 4,550 3% 6%
� � � The�net�equity�hedge�result�therefore�includes�significant�accounting�mismatches�and�other�factors�that�do�not�represent�the�economic�result.�These�other�factors�include:� � � –��The�variable�annuity�guarantees�and�fixed�index�annuity�embedded�options�being�only�partially�fair�valued�under�‘grandfathered’�US�GAAP�as�described�in�note�B1.3(c); � � –��The�interest�rate�exposure�being�managed�through�the�other�than�equity-related�derivative�programme�explained�in�note�(b)�below;�and � � –��Jackson’s�management�of�its�economic�exposures�for�a�number�of�other�factors�that�are�treated�differently�in�the�accounting�frameworks�such�as�future�fees�and�assumed�
� US$m � % � US$m � £m � US$m � % � US$m � £m
B1.3 Determining operating segments and performance measure of operating segments Operating segments The�Group’s�operating�segments�for�financial�reporting�are�defined�and�presented�in�accordance�with�IFRS�8,�‘Operating�Segments’,� on�the�basis�of�the�management�reporting�structure�and�its�financial�management�information.�
(iii) US variable annuity and fixed index annuity business This�business�has�guarantee�liabilities�which�are�measured�on�a�combination�of�fair�value�and�other�US�GAAP�derived�principles.�These� liabilities�are�subject�to�an�extensive�derivative�programme�to�manage�equity�and�interest�rate�exposures�whose�fair�value�movements� pass�through�the�income�statement�each�period.�The�principles�for�determination�of�the�adjusted�IFRS�operating�profit�based�on� longer-term�investment�returns�and�short-term�fluctuations�are�as�discussed�in�section�(c)�below.�
(ii) US variable and fixed index annuity business The�following�value�movements�for�Jackson’s�variable�and�fixed�index�annuity�business�are�excluded�from�adjusted�IFRS�operating�profit� based�on�longer-term�investment�returns.�See�note�B1.2�note�(ii): �— Fair�value�movements�for�equity-based�derivatives; �— Fair�value�movements�for�guaranteed�benefit�options�for�the�‘not�for�life’�portion�of�Guaranteed�Minimum�Withdrawal�Benefit� (GMWB)�and�fixed�index�annuity�business,�and�Guaranteed�Minimum�Income�Benefit�(GMIB)�reinsurance�(see�below); �— Movements�in�the�accounts�carrying�value�of�Guaranteed�Minimum�Death�Benefit�(GMDB),�GMIB�and�the�‘for�life’�portion�of�GMWB� liabilities,�(see�below)�for�which,�under�the�‘grandfathered’�US�GAAP�applied�under�IFRS�for�Jackson’s�insurance�assets�and�liabilities,� the�measurement�basis�gives�rise�to�a�muted�impact�of�current�period�market�movements�(ie�they�are�relatively�insensitive�to�the�effect� of�current�period�equity�market�and�interest�rate�changes); �— A�portion�of�the�fee�assessments�as�well�as�claim�payments,�in�respect�of�guarantee�liabilities;�and �— Related�amortisation�of�deferred�acquisition�costs�for�each�of�the�above�items.
Guaranteed benefit options for the ‘not for life’ portion of GMWB and equity index options for the fixed index annuity business The�‘not�for�life’�portion�of�GMWB�guaranteed�benefit�option�liabilities�is�measured�under�the�US�GAAP�basis�applied�for�IFRS�in�a� manner�consistent�with�IAS�39�under�which�the�projected�future�growth�rate�of�the�account�balance�is�based�on�current�swap�rates� (rather�than�expected�rates�of�return)�with�only�a�portion�of�the�expected�future�guarantee�fees�included.�Reserve�value�movements�on� these�liabilities�are�sensitive�to�changes�to�levels�of�equity�markets,�implied�volatility�and�interest�rates.�The�equity�index�option�for�fixed� index�annuity�business�is�measured�under�the�US�GAAP�basis�applied�for�IFRS�in�a�manner�consistent�with�IAS�39�under�which�the� projected�future�growth�is�based�on�current�swap�rates.
Guaranteed benefit option for variable annuity guarantee minimum income benefit The�GMIB�liability,�which�is�substantially�reinsured,�subject�to�a�deductible�and�annual�claim�limits,�is�accounted�for�using�‘grandfathered’� US�GAAP.�This�accounting�basis�substantially�does�not�recognise�the�effects�of�market�movements.�The�corresponding�reinsurance�asset� is�measured�under�the�‘grandfathered’�US�GAAP�basis�applied�for�IFRS�in�a�manner�consistent�with�IAS�39,�‘Financial�Instruments:� Recognition�and�Measurement’,�and�the�asset�is�therefore�recognised�at�fair�value.�As�the�GMIB�is�economically�reinsured,�the�mark�to� market�element�of�the�reinsurance�asset�is�included�as�a�component�of�short-term�fluctuations�in�investment�returns.
B1.3 Determining operating segments and performance measure of operating segments continued
(iv) Other US shareholder-financed business Debt securities The�distinction�between�impairment�losses�and�interest-related�realised�gains�and�losses�is�of�particular�relevance�to�Jackson.�Jackson�has� used�the�ratings�by�Nationally�Recognised�Statistical�Ratings�Organisations�(NRSRO)�or�ratings�resulting�from�the�regulatory�ratings�detail� issued�by�the�National�Association�of�Insurance�Commissioners�(NAIC)�to�determine�the�average�annual�risk�margin�reserve�to�apply�to� debt�securities�held�to�back�general�account�business.�Debt�securities�held�to�back�separate�account�and�reinsurance�funds�withheld�are� not�subject�to�risk�margin�reserve�charge.�Further�details�of�the�risk�margin�reserve�charge,�as�well�as�the�amortisation�of�interest-related� realised�gains�and�losses,�for�Jackson�are�shown�in�note�B1.2�note�(ii)(c).
(e) Fund management and other non-insurance businesses For�these�businesses,�the�particular�features�applicable�for�life�assurance�noted�above�do�not�apply�and�therefore�the�adjusted�IFRS� operating�profit�based�on�longer-term�investment�returns�is�not�determined�on�the�basis�described�above.�Instead,�realised�gains�and� losses�are�generally�included�in�adjusted�IFRS�operating�profit�based�on�longer-term�investment�returns�with�temporary�unrealised�gains� and�losses�being�included�in�short-term�fluctuations.�In�some�instances,�realised�gains�and�losses�on�derivatives�and�other�financial� instruments�are�amortised�to�adjusted�IFRS�operating�profit�based�on�longer-term�investment�returns�over�a�time�period�that�reflects�the� underlying�economic�substance�of�the�arrangements.
Acquisition�costs�and�other�operating� expenditure note B2, note (iii),(iv) (3,866) (2,077) (2,360) (8,303) (552) (8,855)
Profit�(loss)�before�tax�(being tax attributable to shareholders’ and policyholders’ returns) note (viii) 2,277 762 1,789 4,828 (858) 3,970
B1.6 Additional analysis of performance by segment components B1.6(a) Asia 2018� £m 2017� £m
shareholder-backed�business (512) – – (512) (1) Amortisation�of�acquisition�accounting�adjustments (4) – – (4) (7) (Loss)�gain�on�disposal�of�businesses�and�corporate�
Earned�premiums,�net�of�reinsurance note (iii) (76) – – (76) 12,076 Other�income note (ii) 347 1,248 – 1,595 1,234
Acquisition�costs�incurred�for�insurance�policies (3,438) (3,712) Acquisition�costs�deferred�less�amortisation�of�acquisition�costs 59 911 Administration�costs�and�other�expenditure* (5,380) (6,208) Movements�in�amounts�attributable�to�external�unit�holders�of�consolidated�investment�funds (96) (984)
(e)��The�segmental�analysis�of�interest�expense�(other�than�interest�expense�in�core�structural�borrowings)�and�depreciation�and� amortisation�included�within�total�acquisition�costs�and�other�expenditure�was�as�follows: Other interest expense Depreciation and amortisation 2018� £m 2017� £m 2018� £m 2017� £m
B2.1 Staff and employment costs The�average�number�of�staff�employed�by�the�Group�during�the�years�shown�was: Asia�operations 16,798 15,477 US�operations 4,285 4,564 UK�and�Europe�operations* 7,123 7,110 *�The�UK�and�Europe�staff�numbers�include�staff�from�central�operations�and�Africa�which�are�unallocated�to�a�segment.
(b) Outstanding options and awards The�following�table�shows�movement�in�outstanding�options�and�awards�under�the�Group’s�share-based�compensation�plans� at�31�December: Options outstanding under SAYE schemes Awards outstanding under incentive plans
(c) Fair value of options and awards The�fair�value�amounts�estimated�on�the�date�of�grant�relating�to�all�options�and�awards�were�determined�by�using�the�following� assumptions: Prudential LTIP (TSR)
Risk-free�interest�rate�(%) 1.19 0.97 – 0.62 0.56 �–� Expected�option�life�(years) – 3.94 – �–� 3.49 �–� Weighted�average�exercise�price�(£) – 13.94 – �–� 14.55 �–� Weighted�average�share�price�at�grant�date�(£) 17.46 16.64 – 16.80 17.74 �–� Weighted�average�fair�value�at�grant�date�(£) 6.64 3.29 17.04 8.30 3.29 16.12
(a) Total tax charge by nature of expense The�total�tax�charge�in�the�income�statement�is�as�follows: Tax charge 2018� £m 2017� £m
Effect�of�results�of�joint�ventures�and�associates note (iii) (63) – (3) 2 (64) (1.8)% Irrecoverable�withholding�taxes note (iv) – – – 47 47 1.3%
Tax�on�non-operating�profit (31) (46) (97) 4 (170) Actual�tax�rate: Adjusted�IFRS�operating�profit�based�on�longer-term� investment�returns: Including�non-recurring�tax�reconciling�items 14% 16% 19% 15% 16% Excluding�non-recurring�tax�reconciling�items 14% 16% 20% 16% 16%
The�dividends�are�exempt�from�UK�tax�and�consequently�the�withholding�tax�cannot�be�offset�against�UK�tax�payments.� (v)� Movements in provisions for open tax matters � The�complexity�of�the�tax�laws�and�regulations�that�relate�to�our�businesses�means�that�from�time�to�time�we�may�disagree�with�tax�authorities�on�the�technical�interpretation�of�a�
Tax�at�the�expected�rate 426 267 259 (163) 789 23.9% Effects�of�recurring�tax�reconciliation�items: Income�not�taxable�or�taxable�at�concessionary�rates (64) (11) (2) (14) (91) (2.8)% Deductions�not�allowable�for�tax�purposes� 26 6 13 10 55 1.7% Items�related�to�taxation�of�life�insurance�businesses (92) (238) (2) – (332) (10.1)%
investment�returns: Including�non-recurring�tax�reconciling�items 14% 25% 19% 14% 21% Excluding�non-recurring�tax�reconciling�items 13% 24% 20% 13% 20%
Dividends�paid�in�reporting�year: Current�year�first�interim�ordinary�dividend 15.67p 404 14.50p� 373 Second�interim�ordinary�dividend�for�prior�year 32.50p 840 30.57p� 786
C1 Analysis of Group statement of financial position by segment 31 Dec 2018� £m
Unallocated�surplus�of�with-profits�funds C4.1 2,511 – 13,334 – – 15,845 Core�structural�borrowings�of�shareholder-financed�businesses C6.1 – 196 – 7,468 – 7,664 Operational�borrowings�attributable�to�shareholder-financed�
(iv)� Unallocated to a segment includes central operations, Prudential Capital and Africa operations as per note B1.3.
C3.1 Group assets and liabilities – measurement (a) Determination of fair value 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.
(b) Fair value measurement hierarchy of Group assets and liabilities Assets and liabilities carried at fair value on the statement of financial position The�table�overleaf�shows�the�assets�and�liabilities�carried�at�fair�value�analysed�by�level�of�the�IFRS�13,�‘Fair�Value�Measurement’�defined� fair�value�hierarchy.�This�hierarchy�is�based�on�the�inputs�to�the�fair�value�measurement�and�reflects�the�lowest�level�input�that�is� significant�to�that�measurement.�
Analysis of financial investments, net of derivative liabilities by business type
With-profits Loans – – 1,703 1,703 Equity�securities�and�portfolio�holdings�in�unit�trusts 52,320 5,447 488 58,255
With-profits Loans – – 2,023� 2,023 Equity�securities�and�portfolio�holdings�in�unit�trusts 57,347 4,470 351� 62,168
Group total analysis, including other financial liabilities held at fair value
Net�asset�value�attributable�to� unit�holders�of�consolidated� unit�trusts�and�similar�funds (413) 67 31 – – 57 (697) – (33) (988)
Net�asset�value�attributable�to� unit�holders�of�consolidated� unit�trusts�and�similar�funds (883) (559) – (13) – 1,276 (234) – – (413)
Valuation approach for level 3 fair valued assets and liabilities Financial instruments at fair value Investments�valued�using�valuation�techniques�include�financial�investments�which�by�their�nature�do�not�have�an�externally�quoted� price�based�on�regular�trades,�and�financial�investments�for�which�markets�are�no�longer�active�as�a�result�of�market�conditions,�eg�market� illiquidity.�The�valuation�techniques�used�include�comparison�to�recent�arm’s-length�transactions,�reference�to�other�instruments�that�are� substantially�the�same,�discounted�cash�flow�analysis,�option�adjusted�spread�models�and,�if�applicable,�enterprise�valuation.�These� techniques�may�include�a�number�of�assumptions�relating�to�variables�such�as�credit�risk�and�interest�rates.�Changes�in�assumptions� relating�to�these�variables�could�positively�or�negatively�impact�the�reported�fair�value�of�these�instruments.�When�determining�the� inputs�into�the�valuation�techniques�used�priority�is�given�to�publicly�available�prices�from�independent�sources�when�available,�but� overall�the�source�of�pricing�is�chosen�with�the�objective�of�arriving�at�a�fair�value�measurement�that�reflects�the�price�at�which�an�orderly� transaction�would�take�place�between�market�participants�on�the�measurement�date.
UK and Europe Government AAA�to�A- 8,150 7,994 BBB�to�B- 3,034 3,141 Below�B-�or�unrated 3,813 2,436
(b) Additional analysis of US insurance operations debt securities 31 Dec 2018� £m 31 Dec 2017� £m
(c) Movements in unrealised gains and losses on Jackson available-for-sale securities The�movement�in�the�statement�of�financial�position�value�for�debt�securities�classified�as�available-for-sale�was�from�a�net�unrealised�gain� of�£1,205�million�to�a�net�unrealised�loss�of�£414�million�as�analysed�in�the�table�below.
(iii) Age analysis of unrealised losses for the periods indicated The�age�analysis�of�all�the�unrealised�losses�in�the�portfolio�by�reference�to�the�length�of�time�the�securities�have�been�in�an�unrealised� loss�position: 31 Dec 2018� £m 31 Dec 2017� £m
Shareholder-backed business Covered Senior Total Tier 1 Tier 2 Total Total Total
With-profits funds Italy – 38 38 – – – 38 31
Other�operations – – – – – – 109 109 *�All�mortgage�loans�are�secured�by�properties.� †�In�the�US�£2,783�million�(31�December�2017:�£2,512�million)�policy�loans�are�backing�liabilities�for�funds�withheld�under�reinsurance�arrangements�and�are�accounted�for�at�fair�value�
C3.4(a) Financial risk (i) Liquidity analysis Contractual maturities of financial liabilities on an undiscounted cash flow basis The�following�table�sets�out�the�contractual�maturities�for�applicable�classes�of�financial�liabilities,�excluding�derivative�liabilities�and� investment�contracts�that�are�separately�presented.�The�financial�liabilities�are�included�in�the�column�relating�to�the�contractual� maturities�at�the�undiscounted�cash�flows�(including�contractual�interest�payments)�due�to�be�paid�assuming�conditions�are�consistent� with�those�of�year�end.
Maturity analysis of derivatives The�following�table�shows�the�gross�and�net�derivative�positions�together�with�a�maturity�profile�of�the�net�derivative�position: Carrying value of net derivative� £m Maturity profile of net derivative position� £m
C3.4(c) Derecognition, collateral and offsetting Securities lending and reverse repurchase agreements The�Group�has�entered�into�securities�lending�(including�repurchase�agreements)�whereby�blocks�of�securities�are�loaned�to�third� parties,�primarily�major�brokerage�firms.�Typically,�the�value�of�collateral�assets�granted�to�the�Group�in�these�transactions�is�in�excess� of�the�value�of�securities�lent,�with�the�excess�determined�by�the�quality�of�the�collateral�assets�granted.�Collateral�requirements�are� calculated�on�a�daily�basis.�The�loaned�securities�are�not�removed�from�the�Group’s�consolidated�statement�of�financial�position,�rather� they�are�retained�within�the�appropriate�investment�classification.�Collateral�typically�consists�of�cash,�debt�securities,�equity�securities� and�letters�of�credit.�
Gross amount included in the consolidated statement of financial position note�(i)
Related amounts not offset in the consolidated statement of financial position
The�note�provides�information�of�policyholder�liabilities�and�unallocated�surplus�of�with-profits�funds�held�on�the�Group’s�statement� of�financial�position: C4.1 Movement and duration of liabilities C4.1(a) Group overview (i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds
(excludes £32 million classified as unallocated to a segment) 62,898 180,724 167,589 411,211 – Unallocated surplus of with-profits funds on the consolidated statement of financial position 3,474 – 13,477 16,951 – Group's share of policyholder liabilities of joint ventures and associate note (ii) 7,467 – – 7,467
Comprising: – Policyholder liabilities on the consolidated statement of financial position note (i) (excludes £39 million classified as unallocated to a segment) 72,107 185,600 151,555 409,262
– Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,511 – 13,334 15,845
– Group's share of policyholder liabilities of joint ventures and associate note (ii) 8,145 – – 8,145 Average�policyholder�liability�balances note (v)
(excludes £32 million classified as unallocated to a segment) 29,935 180,724 56,367 267,026 – Group's share of policyholder liabilities relating to joint ventures and associate 7,467 – – 7,467
(excludes £39 million classified as unallocated to a segment) 32,452 185,600 40,760 258,812 – Group's share of policyholder liabilities relating to joint ventures
(iii) Movement in insurance contract liabilities and unallocated surplus of with-profits funds Further�analysis�of�the�movement�in�the�year�of�the�Group’s�insurance�contract�liabilities,�gross�and�reinsurance�share,�investment� contracts�and�unallocated�surplus�of�with-profits�funds�(excluding�those�held�by�joint�ventures�and�associate)�is�provided�below: Insurance contract liabilities
Net�flows note (iii) 4,574 497 1,804 6,875 Shareholders'�transfers�post-tax (54) – – (54) Investment-related�items�and�other�movements� 4,385 2,830 967 8,182 Foreign�exchange�translation�differences note (v) (2,401) (807) (740) (3,948)
Comprising: – Policyholder liabilities on the consolidated statement of financial position 32,963 16,263 13,672 62,898 – Unallocated surplus of with-profits funds on the consolidated statement of financial position 3,474 – – 3,474 – Group's share of policyholder liabilities relating to joint ventures and associate note (i) – 3,764 3,703 7,467 Premiums�
Net�flows note (iii) 5,165 1,149 2,102 8,416 Shareholders'�transfers�post-tax (65) – – (65) Investment-related�items�and�other�movements note (iv) (1,580) (1,425) 221 (2,784) Foreign�exchange�translation�differences note (v) 2,209 431 717 3,357
Comprising: – Policyholder liabilities on the consolidated statement of financial position 39,655 16,368 16,084 72,107 – Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,511 – – 2,511 – Group's share of policyholder liabilities relating to joint ventures and associate note (i) – 3,814 4,331 8,145 Average�policyholder�liability�balances note (vii)
(ii) Duration of liabilities The�table�below�shows�the�carrying�value�of�policyholder�liabilities�and�the�maturity�profile�of�the�cash�flows�on�a�discounted�basis,� taking�account�of�expected�future�premiums�and�investment�returns: 31 Dec 2018� £m 31 Dec 2017� £m
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
Net�flows note (ii) 3,506 (369) 3,137 Transfers�from�general�to�separate�account 2,096 (2,096) – Investment-related�items�and�other�movements� 15,956 295 16,251 Foreign�exchange�translation�differences note (i) (11,441) (4,849) (16,290)
Net�flows note (ii) 1,087 (1,300) (213) Addition�for�closed�block�of�group�payout�annuities�in�the�US note (iii) – 4,143 4,143 Transfers�from�general�to�separate�account 530 (530) – Investment-related�items�and�other�movements note (iv) (11,561) 1,562 (9,999) Foreign�exchange�translation�differences note (i) 7,636 3,309 10,945
(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�2018� and�2017: Fixed annuity and other business
C4.1(d) UK and Europe insurance operations (i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds A�reconciliation�of�the�total�policyholder�liabilities�and�unallocated�surplus�of�with-profits�funds�of�UK�and�Europe�insurance�operations� from�the�beginning�of�the�year�to�the�end�of�the�year�is�as�follows: Shareholder-backed funds and subsidiaries
Comprising: – Policyholder liabilities on the consolidated statement of financial position 101,496 22,119 34,039 157,654 – Unallocated surplus of with-profits funds on the consolidated statement of financial position 11,650 – – 11,650
Comprising: – Policyholder liabilities on the consolidated statement of financial position 111,222 23,145 33,222 167,589 – Unallocated surplus of with-profits funds on the consolidated statement of financial position 13,477 – – 13,477 Reclassification�of�reinsured�UK�annuity�contracts�as�held�for�sale note (ii) – – (10,858) (10,858)
Investment-related�items�and�other�movements note (iii) (3,341) (1,171) (969) (5,481) Foreign�exchange�translation�differences (14) – – (14)
Comprising: – Policyholder liabilities on the consolidated statement of financial position 110,795 20,717 20,043 151,555 – Unallocated surplus of with-profits funds on the consolidated statement of financial position 13,334 – – 13,334 Average�policyholder�liability�balances note (iv)
These�products�often�offer�a� guaranteed�maturity�and�surrender� value.�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�is� reflected�within�the�guaranteed� maturity�and�surrender�values.� Guarantees�are�borne�by� shareholders.�
The�determination�of�the�liabilities� of�health�and�protection�contracts� are�driven�by�the�local�solvency�basis.� A�gross�premium�valuation�method� is�used�in�those�countries�where�a� risk-based�capital�framework�is� adopted�for�local�solvency.�Under�the� gross�premium�valuation�method,�all� cash�flows�are�valued�explicitly�using� best�estimate�assumptions�with�a� suitable�margin�for�prudence.�
Estimated�gross�profits�include�estimates� of�the�following,�each�of�which�will�be� determined�based�on�the�best�estimate� of�amounts�over�the�life�of�the�book�of� contracts�without�provision�for�adverse� deviation: �— Amounts�expected�to�be�assessed�for� mortality�less�benefit�claims�in�excess� of�related�policyholder�balances; �— Amounts�expected�to�be�assessed�for� contract�administration�less�costs� incurred�for�contract�administration; �— Amounts�expected�to�be�earned�from� the�investment�of�policyholder� balances�less�interest�credited�to� policyholder�balances; �— Amounts�expected�to�be�assessed� against�policyholder�balances�upon� termination�of�contracts�(sometimes� referred�to�as�surrender�charges);�and
Fixed�index�annuities�vary�in� structure�but�are�generally�deferred� annuities�that�enable�policyholders� to�obtain�a�portion�of�an�equitylinked �return�(based�on�participation� rates�and�caps),�and�provide�a� guaranteed�minimum�return.�Fixed� index�annuities�accounted�for� 5�per�cent�(2017:�5�per�cent)�of� Jackson’s�policy�and�contract� liabilities�at�31�December�2018.
The�rate�of�return�depends�upon�the� performance�of�the�selected�fund� portfolio.�Policyholders�may�allocate� their�investment�to�either�the�fixed� account�or�a�selection�of�variable� accounts.�Subject�to�benefit� guarantees,�investment�risk�on�the� variable�account�is�borne�by�the� policyholder,�while�investment�risk� on�the�fixed�account�is�borne�by� Jackson�through�guaranteed� minimum�fixed�rates�of�return.�At� 31�December�2018,�5�per�cent� (2017:�5�per�cent)�of�variable�annuity� funds�were�in�fixed�accounts.
Jackson�offers�a�choice�of� guaranteed�benefit�options�within� its�variable�annuity�product� portfolio,�which�can�be�elected�for� additional�fees.�These�guaranteed� benefits�might�be�expressed�as�the� return�of�either:�(a)�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�that�contract�anniversary.
The�liability�for�Guaranteed�Minimum� Death�Benefit�(GMDB)�is�determined� each�period�end�by�estimating�the� expected�value�of�benefits�in�excess� of�the�projected�account�balance�and� recognising�the�excess�rateably�over� the�life�of�the�contract�based�on�total� expected�assessments.�At� 31�December�2018,�these�liabilities� were�valued�using�a�series�of�stochastic� investment�performance�scenarios,�a� mean�investment�return�of�7.4�per�cent� (2017:�7.4�per�cent)�net�of�external�fund� management�fees,�and�assumptions�for� policyholder�behaviour,�mortality�and� expense�that�are�similar�to�those�used� in�amortising�the�capitalised�acquisition� costs.
Excluding�the�business�that�is� subject�to�the�retrocession�treaties� at�31�December�2018,�Jackson�had� interest-sensitive�life�business�in� force�with�total�account�value�of� £6.4�billion�(2017:�£6.3�billion),� with�minimum�guaranteed�interest� rates�ranging�from�2.5�per�cent�to� 6.0�per�cent�with�a�4.67�per�cent� average�guaranteed�rate�(2017:� 2.5�per�cent�to�6.0�per�cent� with�a�4.67�per�cent�average� guaranteed�rate).
Variable�universal�life�is�a�type�of�life� insurance�policy�that�combines� death�benefit�protection�with�the� ability�for�the�policyholder�account� to�be�invested�in�separate�account� funds.�For�certain�fixed�universal�life� plans,�additional�provisions�are�held� to�reflect�the�existence�of� guarantees�offered�in�the�past�that� are�no�longer�supported�by�earnings� on�the�existing�asset�portfolio,�or�for� situations�where�future�mortality� charges�are�not�expected�to�be� sufficient�to�provide�for�future� mortality�costs.
The�provisions�have�been�determined� on�a�basis�consistent�with�the�detailed� methodology�included�in�regulations� contained�in�the�PRA’s�previously� issued�rules�for�the�determination�of� reserves�on�the�PRA’s�‘realistic’�Peak�2� basis.�Though�no�longer�in�force�for� regulatory�purposes,�these�rules� continue�to�be�applied�to�determine� with-profits�contract�liabilities�in� accordance�with�IFRS�4.�In�aggregate,� the�regime�has�the�effect�of�placing�a� value�on�the�liabilities�of�UK�withprofits �contracts,�which�reflects�the� amounts�expected�to�be�paid�based�on� the�current�value�of�investments�held� by�the�with-profits�funds�and�current� circumstances.�These�contracts�are� a�combination�of�insurance�and� investment�contracts�with� discretionary�participation�features,� as�defined�by�IFRS�4.
SAIF�is�a�ring-fenced�with-profits� 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.
Application of significant judgement Determining�bonuses�using�the�table�described�in�the�material�features�table�above�requires�the�PAC�Board�to�apply�significant� judgement�in�many�respects,�including�in�particular�the�following: �— Determining�what�constitutes�fair�treatment�of�customers; �— Smoothing�of�investment�returns;�and �— Determining�at�what�level�to�set�bonuses�to�ensure�that�they�are�competitive.�
Assessment of whether goodwill may be impaired Goodwill�is�tested�for�impairment�by�comparing�the�cash-generating�unit’s�carrying�amount,�including�any�goodwill,�with�its�recoverable� amount.�The�Group’s�methodology�of�assessing�whether�goodwill�may�be�impaired�for�acquired�life�and�asset�management�operations�is� discussed�below: M&G The�recoverable�amount�for�the�M&G�business�(which�is�part�of�the�UK�and�Europe�operating�segment)�has�been�determined�by� calculating�the�value�in�use�of�M&G�Group�Limited�and�its�subsidiaries�(considered�to�be�a�cash-generating�unit�during�2018).�This�has� been�calculated�by�aggregating�the�present�value�of�future�cash�flows�expected�to�be�derived�from�the�M&G�business.�
The�value�in�use�is�particularly�sensitive�to�a�number�of�key�assumptions�as�follows: �— The�set�of�economic,�market�and�business�assumptions�used�to�derive�the�three-year�plan.�The�direct�and�secondary�effects�of�recent� developments,�such�as�changes�in�global�equity�markets�and�trends�in�fund�flows,�are�considered�by�management�in�arriving�at�the� expectations�for�the�final�projections�for�the�plan; �— The�assumed�growth�rate�on�forecast�cash�flows�beyond�the�terminal�year�of�the�plan�after�considering�expected�future�and�past� growth�rates.�A�growth�rate�of�1.7�per�cent�(2017:�1.7�per�cent)�has�been�used�to�extrapolate�beyond�the�plan�period; �— The�risk�discount�rate.�Differing�discount�rates�have�been�applied�in�accordance�with�the�nature�of�the�individual�component� businesses.�For�the�most�material�component�retail�and�institutional�business,�a�risk�discount�rate�of�12�per�cent�(2017:�12�per�cent)�has� been�applied�to�post-tax�cash�flows.�The�pre-tax�risk�discount�rate�was�15�per�cent�(2017:�15�per�cent);�and
C5.2 Deferred acquisition costs and other intangible assets 31 Dec 2018� £m 31 Dec 2017� £m
Disposals�and�transfers – – – – (14) (14) – Exchange�differences�and�other�movements 47 512 (2) – 23 580 (799) Amortisation�of�DAC�related�to�net�unrealised�
C6.1 Core structural borrowings of shareholder-financed businesses 31 Dec 2018� £m 31 Dec 2017� £m
US$250m�6.75%�Notes�(Tier�1) note (vi) 196 185 US$300m�6.5%�Notes�(Tier�1) note (vi) 235 222 US$700m�5.25%�Notes�(Tier�2) 550 517 US$550m�7.75%�Notes�(Tier�1) note (v) – 407 US$1,000m�5.25%�Notes�(Tier�2) 780 731 US$725m�4.375%�Notes�(Tier�2) 565 530 US$750m�4.875%�Notes�(Tier�2) 583 548
Holding company total 7,468 5,821 Prudential�Capital�bank�loan note (iii) – 275 Jackson�US$250m�8.15%�Surplus�Notes�2027 note (viii) 196 184
C6.2 Other borrowings (i) Operational borrowings attributable to shareholder-financed businesses 31 Dec 2018� £m 31 Dec 2017� £m
(ii) Borrowings attributable to with-profits businesses 31 Dec 2018� £m 31 Dec 2017� £m
Non-recourse�borrowings�of�consolidated�investment�funds* 3,845 3,570 £100m�8.5%�undated�subordinated�guaranteed�bonds�of�Scottish�Amicable�Finance�plc† – 100 Other�borrowings�(including�obligations�under�finance�leases) 95 46 *�In�all�instances�the�holders�of�the�debt�instruments�issued�by�these�subsidiaries�and�funds�do�not�have�recourse�beyond�the�assets�of�these�subsidiaries�and�funds.� †�The�interests�of�the�holders�of�the�bonds�issued�by�Scottish�Amicable�Finance�plc,�a�subsidiary�of�the�Scottish�Amicable�Insurance�Fund,�are�subordinated�to�the�entitlements�of�the�
Mortality experience and assumptions for longevityInterest rate risk for assets in excess of liabilities, ie assets representing shareholder capital
The sensitivities below do not reflect that assets and liabilities are actively managed and may vary at the time any actual market movement occurs. There are strategies in place to minimise the exposure to market fluctuations. For example, as market indices fluctuate, Prudential would take certain actions including selling investments, changing investment portfolio allocation and adjusting bonuses credited to policyholders. In addition, this analysis does not consider the effect of market changes on new business generated in the future.
The degree of sensitivity of the results of the non-linked shareholder-backed business of the Asia operations to movements in interest rates depends upon the degree to which the liabilities under the ‘grandfathered’ IFRS 4 measurement basis reflects market interest rates from period-to-period. For example for countries applying US GAAP, the results can be more sensitive as the effect of interest rate movements on the backing investments may not be offset by liability movements.
Net effect on profit and shareholders’ equity (540) (271) (471) (235)
(ii) Sensitivity to foreign exchange risk Consistent with the Group’s accounting policies, the profits of the Asia insurance operations are translated at average exchange rates and shareholders’ equity at the closing rate for the reporting period. For 2018, the rates for the most significant operations are given in note A1.
— The risk of mismatch between the expected duration of certain annuity liabilities and prepayment risk and extension risk inherent in mortgage-backed securities.
These derivatives are used to hedge Jackson’s exposure to movements in interest rates.
Cross-currency swaps Cross-currency swaps, which embody spot and forward currency swaps and additionally, in some cases, interest rate swaps and equity index swaps, are entered into for the purpose of hedging Jackson’s foreign currency denominated funding agreements supporting trust instrument obligations.
(i) Sensitivity to equity risk Jackson had variable annuity contracts with guarantees, for which the net amount at risk (NAR) is defined as the amount of guaranteed benefit in excess of current account value, as follows: Minimum return
Due to the nature of valuation under IFRS of the free-standing derivatives and the variable annuity guarantee features, this hedge, while highly effective on an economic basis, would not automatically offset within the financial statements as the impact of equity market movements resets the free-standing derivatives immediately while the hedged liabilities reset more slowly and fees are recognised prospectively in the period in which they are earned.
In addition to the exposure explained above, Jackson is also exposed to equity risk from its holding of equity securities, partnerships in investment pools and other financial derivatives.
The estimated sensitivity of Jackson’s profit and shareholders’ equity to immediate increases and decreases in equity markets is shown below. The sensitivities are shown net of related changes in DAC amortisation, as described above.
Pre-tax profit, net of related changes in amortisation of DAC 1,058 427 58 (125) 1,107 336 619 262
(ii) Sensitivity to interest rate risk Except in the circumstances of interest rate scenarios where the guarantee rates included in contract terms are higher than crediting rates that can be supported from assets held to cover liabilities, the accounting measurement of fixed annuity liabilities of Jackson’s products is not generally sensitive to interest rate risk. This position derives from the nature of the products and the US GAAP basis of measurement. The GMWB features attached to variable annuity business (other than ‘for life’ components) are accounted for under US GAAP at fair value and, therefore, will be sensitive to changes in interest rates.
Debt securities and related derivatives are marked to fair value. Value movements on derivatives, again net of related changes to amortisation of DAC and deferred tax, are recorded within the income statement. Fair value movements on debt securities, net of related changes to amortisation of DAC and deferred tax, are recorded within other comprehensive income. The estimated sensitivity of these items and policyholder liabilities to a 1 per cent and 2 per cent decrease and increase in interest rates is as follows: Decrease Increase Decrease Increase of 2% of 1% of 1% of 2% of 2% of 1% of 1% of 2%
Related effect on charge for deferred tax 742 361 (252) (464) 857 401 (288) (532)
Other comprehensive income: Direct effect on carrying value of debt securities (net of related changes in amortisation of DAC) 4,134 2,346 (2,346) (4,134) 3,063 1,700 (1,700) (3,063)
Total net effect on shareholders’ equity 473 496 (904) (1,520) (802) (167) (258) (419)
(iii) Sensitivity to foreign exchange risk Consistent with the Group’s accounting policies, the profits of the Group’s US operations are translated at average exchange rates and shareholders’ equity at the closing rate for the reporting period. For 2018, the average and closing rates were US$1.34 (31 December 2017: US$1.29) and US$1.27 (31 December 2017: US$1.35) to £1.00 sterling respectively. A 10 per cent increase (weakening of the dollar) or decrease (strengthening of the dollar) in these rates would reduce or increase profit before tax attributable to shareholders, profit for the year and shareholders’ equity attributable to US insurance operations respectively as follows: A 10% increase in US$:£ exchange rates
Profit before tax attributable to shareholders (159) (54) 194 66 Profit for the year (136) (20) 166 24 Shareholders’ equity attributable to US insurance operations (508) (456) 620 557
(iv) Other sensitivities The total profit of Jackson is sensitive to market risk on the assets covering liabilities other than variable annuity business segregated in the separate accounts.
For variable annuity business, an assumption made is the expected long-term level of separate account returns, which for 2018 was 7.4 per cent (2017: 7.4 per cent). The impact of using this return is reflected in two principal ways, namely: — Through the projected expected gross profits that are used to determine the amortisation of deferred acquisition costs. This is applied through the use of a mean reversion technique which is described in more detail in note A3.1 above; and
Further details are described below. The adjusted IFRS operating profit based on longer-term investment returns for UK and Europe insurance operations is sensitive to changes in longevity assumptions affecting the carrying value of liabilities to policyholders for UK shareholder-backed annuity business. At the total IFRS profit level, the result is particularly sensitive to temporary value movements on assets backing the capital of the shareholder-backed annuity business.
The investment assets of UK with-profits funds are subject to market risk. Changes in their carrying value, net of related changes to asset-share liabilities of with-profits contracts, affect the level of unallocated surplus of the fund. Therefore, the level of unallocated surplus is particularly sensitive to the level of investment returns on the portion of the assets that represents surplus. However, as unallocated surplus is accounted for as a liability under IFRS, movements in its value do not affect shareholders’ profit and equity.
Shareholder-backed annuity business Profits from shareholder-backed annuity business are most sensitive to: — The extent to which the duration of the assets held closely matches the expected duration of the liabilities under the contracts; — Actual versus expected default rates on assets held; — The difference between long-term rates of return on corporate bonds and risk-free rates; — The variance between actual and expected mortality experience; — The extent to which changes to the assumed rate of improvements in mortality give rise to changes in the measurement of liabilities; and
Due to the matching of policyholder liabilities to attaching asset value movements, the UK unit-linked business is not directly affected by market or credit risk. The liabilities of other business are also broadly insensitive to market risk. Profits from unit-linked and similar contracts primarily arise from the excess of charges to policyholders for management of assets, over expenses incurred. The former is most sensitive to the net accretion of funds under management as a function of new business, persistency and timing of death. The accounting impact of the latter is dependent upon the amortisation of acquisition costs in line with the emergence of margins (for insurance contracts) and amortisation in line with service provision (for the investment management component of investment contracts). By virtue of the design features of most of the contracts that provide low levels of mortality cover, the profits are relatively insensitive to changes in mortality experience.
Carrying value of debt securities and derivatives 7,369 3,317 (2,792) (5,193) 13,497 5,805 (4,659) (8,541)
Net sensitivity of profit after tax and shareholders’ equity 2,139 956 (820) (1,553) 3,413 1,341 (1,026) (1,898)
In addition, the shareholder-backed portfolio of UK non-linked insurance operations (covering policyholder liabilities and shareholders’ equity) includes equity securities and investment properties. Excluding any offsetting effects on the measurement of policyholder liabilities, a fall in their value would have given rise to the following effects on pre-tax profit, profit after tax and shareholders’ equity.
Net sensitivity of profit after tax and shareholders’ equity (279) (139) (275) (138)
A 10 per cent increase in the relevant exchange rates (strengthening of the pound sterling) would have reduced reported profit before tax attributable to shareholders, and shareholders’ equity excluding goodwill attributable to Eastspring Investments and US asset management operations, by £10 million and £43 million respectively (2017: £30 million and £53 million, respectively).
(ii) Other operations The Group holds certain derivatives that are used to manage foreign currency movements and macroeconomic exposures. The fair value of these derivatives is sensitive to the combined effect of movements in exchange rates, interest rates and inflation rates. The possible permutations cover a wide range of scenarios. For indicative purposes, a reasonably possible range of fair value movements based on historical experience could be plus or minus £150 million.
The�deferred�tax�balances�at�31�December�2018�and�2017�arise�in�the�following�parts�of�the�Group: Deferred tax assets Deferred tax liabilities 2018� £m 2017� £m 2018� £m 2017� £m
The�taxation�regimes�applicable�across�the�Group�often�apply�separate�rules�to�trading�and�capital�profits�and�losses.�The�distinction� between�temporary�differences�that�arise�from�items�of�either�a�trading�or�capital�nature�may�affect�the�recognition�of�deferred�tax�assets.� For�the�2018�results�and�financial�position�at�31�December�2018�the�following�tax�benefits�have�not�been�recognised: Tax benefit� £m Losses� £bn Tax benefit� £m Losses� £bn
(i) Background and summary economic and IAS 19 financial positions The�Group’s�businesses�operate�a�number�of�pension�schemes.�The�specific�features�of�these�schemes�vary�in�accordance�with�the� regulations�of�the�country�in�which�the�employees�are�located,�although�they�are,�in�general,�funded�by�the�Group�and�based�either�on�a� cash�balance�formula�or�on�years�of�service�and�salary�earned�in�the�last�year�or�years�of�employment.�The�largest�defined�benefit�scheme� is�the�principal�UK�scheme,�namely�the�Prudential�Staff�Pension�Scheme�(PSPS).�PSPS�accounts�for�82�per�cent�(2017:�82�per�cent)�of�the� underlying�scheme�liabilities�of�the�Group’s�defined�benefit�schemes.�
Risks to which the defined benefit schemes expose the Group Responsibility�of�making�good�of�any�deficit�that�may�arise�in�the�schemes�lies�with�the�employers�of�the�schemes,�which�are�subsidiaries� of�the�Group.�Accordingly,�the�pension�schemes�expose�the�Group�to�a�number�of�risks�and�the�most�significant�of�which�are�interest�rate� and�investment�risk,�inflation�risk�and�mortality�risk.
(i) Background and summary economic and IAS 19 financial positions continued
With the effect of IFRIC 14 Surplus�(deficit)� 207 (101) 124 52 282 Less:�amount�attributable�to�UK�with-profits�fund (110) 46 (46) (20) (130)
2018 £m Net�surplus�(deficit),�beginning�of�year 8,917 (8,225) 692 (485) 207 (151) 56 GMP�equalisation�provision note (e) – (53) (53) – (53) – (53)
Net�surplus�(deficit),�end�of�year� 8,483 (7,524) 959 (677) 282 (225) 57 2017 £m Net�surplus�(deficit),�beginning�of�year 9,006 (8,443) 563 (558) 5 (134) (129)
(iv) Sensitivity of the pension scheme liabilities to key variables The�sensitivity�information�below�is�based�on�the�core�scheme�liabilities�and�assumptions�at�the�balance�sheet�date.�The�sensitivities�are� calculated�based�on�a�change�in�one�assumption�with�all�other�assumptions�being�held�constant.�As�such,�interdependencies�between� the�assumptions�are�excluded.�The�impact�of�the�rate�of�inflation�assumption�sensitivity�includes�the�impact�of�inflation�on�the�rate�of� increase�in�salaries�and�rate�of�increase�of�pensions�in�payment.
.� Assumption applied Impact of sensitivity on scheme liabilities on IAS 19 basis 2018 2017 Sensitivity change in assumption 2018 2017
Other�provisions�comprise�staff�benefits�provisions�of�£409�million�(31�December�2017:�£453�million)�that�are�generally�expected�to�be� paid�out�within�the�next�three�years,�other�provisions�of�£171�million�(31�December�2017:�£121�million)�and�a�provision�for�review�of�past� annuity�sales�after�utilisation�during�the�year�of�£324�million�(31�December�2017:�£369�million).�Prudential�has�agreed�with�the�Financial� Conduct�Authority�(FCA)�to�review�annuities�sold�without�advice�after�1�July�2008�to�its�contract-based�defined�contribution�pension� customers.�The�review�is�examining�whether�customers�were�given�sufficient�information�about�their�potential�eligibility�to�purchase�an� enhanced�annuity,�either�from�Prudential�or�another�pension�provider.�A�gross�provision�of�£400�million,�before�costs�incurred,�was� established�at�31�December�2017�to�cover�the�costs�of�undertaking�the�review�and�any�related�redress�and�following�a�reassessment,�no� change�has�been�made�in�2018.�The�majority�of�the�provision�will�be�utilised�in�2019.�The�ultimate�amount�that�will�be�expended�by�the� Group�on�the�review�will�remain�uncertain�until�the�project�is�completed.�If�the�population�subject�to�redress�increased�or�decreased�by� 10�per�cent,�then�the�provision�would�be�expected�to�increase�or�decrease�by�circa�7�per�cent�accordingly.�Additionally,�in�2018,�the� Group�agreed�with�its�professional�indemnity�insurers�that�they�will�meet�£166�million�of�the�Group’s�claims�costs,�which�will�be�paid�as� the�Group�incurs�costs/redress.�This�has�been�recognised�on�the�Group’s�balance�sheet�within�‘Other�debtors’�at�31�December�2018.
C12.1 Group objectives, policies and processes for managing capital (i) Capital measure The�Group�manages�its�Group�Solvency�II�own�funds�as�its�measure�of�capital.�At�31�December�2018�estimated�Group�Solvency�II�own� funds�are�£30.2�billion�(31�December�2017:�£26.4�billion).
Adjustments to local regulatory basis Remove�deferred�acquisition�costs,�goodwill�and�other�intangibles (1,850) (1,515) Other�adjustments 631 306
Total available capital resources of life assurance businesses on a local regulatory basis excluding with-profits funds note 4,649 4,316
Adjustments to regulatory basis Remove�deferred�acquisition�costs (8,727) (8,197) Jackson�surplus�notes 196 184 Investment�and�policyholder�liabilities�valuation�differences�between�IFRS�and�regulatory�basis�for�Jackson 7,217 5,325 Other�adjustments* 63 818
(iv) Asset management operations – regulatory and other surplus Certain�asset�management�subsidiaries�of�the�Group�are�subject�to�local�regulatory�requirements.�The�movement�in�the�year�of�the� estimated�surplus�regulatory�capital�position�of�those�subsidiaries,�combined�with�the�movement�in�the�IFRS�basis�shareholders’�funds� for�unregulated�asset�management�operations,�is�as�follows: Asset management operations 2018� £m 2017� £m
Capital expenditure: property, plant and equipment by segment The�capital�expenditure�of�£254�million�(2017:�£117�million)�arose�as�follows:�£52�million�(2017:�£55�million)�in�Asia,�£14�million�(2017:� £19�million)�in�US�and�£187�million�(2017:�£41�million)�in�UK�and�Europe�with�the�remaining�balance�of�£1�million�(2017:�£2�million)�arising� from�unallocated�corporate�expenditure.
Notes (i)� Loss arising on reinsurance of part of UK shareholder-backed annuity portfolio � In�March�2018,�M&GPrudential�announced�the�reinsurance�of�£12.0�billion�(as�at�31�December�2017)�of�its�shareholder-backed�annuity�portfolio�to�Rothesay�Life.�Under�the�terms�
Transactions between the Company and its subsidiaries that are eliminated on consolidation The�Company�has�transactions�and�outstanding�balances�with�certain�unit�trusts,�Open-Ended�Investment�Companies�(OEICs),� collateralised�debt�obligations�and�similar�entities�that�are�not�consolidated�and�where�a�Group�company�acts�as�manager�which�are� regarded�as�related�parties�for�the�purposes�of�IAS�24.�The�balances�are�included�in�the�Group’s�statement�of�financial�position�at�fair� value�or�amortised�cost�in�accordance�with�IAS�39�classifications.�The�transactions�are�included�in�the�income�statement�and�include� amounts�paid�on�issue�of�shares�or�units,�amounts�received�on�cancellation�of�shares�or�units�and�amounts�paid�in�respect�of�the�periodic� charge�and�administration�fee.
Share of profits from joint ventures and associates, net of related tax
Name of entity Classes of shares held Proportion held Registered office address and country of incorporation 95th�Avenue�Retail�Building,�LLC MI 100.00% 901�S.,�Ste.�201,�Second�St.,�Springfield,�IL,�62704-7909,�United�States
(iii) Structured entities Structured�entities�are�those�that�have�been�designed�so�that�voting�or�similar�rights�are�not�the�dominant�factor�in�deciding�who�controls� the�entity.�Voting�rights�relate�to�administrative�tasks.�Relevant�activities�are�directed�by�means�of�contractual�arrangements.�The�Group� invests�in�structured�entities�such�as: �— Open-Ended�Investment�Companies�(OEICs); �— Unit�Trusts�(UTs); �— Limited�partnerships; �— Variable�interest�entities; �— Investment�vehicles�within�separate�accounts�offered�through�variable�annuities; �— Collateralised�debt�obligations; �— Mortgage-backed�securities;�and� �— Similar�asset-backed�securities.��
(c) Earned premiums, policy fees and claims paid Premiums�for�conventional�with-profits�policies�and�other�protection�type�insurance�policies�are�recognised�as�revenue�when�due.� Premiums�and�annuity�considerations�for�linked�policies,�unitised�with-profits�and�other�investment�type�policies�are�recognised�as� revenue�when�received�or,�in�the�case�of�unitised�or�unit-linked�policies,�when�units�are�issued.�These�amounts�exclude�premium�taxes� and�similar�duties�where�Prudential�collects�and�settles�taxes�borne�by�the�customer.
(e) Financial investments other than instruments classified as long-term business contracts (i) Investment classification The�Group�holds�financial�investments�in�accordance�with�IAS�39,�whereby�subject�to�specific�criteria,�financial�instruments�are�required� to�be�accounted�for�under�one�of�the�following�categories:�
(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.
Fixed assets Investments in subsidiary undertakings 5 10,825 10,798 Current assets Debtors: Amounts owed by subsidiary undertakings 5,904 4,732 Other debtors 5 5
Total comprehensive income for the year Profit for the year – – 1,235 1,235 Actuarial gains recognised in respect of the defined benefit pension scheme – – 28 28
Transactions with owners, recorded directly in equity New share capital subscribed – 21 – 21 Share based payment transactions – – (1) (1)
Impact of initial application of IFRS 9 – – (9) (9) Total comprehensive income for the year Profit for the year – – 1,041 1,041 Actuarial gains recognised in respect of the defined benefit pension scheme – – 16 16
Total contributions by and distributions to owners 1 16 (1,244) (1,227)
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 operations in Asia, the US, UK and Europe and Africa. The Group offers a wide range of retail financial products and services and asset management services throughout these operations. The retail financial products and services primarily include life insurance, pensions and annuities as well as collective investment schemes. On 14 March 2018, the Company announced its intention to demerge M&GPrudential, its UK and Europe business, from Prudential plc resulting in two separately listed companies.
In these financial statements, the Company has applied the exemptions available under FRS 101 in respect of the following disclosures: — A cash flow statement and related notes; — Disclosures in respect of transactions with wholly-owned subsidiaries within the Prudential Group; — Disclosure in respect of capital management; and — The effects of new but not yet effective IFRSs.
— IFRS 15, ‘Revenue from Contracts with Customers’ in respect of revenue recognition.
Amounts owed by subsidiary undertakings Amounts owed by subsidiary undertakings are shown at cost, less provisions. Upon the adoption of IFRS 9 in 2018, the provisions are determined using the expected credit loss approach.
Deferred tax assets and liabilities are recognised in accordance with the provisions of IAS 12, ’Income Taxes’. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that future taxable profits will be available against which these losses can be utilised. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date.
Under IFRS 2 ‘Share-based payment’, where the Company, as the parent company, has the obligation to settle the options or awards of its equity instruments to employees of its subsidiary undertakings, and such share-based payments are accounted for as equity-settled in the Group financial statements, the Company records an increase in the investment in subsidiary undertakings for the value of the share options and awards granted with a corresponding credit entry recognised directly in equity. The value of the share options and awards granted is based upon the fair value of the options and awards at the grant date, the vesting period and the vesting conditions.
Notes on the parent company financial statements continued 4 Reconciliation from the FRS 101 parent company results to the IFRS Group results
Net equity Shareholders’ equity of the Company in accordance with FRS 101 and IFRS 7,450 7,629 Accounting policy difference* 14 – Share in the IFRS net equity of the Group† 9,785 8,458
Shareholders’ equity of the Group in accordance with IFRS 17,249 16,087 * Adjustment represents difference in accounting policy for expected credit losses on loan assets, the Company has adopted IFRS 9 while the Group applies IAS 39. † The ‘share in the IFRS result and net equity of the Group’ lines represent the parent company’s equity in the earnings and net assets of its subsidiaries and associates.
Subsidiary undertakings of the Company at 31 December 2018 are listed in note D6 of the Group financial statements.
Cross-currency swap 5 – 5 – Inflation-linked swap – 423 – 443
Derivative financial instruments are held to manage certain macro-economic exposures. The change in fair value of the derivative financial instruments of the Company was a gain before tax of £20 million (2017: gain of £5 million).
At 31 December 2005, the allocation of surpluses and deficits attaching to the Scheme between the Company and the unallocated surplus of UK with-profits fund was apportioned in the ratio 30/70 following detailed consideration of the sourcing of previous contributions. This ratio was applied to the base deficit position at 1 January 2006 and for the purpose of determining the allocation of the movements in that position up to 31 December 2018. The IAS 19 service charge and ongoing employer contributions are allocated by reference to the cost allocation for current activity.
The last completed triennial actuarial valuation of the Scheme was as at 5 April 2017, which was finalised in 2018. Further details on the results of this valuation and the total employer contributions to the Scheme for the year are provided in note C9 of the Group financial statements, together with the key assumptions adopted, including mortality assumptions.
The changes in the fair value of the underlying Scheme assets and the present value of the underlying benefit obligations are as follows: 2018 £m
Notes (i) The weighted average duration of the benefit obligations of the Scheme is 17 years (2017: 17 years). The following table provides an expected maturity analysis of the undiscounted benefit obligations as at 31 December: £m 1 year or less After 1 year to 5 years After 5 years to 10 years After 10 years to 15 years After 15 years to 20 years Over 20 years Total
(ii) The actuarial gains attributable to policyholders and shareholders are analysed as follows: Return on Scheme assets excluding interest income* (186) 40 Actuarial gains (losses) Experience gains on Scheme liabilities 1 70 Actuarial gains (losses) – demographic assumptions 125 (10) Actuarial gains (losses) – financial assumptions 283 (93)
Total actuarial gains (losses) without the effect of IFRIC 14 223 7
(iii) Employer contributions to be paid into the Scheme for the year ending 31 December 2019 are expected to amount to £10 million, comprising ongoing service contributions and expenses.
In light of this Court ruling, at 31 December 2018, an estimated allowance for GMP equalisation of £31 million has been recognised within the IAS 19 valuation for the Scheme, of which £9 million was allocated to the Company. The impact on profit before tax is £9 million (before taking into account any charge to PSPS surplus restriction). After taking into account the change to the PSPS surplus restriction as reflected in the actuarial gains and losses within other comprehensive income, there was no impact on shareholders’ funds.
A summary of the ordinary shares in issue and the options outstanding to subscribe for the Company’s shares at 31 December 2018 is set out in note C10 of the Group financial statements.
Notes on the parent company financial statements continued 11 Retained profit of the Company
The second interim ordinary dividend for the year ended 31 December 2018, which was approved by the Board of Directors after 31 December 2018, is described in note B6 of the Group financial statements.
Company�law�requires�the�Directors�to� prepare�Group�and�parent�company� financial�statements�for�each�financial�year.� Under�that�law,�the�Directors�are�required� to�prepare�the�Group�financial�statements� in�accordance�with�International�Financial� Reporting�Standards�as�adopted�by�the� European�Union�(IFRSs�as�adopted�by�the� EU)�and�applicable�law�and�have�elected� to�prepare�the�parent�company�financial� statements�in�accordance�with�UK� Accounting�Standards�and�applicable�law� (UK�Generally�Accepted�Accounting� Practice)�including�FRS�101�Reduced� Disclosure�Framework.
Under�company�law,�the�Directors�must� not�approve�the�financial�statements�unless� they�are�satisfied�that�they�give�a�true�and� fair�view�of�the�state�of�affairs�of�the�Group� and�parent�company�and�of�their�profit�or� loss�for�that�period.�In�preparing�each�of� the�Group�and�parent�company�financial� statements,�the�Directors�are�required�to: �— Select�suitable�accounting�policies�and� then�apply�them�consistently; �— Make�judgements�and�estimates�that� are�reasonable�and�prudent; �— For�the�Group�financial�statements,� state�whether�they�have�been�prepared� in�accordance�with�IFRSs�as�adopted�by� the�EU; �— For�the�parent�company�financial� statements,�state�whether�applicable� UK�Accounting�Standards�have�been� followed,�subject�to�any�material� departures�disclosed�and�explained� in�the�parent�company�financial� statements;�and
The�Directors�of�Prudential�plc,�whose� names�and�positions�are�set�out�on�pages� 89�to�94�confirm�that�to�the�best�of�their� knowledge: �— The�financial�statements,�prepared� in�accordance�with�the�applicable�set� of�accounting�standards,�give�a�true� and�fair�view�of�the�assets,�liabilities,� financial�position�and�profit�or�loss�of� the�Company�and�the�undertakings� included�in�the�consolidation�taken� as�a�whole; �— The�strategic�report�includes�a�fair� review�of�the�development�and� performance�of�the�business�and� the�position�of�the�Group�and�the� undertakings�included�in�the� consolidation�taken�as�a�whole,�together� with�a�description�of�the�principal�risks� and�uncertainties�that�they�face;�and
Our�procedures�included: Methodology choice We�have�assessed�the�methodology�for�selecting�assumptions� and�calculating�the�policyholder�liabilities.�This�included: �— Assessing�the�methodology�adopted�for�selecting�assumptions� by�applying�our�industry�knowledge�and�experience�and� comparing�the�methodology�used�against�industry�standard� actuarial�practice; �— Assessing�the�methodology�adopted�for�calculating�the� policyholder�liabilities�by�reference�to�the�requirements�of�the� accounting�standard�and�assessing�the�impact�of�current�year� changes�in�methodology�on�the�calculation�of�policyholder� liabilities; �— Comparing�changes�in�methodology�to�our�expectations�derived� from�market�experience;�and�
Control operation We�used�our�own�IT�specialists�to�assist�us�in�performing�our� procedures�in�this�area�which�included�testing�of�the�design,� implementation�and�operating�effectiveness�of�key�controls�over�the� valuation�process�including�additional�testing�in�relation�to�model� evaluation�as�a�result�of�identified�weaknesses�in�the�general�IT� control�environment.�Controls�testing�in�respect�of�the�valuation� process�included�assessment�and�approval�of�the�methods�and� assumptions�adopted�over�the�calculation�of�policyholder�liabilities� as�well�as�appropriate�access�and�change�management�controls�over� the�actuarial�models.�
Our procedures for the UK insurance segment also included: Historical comparison
Our procedures for the Asia insurance segment also included: Historical comparison Evaluating�the�experience�analysis�in�respect�of�the�mortality�and� morbidity�assumptions�by�reference�to�actual�experience�in�order�to� assess�whether�this�supported�the�year-end�assumptions�adopted.
For harder to value positions: Control operation We�tested�the�design,�implementation�and�operating�effectiveness� of�key�controls�over�the�valuation�process,�including�the�Group’s� review�and�approval�of�the�estimates�and�assumptions�used�for�the� valuation�including�key�authorisation�and�data�input�controls.�
3 Our application of materiality and an overview of the scope of our audit Materiality�for�the�Group�financial� statements�as�a�whole�was�set�at� £350�million�(2017:�£350�million)� determined�with�reference�to�a�benchmark� of�IFRS�shareholders’�equity�(of�which�it� represents�2�per�cent�(2017:�2.2�per�cent)).� We�consider�IFRS�shareholders’�equity�to� be�the�most�appropriate�benchmark�as�it� represents�the�residual�interest�that�can�be� ascribed�to�shareholders�after�policyholder� assets�and�corresponding�liabilities�have� been�accounted�for;�we�consider�that�this� is�the�most�appropriate�measure�for�the� size�of�the�business�and�that�it�provides�a� stable�measure�year�on�year.�We�compared� our�materiality�against�other�relevant� benchmarks,�such�as�total�assets,�total� revenue�and�profit�before�tax�to�ensure� the�materiality�selected�was�appropriate� for�our�audit.
(£55 million to £115 million) (2017: £80 million to £186 million)
The�Group�audit�team�held�a�global� planning�conference�with�component� auditors�to�identify�audit�risks�and�decide� how�each�component�team�should�address� the�identified�audit�risks.�The�Group�audit� team�instructed�component�auditors� as�to�the�significant�areas�to�be�covered,� including�the�relevant�risks�detailed� above�and�the�information�to�be�reported.� The�Group�audit�team�approved�the� component�materialities,�which�ranged� from�£55�million�to�£115�million�(2017:� £80�million�to�£186�million)�across�the� components,�having�regard�to�the�size� and�risk�profile�of�the�Group�across�the� components.�The�work�on�15�components� (2017:�15�components)�was�performed� by�component�auditors�and�work�on�the� remaining�component,�which�was�the� parent�company,�was�performed�by�the� Group�audit�team.�
4 We have nothing to report on going concern The�Directors�have�prepared�the�financial� statements�on�the�going�concern�basis� as�they�do�not�intend�to�liquidate�the� Company�or�the�Group�or�to�cease�their� operations,�and�as�they�have�concluded� that�the�Company’s�and�the�Group’s� financial�position�means�that�this�is�realistic.� They�have�also�concluded�that�there�are� no�material�uncertainties�that�could�have� cast�significant�doubt�over�their�ability� to�continue�as�a�going�concern�for�at�least� a�year�from�the�date�of�approval�of� the�financial�statements�(‘the�going� concern�period’).�
Based�on�this�work,�we�are�required� to�report�to�you�if: �— We�have�anything�material�to�add�or� draw�attention�to�in�relation�to�the� directors’�statement�in�note�A1�to�the� financial�statements�on�the�use�of�the� going�concern�basis�of�accounting�with� no�material�uncertainties�that�may�cast� significant�doubt�over�the�Group�and� Company’s�use�of�that�basis�for�a�period� of�at�least�a�year�from�the�date�of� approval�of�the�financial�statements;�or�
5 We have nothing to report on the other information in the Annual Report The�directors�are�responsible�for�the� other�information�presented�in�the� Annual�Report�together�with�the�financial� statements.�Our�opinion�on�the�financial� statements�does�not�cover�the�other� information�and,�accordingly,�we�do�not� express�an�audit�opinion�or,�except�as� explicitly�stated�below,�any�form�of� assurance�conclusion�thereon.�
Strategic report and directors’ report Based�solely�on�our�work�on�the�other� information: �— we�have�not�identified�material� misstatements�in�the�strategic�report� and�the�directors’�report;�
�— The�directors’�explanation�in�the� viability�statement�of�how�they�have� assessed�the�prospects�of�the�Group,� over�what�period�they�have�done�so� and�why�they�considered�that�period� to�be�appropriate,�and�their�statement� as�to�whether�they�have�a�reasonable� expectation�that�the�Group�will�be�able� to�continue�in�operation�and�meet�its� liabilities�as�they�fall�due�over�the�period� of�their�assessment,�including�any� related�disclosures�drawing�attention� to�any�necessary�qualifications� or�assumptions.
Our�work�is�limited�to�assessing�these� matters�in�the�context�of�only�the� knowledge�acquired�during�our�financial� statements�audit.�As�we�cannot�predict� all�future�events�or�conditions�and�as� subsequent�events�may�result�in�outcomes� that�are�inconsistent�with�judgements�that� were�reasonable�at�the�time�they�were� made,�the�absence�of�anything�to�report� on�these�statements�is�not�a�guarantee� as�to�the�Group’s�longer-term�viability.
Corporate governance disclosures We�are�required�to�report�to�you�if: �— We�have�identified�material� inconsistencies�between�the�knowledge� we�acquired�during�our�financial� statements�audit�and�the�directors’� statement�that�they�consider�that�the� annual�report�and�financial�statements� taken�as�a�whole�is�fair,�balanced�and� understandable�and�provides�the� information�necessary�for�shareholders� to�assess�the�Group’s�position�and� performance,�business�model�and� strategy;�or�
Auditor’s responsibilities Our�objectives�are�to�obtain�reasonable� assurance�about�whether�the�financial� statements�as�a�whole�are�free�from� material�misstatement,�whether�due�to� fraud,�other�irregularities,�or�error,�and�to� issue�our�opinion�in�an�auditor’s�report.� Reasonable�assurance�is�a�high�level�of� assurance,�but�does�not�guarantee�that�an� audit�conducted�in�accordance�with�ISAs� (UK)�will�always�detect�a�material� misstatement�when�it�exists.�Misstatements� can�arise�from�fraud,�other�irregularities� or�error�and�are�considered�material�if,� individually�or�in�aggregate,�they�could� reasonably�be�expected�to�influence�the� economic�decisions�of�users�taken�on�the� basis�of�the�financial�statements.�
Owing�to�the�inherent�limitations�of�an� audit,�there�is�an�unavoidable�risk�that� we�may�not�have�detected�some�material� misstatements�in�the�financial�statements,� even�though�we�have�properly�planned� and�performed�our�audit�in�accordance� with�auditing�standards.�For�example,� the�further�removed�non-compliance�with� laws�and�regulations�is�from�the�events� and�transactions�reflected�in�the�financial� statements,�the�less�likely�the�inherently� limited�procedures�required�by�auditing� standards�would�identify�it.�In�addition,� as�with�any�audit,�there�remained�a�higher� risk�of�non-detection�of�irregularities,� as�these�may�involve�collusion,�forgery,� intentional�omissions,�misrepresentations,� or�the�override�of�internal�controls.� We�are�not�responsible�for�preventing� non-compliance�and�cannot�be�expected� to�detect�non-compliance�with�all�laws� and�regulations.�
8 The purpose of our audit work and to whom we owe our responsibilities This�report�is�made�solely�to�the�Company’s� members,�as�a�body,�in�accordance�with� Chapter�3�of�Part�16�of�the�Companies�Act� 2006.�Our�audit�work�has�been�undertaken� so�that�we�might�state�to�the�Company’s� members�those�matters�we�are�required� to�state�to�them�in�an�auditor’s�report�and� for�no�other�purpose.�To�the�fullest�extent� permitted�by�law,�we�do�not�accept�or� assume�responsibility�to�anyone�other� than�the�Company�and�the�Company’s� members,�as�a�body,�for�our�audit�work,� for�this�report,�or�for�the�opinions�we� have�formed.�
Asia�operations 4,546 3,860 US�operations 2,118 2,150 UK�and�Europe�operations 1,781 1,431 Other�income�and�expenditure (726) (746) Restructuring�costs (156) (97)
Profit�for�the�year�attributable�to�equity�holders�of�the�Company 4,585 8,750 Items�taken�directly�to�equity: Exchange�movements�on�foreign�operations�and�net�investment�hedges 1,706 (2,045) External�dividends (1,244) (1,159) Mark�to�market�value�movements�on�Jackson�assets�backing�surplus�and�required�capital (95) 40 Other�reserve�movements 132 144
Total assets less liabilities, before deduction of insurance funds* 431,269 434,615 Less�insurance�funds: Policyholder�liabilities�(net�of�reinsurers’�share)�and�unallocated�surplus�of�with-profits�funds (414,002) (418,521) Less�shareholders’�accrued�interest�in�the�long-term�business 8 32,533 28,611
Notes on the EEV basis results continued 2018� £m 2017� £m % change
Short-term�fluctuations�in�investment�returns 5 (3,219) 2,111 2,057 Effect�of�changes�in�economic�assumptions 6 146 (102) (91) Mark�to�market�value�movements�on�core�
Impact�of�US�tax�reform 16 – 390 376 (Loss)�profit�attaching�to�corporate�transactions 17 (451) 80 77 Total�non-operating�(loss)�profit (2,975) 2,153 2,093
Unwind�of�discount�and�other�expected�returns 1,218 881 474 2,573 Effect�of�changes�in�operating�assumptions 342 115 330 787 Experience�variances�and�other�items 223 198 218 639 2017� £m
Unwind�of�discount�and�other�expected�returns note (a) 1,218 1,007 Effect�of�changes�in�operating�assumptions note (b) 342 241 Experience�variances�and�other�items note (c) 223 89
Notes (a)� The�net�result�relating�to�fixed�income�securities�reflects�a�number�of�offsetting�items�as�follows: � –� The�impact�on�portfolio�yields�of�changes�in�the�asset�portfolio�in�the�year; � –� The�difference�between�actual�realised�gains�and�losses�and�the�amortisation�of�interest-related�realised�gains�and�losses�that�is�recorded�within�operating�profit;�and � –� Credit�experience�(versus�the�longer-term�assumption).
352� Prudential plc� Annual�Report�2018� www.prudential.co.uk 6 Effect of changes in economic assumptions
Operating profit based on longer-term investment returns 4,527 2,101 1,672 (737) 7,563
Profit for the year attributable to equity holders of the Company 3,601 788 409 (213) 4,585
Intra-group�dividends�and�investment�in�operations note (ii) (1,177) (337) (447) 1,961 – External�dividends – – – (1,244) (1,244) Mark�to�market�value�movements�on�Jackson�assets�backing�
Existing�business�–�transfer�to�net�worth 3,439 (776) 2,663 (2,663) – Expected�return�on�existing�business note 4 201 195 396 2,177 2,573 Changes�in�operating�assumptions�and��
Operating profit based on longer-term investment returns 3,535 107 3,642 4,146 7,788
Shareholders’ equity at end of year 7,527 9,848 17,375 33,013 50,388
Existing�business�–�transfer�to�net�worth 1,370 (253) 1,117 (1,117) – Expected�return�on�existing�business note 4 68 55 123 1,095 1,218 Changes�in�operating�assumptions�and��
Existing�business�–�transfer�to�net�worth 1,462 (171) 1,291 (1,291) – Expected�return�on�existing�business note 4 54 69 123 758 881 Changes�in�operating�assumptions�and�
Operating profit based on longer-term investment returns 1,399 192 1,591 507 2,098
Existing�business�–�transfer�to�net�worth 607 (352) 255 (255) – Expected�return�on�existing�business note 4 79 71 150 324 474 Changes�in�operating�assumptions�and��
Total embedded value note 8(iv) 24,329 14,650 11,409 50,388 20,947 13,257 11,713 45,917 *�The�cost�of�time�value�of�guarantees�arises�from�the�variability�of�economic�outcomes�in�the�future�and�is,�where�appropriate,�calculated�as�the�difference�between�a�full�stochastic� valuation�and�a�single�deterministic�valuation�as�described�in�note�13(i)(d).�Both�valuations�reflect�the�level�of�policyholder�benefits�(including�guaranteed�benefits�and�discretionary� bonuses)�and�associated�charges,�together�with�management�actions�in�response�to�emerging�investment�and�fund�solvency�conditions.�The�increase�in�the�cost�of�time�value�of� guarantees�for�Asia�operations�from�£(186)�million�at�31�December�2017�to�£(981)�million�at�31�December�2018�reflects�the�interaction�between�these�effects�on�the�two�valuations�at� the�respective�level�of�interest�rates�and�equity�markets,�as�well�as�growth�in�the�business�over�the�year.�The�increase�in�the�cost�of�time�value�of�guarantees�for�the�US�operations�from� £(650)�million�at�31�December�2017�to�£(1,446)�million�at�31�December�2018�primarily�reflects�the�reduction�in�US�equity�markets�during�the�fourth�quarter�of�2018.
(i) Underlying free surplus generated – insurance and asset management operations The�2017�comparative�results�are�shown�below�on�both�actual�exchange�rates�(AER)�and�constant�exchange�rates�(CER)�bases.�The�2017� CER�comparative�results�are�translated�at�2018�average�exchange�rates.
Asia operations Underlying�free�surplus�generated�from�in-force�life�business 1,500 1,407 1,343 7% 12% Investment�in�new�business note (iii)(a) (488) (484) (466) (1)% (5)%
UK and Europe operations Underlying�free�surplus�generated�from�in-force�life�business 1,277 1,070 1,070 19% 19% Investment�in�new�business note (iii)(a) (102) (175) (175) 42% 42%
Underlying free surplus generated from insurance and asset management operations before restructuring costs 4,172 3,717 3,620 12% 15%
Underlying free surplus generated from insurance and asset management operations 4,047 3,640 3,543 11% 14%
(ii) Underlying free surplus generated – Group total 2018� £m 2017� £m % change
Balance at end of year 2,034 2,167 4,693 8,894 3,008 11,902
Required�capital note 9 9,848 10,265 Value�of�in-force�business�(VIF) note 9 33,013 29,410 Add�back:�deduction�for�cost�of�time�value�of�guarantees note 9 2,427 836 Other�items* (2,169) (1,371)
Expected period of conversion of future post-tax distributable earnings and required capital flows to free surplus 2017 total as shown above 1-5 years 6-10 years 11-15 years 16-20 years 21-40 years 40+ years 12 Sensitivity of results to alternative assumptions
Embedded value of long-term business operations 31 Dec 2018� £m 31 Dec 2017� £m
New business contribution from long-term business operations 2018� £m 2017� £m
(i) Methodology continued (b) Valuation of in-force and new business The�embedded�value�results�are�prepared�incorporating�best�estimate�assumptions�about�all�relevant�factors�including�levels�of�future� investment�returns,�expenses,�persistency,�mortality�and�morbidity,�as�described�in�note�14(vii).�These�assumptions�are�used�to�project� future�cash�flows.�The�present�value�of�the�future�cash�flows�is�then�calculated�using�a�discount�rate�which�reflects�both�the�time�value�of� money�and�the�non-diversifiable�risks�associated�with�the�cash�flows�that�are�not�otherwise�allowed�for.
(f) With-profits business and the treatment of the estate The�proportion�of�surplus�allocated�to�shareholders�from�the�UK�with-profits�fund�has�been�based�on�the�present�level�of�10�per�cent.� The�value�attributed�to�the�shareholders’�interest�in�the�estate�is�derived�by�increasing�final�bonus�rates�(and�related�shareholder� transfers)�so�as�to�exhaust�the�estate�over�the�lifetime�of�the�in-force�with-profits�business.�In�any�scenarios�where�the�total�assets�of�the� life�fund�are�insufficient�to�meet�policyholder�claims�in�full,�the�excess�cost�is�fully�attributed�to�shareholders.�Similar�principles�apply,� where�appropriate,�for�other�with-profits�funds�of�the�Group’s�Asia�operations.
(g) Internal asset management The�in-force�and�new�business�results�from�long-term�business�include�the�projected�value�of�profits�or�losses�from�asset�management� and�service�companies�that�support�the�Group’s�covered�insurance�businesses.�The�results�of�the�Group’s�asset�management�operations� include�the�current�year�profits�from�the�management�of�both�internal�and�external�funds.�EEV�basis�shareholders’�other�income�and� expenditure�is�adjusted�to�deduct�the�unwind�of�the�expected�internal�asset�management�profit�margin�for�the�year�as�included�in�‘Other� operations’.�The�deduction�is�on�a�basis�consistent�with�that�used�for�projecting�the�results�for�covered�insurance�business.�Group� operating�profit�accordingly�includes�the�variance�between�actual�and�expected�profit�in�respect�of�management�of�the�assets�for� covered�business.
Additional credit risk allowance The�Group’s�methodology�is�to�allow�appropriately�for�credit�risk.�The�allowance�for�total�credit�risk�is�to�cover: �— Expected�long-term�defaults; �— Credit�risk�premium�(to�reflect�the�volatility�in�downgrade�and�default�levels);�and �— Short-term�downgrades�and�defaults.
(b) Investment returns included in operating profit For�the�investment�element�of�the�assets�covering�the�net�worth�of�long-term�insurance�business,�investment�returns�are�recognised�in� operating�results�at�the�expected�long-term�rate�of�return.�These�expected�returns�are�calculated�by�reference�to�the�asset�mix�of�the� portfolio.�For�the�purpose�of�calculating�the�longer-term�investment�return�to�be�included�in�the�operating�result�of�the�with-profits� fund�of�M&GPrudential,�where�assets�backing�the�liabilities�and�unallocated�surplus�are�subject�to�market�volatility,�asset�values�at�the� beginning�of�the�reporting�period�are�adjusted�to�remove�the�effects�of�short-term�market�movements�as�explained�in�note�13(ii)(c).
US�10-year�treasury�yield 2.7 2.4 Allowance�for�long-term�defaults�included�in�projected�spread note 13(i)(h) 0.17 0.19 Pre-tax�expected�long-term�nominal�rate�of�return�for�US�equities 6.7 6.4 Expected�long-term�rate�of�inflation 2.9 3.0 Equity�risk�premium 4.0 4.0 S&P�equity�return�volatility 17.5 18.0
Risk�discount�rate 4.7 4.0 Pre-tax�expected�15-year�nominal�rates�of�investment�return note (c) 3.1 2.6 With-profits and other business: Risk�discount�rate: note (b)
including�the�portion�of�future�with-profits�business�shareholders’�transfers�recognised�in�net�worth. (c)� The�table�below�shows�the�pattern�of�the�UK�risk-free�Solvency�II�spot�yield�curve�at�the�end�of�31�December: 1 year 5 year 10 year 15 year 20 year
(iv) Asia �— The�stochastic�cost�of�guarantees�is�primarily�of�significance�for�the�Hong�Kong,�Malaysia,�Singapore�and�Taiwan�operations; �— The�principal�asset�classes�are�government�and�corporate�bonds; �— The�asset�return�models�are�similar�to�the�models�as�described�for�M&GPrudential�below;�and �— The�volatility�of�equity�returns�ranges�from�18�per�cent�to�35�per�cent�for�both�years,�and�the�volatility�of�government�bond�yields� ranges�from�1.1�per�cent�to�2.0�per�cent�(2017:�from�1.1�per�cent�to�2.0�per�cent).
Notes (i)� Transactions associated with M&GPrudential � The�following�transactions�reduced�the�Group’s�EEV�by�£(376)�million,�which�primarily�reflects�the�loss�of�profits�on�the�portion�of�annuity�liabilities�sold. Intention to demerge the Group’s UK and Europe business and transfer of Hong Kong insurance subsidiaries � In�March�2018,�the�Group�announced�its�intention�to�demerge�its�UK�and�Europe�business�(M&GPrudential)�from�Prudential�plc,�resulting�in�two�separately�listed�companies.�In�
Renewal of strategic bancassurance alliance with United Overseas Bank Limited In�January�2019,�the�Group�announced�the�renewal�of�its�regional�strategic�bancassurance�alliance�with�United�Overseas�Bank�Limited� (UOB).�The�new�agreement�extends�the�original�alliance�which�commenced�in�2010�to�2034�and�increases�the�geographical�scope�to� include�a�fifth�market,�Vietnam,�alongside�the�existing�markets�across�Singapore,�Malaysia,�Thailand�and�Indonesia.
�— Identified�and�described�the�business� covered�by�the�EVM; �— Applied�the�EVM�consistently�to�the� covered�business; �— Determined�assumptions�on�a�realistic� basis,�having�regard�to�past,�current�and� expected�future�experience�and�to�any� relevant�external�data,�and�then�applied� them�consistently; �— Made�estimates�that�are�reasonable�and� consistent;�and
Opinions and conclusions arising from our audit Our opinion on the EEV basis supplementary information is unmodified We�have�audited�the�EEV�basis� supplementary�information� of�Prudential�plc�(“the�Company”)�for�the� year�ended�31�December�2018�set�out�in� the�EEV�basis�results�and�Notes�on�the� EEV�basis�results�pages.�The�EEV�basis� supplementary�information�should�be� read�in�conjunction�with�the�Group� financial�statements.
The impact of uncertainties due to the UK exiting the European Union on our audit Uncertainties�related�to�the�effects�of� Brexit�are�relevant�to�understanding�our� audit�of�the�financial�statements.�All�audits� assess�and�challenge�the�reasonableness� of�estimates�made�by�the�directors�and� related�disclosures�and�the�appropriateness� of�the�going�concern�basis�of�preparation� of�the�financial�statements.�All�of�these� depend�on�assessments�of�the�future� economic�environment�and�the�group’s� future�prospects�and�performance.�Brexit� is�one�of�the�most�significant�economic� events�for�the�UK,�and�at�the�date�of� this�report�its�effects�are�subject�to� unprecedented�levels�of�uncertainty�of� outcomes,�with�the�full�range�of�possible� effects�unknown.�We�applied�a� standardised�firm-wide�approach�in� response�to�that�uncertainty�when� assessing�the�group’s�future�prospects� and�performance.�However,�no�audit� should�be�expected�to�predict�the� unknowable�factors�or�all�possible�future� implications�for�a�company�and�this�is� particularly�the�case�in�relation�to�Brexit.
The purpose of this report and restrictions on its use by persons other than the Company This�report�is�made�solely�to�the�Company� in�accordance�with�the�terms�of�our� engagement.�Our�audit�work�has�been� undertaken�so�that�we�might�state�to�the� Company�those�matters�we�have�been� engaged�to�state�in�this�report�and�for�no� other�purpose.�To�the�fullest�extent� permitted�by�law,�we�do�not�accept�or� assume�responsibility�to�anyone�other�than� the�Company�for�our�audit�work,�for�this� report,�or�for�the�opinions�we�have�formed.
I(a) Analysis of long-term insurance business adjusted IFRS operating profit based on longer-term investment returns by driver This�schedule�classifies�the�Group’s�adjusted�IFRS�operating�profit�based�on�longer-term�investment�returns�from�long-term�insurance� operations�into�the�underlying�drivers,�using�the�following�categories: �— Spread income�represents�the�difference�between�net�investment�income�and�amounts�credited�to�certain�policyholder�accounts.� It�excludes�the�operating�investment�return�on�shareholder�net�assets,�which�has�been�separately�disclosed�as�expected�return�on� shareholder�assets.
Analysis of adjusted IFRS operating profit based on longer-term investment returns by source and margin analysis of Group long-term insurance business The�following�analysis�expresses�certain�of�the�Group’s�sources�of�adjusted�IFRS�operating�profit�based�on�long-term�investment�returns� as�a�margin�of�policyholder�liabilities�or�other�relevant�drivers.�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 2,105 – 149 2,254 Expenses: Expected�return�on�shareholder�assets 129 11 102 242
Margin�on�revenues 2,021 – 189 2,210 Expenses: Expected�return�on�shareholder�assets 120 4 104 228
actions�to�improve�solvency – – 276 276 Changes�in�longevity�assumption�basis – – 204 204 Provision�for�review�of�past�annuity�sales – – (225) (225)
I(a) Analysis of long-term insurance business adjusted IFRS operating profit based on longer-term investment returns by driver continued
Margin analysis of long-term insurance business – Asia 2018 2017 AER 2017 CER� note�(iii)
Margin�on�revenues 2,105 2,098 2,021 Expenses: � DAC�adjustments note (v) 326 241 235 Expected�return�on�shareholder�assets 129 126 120
Analysis of adjusted IFRS operating profit based on longer-term investment returns before and after acquisition costs and DAC adjustments 2018� £m 2017 AER� £m 2017 CER� £m note�(iii)�
Analysis of adjusted IFRS operating profit based on longer-term investment returns for US operations by product
I(c) Analysis of asset management operating profit based on longer-term investment returns 2018� £m
Shareholder-backed�annuity�new�business 9 9 In-force�business: � Longevity�reinsurance�transactions – 31 � Other�management�actions�to�improve�solvency 58 245 � Changes�in�longevity�assumption�basis 441 204 � Provision�for�the�review�of�past�annuity�sales – (225) � Insurance�recoveries�in�respect�of�above�costs 166 – � Provision�for�guaranteed�minimum�pension�equalisation (55) –
Net remittances to the Group from business units note (i) 1,732 1,788 Net�interest�paid (366) (415) Tax�received 142 152 Corporate�activities (206) (207) Total central outflows (430) (470)
Total�holding�company�cash�flow 971 (352) � Cash�and�short-term�investments�at�beginning�of�year 2,264 2,626 � Foreign�exchange�movements 1 (10)
Cash and short-term investments at end of year note (iii) 3,236 2,264 *�The�holding�company�cash�flow�differs�from�the�IFRS�cash�flow�statement,�which�includes�all�cash�flows�in�the�period�including�those�relating�to�both�policyholder�and�shareholder�funds.� The�holding�company�cash�flow�is�therefore�a�more�meaningful�indication�of�the�Group’s�central�liquidity.
(c) M&G and Eastspring Investments – total funds under management M&G,�the�asset�management�business�of�M&GPrudential�and�Eastspring�Investments,�the�Group’s�asset�management�business�in�Asia,� manage�funds�from�external�parties�and�also�funds�for�the�Group’s�insurance�operations.�The�table�below�analyses�the�total�funds�under� management�managed�by�M&G�and�Eastspring�Investments�respectively.�
Own�Funds�(£bn) 30.2 26.4 Solvency�Capital�Requirement�(£bn) 13.0 13.1 Surplus (£bn) 17.2 13.3 Solvency�ratio�(%) 232% 202%
Other capital movements Net�subordinated�debt�issuance/redemption 1.2 (0.2) Foreign�currency�translation�impacts 0.5 (0.7) Dividends�paid (1.2) (1.2)
The�estimated�movement�in�Group�Solvency�II�surplus�over�2018�is�driven�by: �— Operating experience of £4.2 billion: generated�by�in-force�business�and�new�business�written�in�2018,�after�allowing�for�amortisation� of�the�UK�transitional�measures�and�the�impact�of�one-off�management�optimisations�implemented�over�the�year.�This�includes�a� £0.4�billion�benefit�from�the�impact�of�updates�to�UK�longevity�best�estimate�assumptions�and�a�£0.1�billion�benefit�from�an�insurance� recovery�relating�to�the�costs�and�any�related�redress�of�reviewing�internally�vesting�annuities�sold�without�advice�after�1�July�2008;�
�— Non-operating experience of £(1.2) billion: resulting�mainly�from�the�negative�impact�of�market�movements,�after�allowing�for�the� recalculation�of�the�UK�transitional�measures�at�the�valuation�date,�the�impact�of�US�Risk�Based�Capital�updates�announced�in�June� 2018�to�reflect�US�tax�reform�changes�and�the�£(0.3)�billion�impact�from�the�acquisition�of�TMB�Asset�Management�Co.,�Ltd.� (see�IFRS�Financial�Statements�note�D1.2�for�further�information); �— M&GPrudential transactions of £0.4 billion: the�beneficial�impact�on�the�Group�Solvency�II�surplus�of�the�UK�annuities�reinsurance� transaction�effective�from�14�March�2018�and�the�transfer�of�Prudential�plc’s�Hong�Kong�subsidiaries�to�Prudential�Corporation�Asia� Limited�after�allowing�for�the�impact�of�recalculation�of�the�UK�transitional�measures�as�a�result�of�these�transactions; �— Other capital movements: comprising�an�increase�in�surplus�from�the�net�impact�of�debt�raised�offset�by�debt�redeemed�during�2018,� a�benefit�from�foreign�currency�translation�and�a�reduction�in�surplus�from�payment�of�dividends;�and
Analysis of Group Solvency Capital Requirements The�split�of�the�Group’s�estimated�Solvency�Capital�Requirement�by�risk�type�including�the�capital�requirements�in�respect�of�Jackson’s� risk�exposures�based�on�150�per�cent�of�US�Risk�Based�Capital�requirements�(Company�Action�Level)�but�with�no�diversification�between� Jackson�and�the�rest�of�the�Group,�is�as�follows: Split of the Group’s estimated Solvency Capital Requirements
Reconciliation of IFRS equity to Group Solvency II Shareholder Own Funds £bn £bn
� � Estimated UK shareholder Solvency II capital position* 31 Dec 2018 31 Dec 2017
Reconciliation of UK with-profits IFRS unallocated surplus to Solvency II Own Funds1
IFRS�unallocated�surplus�of�UK�with-profits�funds� 13.3 13.5 Value�of�shareholder�transfers� (2.4) (2.7) Risk�margin�(net�of�transitional�measures) (1.0) (0.7) Other�valuation�differences (0.2) (0.5)
Statement of independent review in respect of Solvency II Capital Position at 31 December 2018 The�methodology,�assumptions�and�overall�result�have�been�subject�to�examination�by�KPMG�LLP.
II(d) Reconciliation of expected transfer of value of in-force business (VIF) and required capital to free surplus The�tables�below�show�how�the�value�of�in-force�business�(VIF)�generated�by�the�in-force�long-term�business�and�the�associated�required� capital�is�modelled�as�emerging�into�free�surplus�over�the�next�40�years.�Although�a�small�amount�(circa�5�per�cent)�of�the�Group’s� embedded�value�emerges�after�this�date,�analysis�of�cash�flows�emerging�in�the�years�shown�in�the�tables�is�considered�most�meaningful.� The�modelled�cash�flows�use�the�same�methodology�underpinning�the�Group’s�embedded�value�reporting�and�so�are�subject�to�the�same� assumptions�and�sensitivities�used�to�prepare�our�2018�results.
The�undiscounted�expected�free�surplus�generation�from�all�in-force�business�at�31�December�2018�shown�below�can�be�reconciled� to�the�amount�that�was�expected�to�be�generated�as�at�31�December�2017�as�follows: Group £m £m £m £m £m £m Other £m Total £m 2017�expected�free�surplus�generation�
At�31�December�2018,�the�total�free�surplus�expected�to�be�generated�on�an�undiscounted�basis�in�the�next�40�years�is�£79.3�billion,� up�from�the�£70.1�billion�expected�at�the�end�of�2017,�reflecting�the�effect�of�new�business�written�across�all�three�business�operations� of�£9.8�billion,�a�positive�foreign�exchange�translation�effect�of�£2.6�billion�and�a�£(0.4)�billion�net�effect�reflecting�operating,�market� assumption�changes�and�other�items.�The�£2.3�billion�impact�in�Asia�of�operating,�non-operating�and�other�movements�includes�the�net� benefit�from�changes�in�operating�assumptions�following�the�annual�review�of�experience,�together�with�the�benefit�of�management� actions�and�generally�higher�interest�rates�increasing�projected�returns.�The�£(0.4)�billion�impact�in�the�US�mainly�reflects�the�effect�of� lower�than�expected�separate�account�return�in�the�year,�partially�offset�by�the�positive�effect�from�persistency�assumption�updates�and� higher�interest�rates�increasing�future�separate�account�return.�The�£(2.3)�billion�impact�in�the�UK�and�Europe�reflects�the�effect�of�lower� than�assumed�investment�returns�on�with-profits�funds�and�the�reinsurance�of�part�of�its�shareholder�annuity�portfolio�to�Rothesay�Life� as�discussed�in�note�17.�The�overall�growth�in�the�Group’s�undiscounted�value�of�free�surplus�reflects�our�ability�to�write�both�growing�and� profitable�new�business.
Transfer�to�free�surplus�in�2018 1,370 1,462 607 3,439 Expected�return�on�free�assets 68 54 79 201 Changes�in�operating�assumptions�and�experience�variances 62 125 591 778
Underlying free surplus generated for total insurance and asset management operations note�(iii)
UK�sterling notes (ii),(iv) 9% 12% 26% US�dollar note (iv) 24% 28% 24%
Beginning End Beginning of year Granted Exercised Cancelled Forfeited Lapsed End of year
23�Sep�14 11.55 01�Dec�17 31�May�18 2,414 – (2,414) – – – –
Beginning End Beginning of year Granted Exercised Cancelled Forfeited Lapsed End of year 21�Sep�12 � 6.29 01�Dec�17 31�May�18 15,264 – (15,264) – – – –
IFRS basis results 2018� £m 2017� £m 2016� £m 2015� £m 2014� £m
Profit�before�tax (being tax attributable to shareholders’ and policyholders’ returns) note (i) 3,309 3,970 3,212 3,321 3,154
Profit�before�tax�attributable�to�shareholders� 3,635 3,296 2,275 3,148 2,614 Tax�charges�attributable�to�shareholders’�returns� (622) (906) (354) (569) (398)
Supplementary IFRS income statement data 2018� £m 2017� £m 2016� £m 2015� £m 2014� £m
Supplementary EEV income statement data (post-tax) � � � � �
Annual�premium�equivalent�(APE)�sales 6,802 6,958 6,320 5,466 4,514 EEV�new�business�profit�(NBP)�(post-tax) 3,877 3,616 3,088 2,609 2,104
Net core structural borrowings of shareholder-financed operations 4,428 4,016 Closing�shareholders’�funds 17,249 16,087
Closing�shareholders’�funds�(£�million) 17,249 16,087 Number�of�issued�shares�at�year�end�(millions)� C10 2,593 2,587 Shareholders’ funds per share (pence) 665 622
Operating income before performance-related fees used in cost/income ratio 424 421 Share�of�joint�venture�revenue (188) (176)
Cost/income ratio – Operating expense/operating income before performance-related fees 55% 56%
Annual premium equivalents as published 6,802 6,958 Adjustment�to�include�100%�of�single�premiums�on�new�business�sold�in�the�year note (i) 28,009 28,769 Premiums�from�in-force�business�and�other�adjustments note (ii) 12,413 8,278
III(h) Reconciliation between IFRS and EEV shareholders’ funds The�table�below�shows�the�reconciliation�of�EEV�shareholders’�funds�and�IFRS�shareholders’�funds�at�the�end�of�the�year: EEV shareholders’ funds 49,782 44,698 Less:�Value�of�in-force�business�of�long-term�business note (i) (33,013) (29,410) Deferred�acquisition�costs�assigned�zero�value�for�EEV�purposes 10,077 9,227 Other note (ii) (9,597) (8,428)
Global�financial�markets�are�subject�to� uncertainty�and�volatility�created�by�a� variety�of�factors.�These�factors�include� the�continuing�reduction�in�accommodative� monetary�policies�in�the�US,�the�UK�and� other�jurisdictions�together�with�its�impact� on�the�valuation�of�all�asset�classes,�effects� on�interest�rates�and�the�risk�of�disorderly� repricing�of�inflation�expectations� and�global�bond�yields,�concerns�over� sovereign�debt,�a�general�slowing�in� world�growth,�the�increased�level�of� geopolitical�risk�and�policy-related� uncertainty�(including�the�imposition�of� trade�barriers)�and�potentially�negative� socio-political�events.�
For�some�non-unit-linked�investment� products,�in�particular�those�written�in�some� of�the�Group’s�Asia�operations,�it�may�not�be� possible�to�hold�assets�which�will�provide� cash�flows�to�match�those�relating�to� policyholder�liabilities.�This�is�particularly� true�in�those�countries�where�bond�markets� are�not�developed�and�in�certain�markets� where�regulated�premium�and�claim�values� are�set�with�reference�to�the�interest�rate� environment�prevailing�at�the�time�of�policy� issue.�This�results�in�a�mismatch�due�to�the� duration�and�uncertainty�of�the�liability�cash� flows�and�the�lack�of�sufficient�assets�of�a� suitable�duration.�While�this�residual�asset/ liability�mismatch�risk�can�be�managed,�it� cannot�be�eliminated.�Where�interest�rates� in�these�markets�remain�lower�than�those� used�to�calculate�premium�and�claim�values� over�a�sustained�period,�this�could�have� a�material�adverse�effect�on�Prudential’s� reported�profit.
Jackson�writes�a�significant�amount�of� variable�annuities�that�offer�capital�or� income�protection�guarantees.�The�value� of�these�guarantees�is�affected�by�market� factors�(such�as�interest�rates,�equity�values,� bond�spreads�and�realised�volatility)�and� policyholder�behaviour.�Jackson�uses�a� derivative�hedging�programme�to�reduce� its�exposure�to�market�risks�arising�on�these� guarantees.�There�could�be�market� circumstances�where�the�derivatives�that� Jackson�enters�into�to�hedge�its�market� risks�may�not�cover�its�exposures�under�the� guarantees.�The�cost�of�the�guarantees� that�remain�unhedged�will�also�affect� Prudential’s�results.
In�addition,�Jackson�hedges�the�guarantees� on�its�variable�annuity�book�on�an� economic�basis�(with�consideration�of� the�local�regulatory�position)�and,�thus,� accepts�variability�in�its�accounting�results� in�the�short�term�in�order�to�achieve�the� appropriate�result�on�these�bases.� In�particular,�for�Prudential’s�Group�IFRS� reporting,�the�measurement�of�the�Jackson� variable�annuity�guarantees�is�typically�less� sensitive�to�market�movements�than�for� the�corresponding�hedging�derivatives,� which�are�held�at�market�value.�However,� depending�on�the�level�of�hedging� conducted�regarding�a�particular�risk�type,� certain�market�movements�can�drive� volatility�in�the�economic�or�local�regulatory� results�that�may�be�less�significant�under� IFRS�reporting.
Prudential is subject to the risk of potential sovereign debt credit deterioration owing to the amounts of sovereign debt obligations held in its investment portfolio Investing�in�sovereign�debt�creates� exposure�to�the�direct�or�indirect� consequences�of�political,�social�or� economic�changes�(including�changes�in� governments,�heads�of�state�or�monarchs)� in�the�countries�in�which�the�issuers�are� located�and�the�creditworthiness�of�the� sovereign.�Investment�in�sovereign�debt� obligations�involves�risks�not�present�in� debt�obligations�of�corporate�issuers.� In�addition,�the�issuer�of�the�debt�or�the� governmental�authorities�that�control�the� repayment�of�the�debt�may�be�unable�or� unwilling�to�repay�principal�or�pay�interest� when�due�in�accordance�with�the�terms�of� such�debt,�and�Prudential�may�have�limited� recourse�to�compel�payment�in�the�event�of� a�default.�A�sovereign�debtor’s�willingness� or�ability�to�repay�principal�and�to�pay� interest�in�a�timely�manner�may�be�affected� by,�among�other�factors,�its�cash�flow� situation,�its�relations�with�its�central�bank,� the�extent�of�its�foreign�currency�reserves,� the�availability�of�sufficient�foreign� exchange�on�the�date�a�payment�is�due,� the�relative�size�of�the�debt�service�burden� to�the�economy�as�a�whole,�the�sovereign� debtor’s�policy�toward�local�and� international�lenders,�and�the�political� constraints�to�which�the�sovereign�debtor� may�be�subject.�
Currently�there�are�also�a�number�of�other� global�regulatory�developments�which� could�impact�Prudential’s�businesses�in� its�many�jurisdictions.�These�include�the� Dodd-Frank�Wall�Street�Reform�and� Consumer�Protection�Act�(Dodd-Frank� Act)�in�the�US,�the�work�of�the�Financial� Stability�Board�(FSB)�in�the�area�of�systemic� risk�including�the�designation�of�Global� Systemically�Important�Insurers�(G-SIIs),� the�Insurance�Capital�Standard�(ICS)�being� developed�by�the�International�Association�
of�Insurance�Supervisors�(IAIS),�the�EU� Markets�in�Financial�Instruments�Directive� (the�‘MiFID�II�Directive’)�and�associated� implementing�measures,�which�came� into�force�on�3�January�2018�and�the�EU� General�Data�Protection�Regulation,� which�came�into�force�on�25�May�2018.� In�addition,�regulators�in�a�number�of� jurisdictions�in�which�the�Group�operates� are�further�developing�local�capital� regimes;�this�includes�potential�future� developments�under�Solvency�II�in�the�UK� (as�referred�to�above),�National�Association� of�Insurance�Commissioners’�(NAIC)� reforms�in�the�US�and�amendments�to� certain�local�statutory�regimes�in�some� territories�in�Asia.�There�remains�a�high� degree�of�uncertainty�over�the�potential� impact�of�these�changes�on�the�Group.
The�IAIS�is�also�developing�the�ICS�as�part� of�ComFrame�–�the�Common�Framework� for�the�supervision�of�Internationally� Active�Insurance�Groups�(IAIGs).�The� implementation�of�ICS�will�be�conducted�in� two�phases�–�a�five-year�monitoring�phase� followed�by�an�implementation�phase.� ComFrame�will�more�generally�establish� a�set�of�common�principles�and�standards� designed�to�assist�supervisors�in� addressing�risks�that�arise�from�insurance� groups�with�operations�in�multiple� jurisdictions.�The�ComFrame�proposals,� including�ICS,�could�result�in�enhanced� capital�and�regulatory�measures�for�IAIGs,� for�which�Prudential�satisfies�the�criteria.
In�late�2018,�the�US�NAIC�concluded� an�industry�consultation�with�the�aim�of� reducing�the�non-economic�volatility�in� the�variable�annuity�statutory�balance� sheet�and�enhancing�risk�management.� The�NAIC�is�targeting�a�January�2020� effective�date�for�the�new�framework,� which�will�have�an�impact�on�Jackson’s� business.�Jackson�continues�to�assess�and� test�the�changes.�The�NAIC�also�has�an� ongoing�review�of�the�C-1�bond�factors�in� the�required�capital�calculation,�on�which� further�information�is�expected�to�be� provided�in�due�course.�The�Group’s� preparations�to�manage�the�impact�of� these�reforms�will�continue.�
The proposed demerger of M&GPrudential carries with it execution risk and will continue to require significant management attention The�proposed�demerger�of�M&GPrudential� is�subject�to�a�number�of�factors�and� dependencies�(including�prevailing�market� conditions,�the�appropriate�allocation� of�debt�and�capital�between�the�two� groups�and�approvals�from�regulators�and� shareholders).�In�addition,�preparing�for� and�implementing�the�proposed�demerger� is�expected�to�continue�to�require� significant�time�from�management,�which� may�divert�management’s�attention�from� other�aspects�of�Prudential’s�business.�
Therefore�there�can�be�no�certainty�as�to� the�timing�of�the�demerger,�or�that�it�will�be� completed�as�proposed�(or�at�all).�Further,� if�the�proposed�demerger�is�completed,� there�can�be�no�assurance�that�either� Prudential�plc�or�M&GPrudential�will� realise�the�anticipated�benefits�of�the� transaction,�or�that�the�proposed�demerger� will�not�adversely�affect�the�trading�value� or�liquidity�of�the�shares�of�either�or�both� of�the�two�businesses.�
The intended UK exit from the EU may adversely impact economic conditions, increase market volatility, increase political and regulatory uncertainty, and cause operational disruption (including reduced access to EU markets) which could have adverse effects on Prudential’s business and its profitability On�29�March�2017,�the�UK�submitted�the� formal�notification�of�its�intention�to� withdraw�from�the�EU�pursuant�to�Article� 50�of�the�Treaty�on�the�European�Union,� as�amended.�Following�submission�of�this� notification,�the�UK�has�a�maximum�period� of�two�years�to�negotiate�the�terms�of�its� withdrawal�from�the�EU.�If�no�formal� withdrawal�agreement�is�reached�between� the�UK�and�the�EU,�then�it�is�expected� the�UK’s�membership�of�the�EU�will� automatically�terminate�at�11.00pm�GMT� on�29�March�2019.�The�UK’s�decision�to� leave�the�EU�will�have�political,�legal�and� economic�ramifications�for�both�the�UK� and�the�EU,�although�these�are�expected� to�be�more�pronounced�for�the�UK.� The�Group�has�several�UK-domiciled� operations,�principally�M&GPrudential,� and�these�will�be�impacted�by�a�UK� withdrawal�from�the�EU,�although� contingency�plans�have�been�developed� and�enacted�since�the�referendum�result� to�ensure�that�Prudential’s�business�is�not� unduly�affected�by�the�UK�withdrawal.� The�outcome�of�the�negotiations�on�the� UK’s�withdrawal�and�any�subsequent� negotiations�on�trade�and�access�to�the� country’s�major�trading�markets,�including� the�single�EU�market,�is�currently�unknown.� As�a�result,�there�is�ongoing�uncertainty� over�the�terms�under�which�the�UK�will� leave�the�EU,�in�particular�after�the� transitional�period�ending�in�December� 2020�(which�itself�is�yet�to�be�agreed�in�a� legally�binding�manner),�and�the�potential� for�a�disorderly�exit�by�the�UK�without�a� negotiated�agreement.�While�the�Group� has�undertaken�significant�work�to�plan�for� and�mitigate�such�risks,�there�can�be�no� assurance�that�these�plans�and�efforts�will� be�successful.�
In�particular,�depending�on�the�nature� of�the�UK’s�exit�from�the�EU,�some�or�all�of� the�following�risks�may�materialise,�which� may�impact�the�business�of�the�Group�and� its�profitability: �— The�UK�and�EU�may�experience� a�downturn�in�economic�activity.� The�effect�of�any�downturn�is�expected� to�be�more�pronounced�for�the�UK� particularly�in�the�event�of�a�disorderly� exit�by�the�UK�from�the�EU.�Market� volatility�and�illiquidity�may�increase� (including�for�property�funds,�where� redemption�restrictions�may�be�applied)� in�the�period�leading�up�to,�and� following,�the�UK’s�withdrawal.�This� could�lead�to�potential�downgrades�in� sovereign�and�corporate�debt�ratings� in�the�UK�and�the�EU�and�falls�in�UK� property�values.�In�a�severe�scenario� where�the�UK’s�sovereign�rating�is� downgraded�by�potentially�more�than� one�notch,�this�may�also�impact�on�the� ratings�of�UK�companies,�including� Prudential’s�UK�business.�Further�or� prolonged�interest�rate�reductions�may� occur�due�to�monetary�easing.�These� impacts�may�result�in�the�adverse� effects�outlined�in�the�market�and� general�economic�conditions�risk�factor.
�— The�UK’s�exit�from�the�EU�could� result�in�significant�changes�to�the� legal�and�regulatory�regime�under� which�the�Group�(and,�in�particular,� M&GPrudential)�operates,�the�nature� and�extent�of�which�remain�uncertain� while�the�outcome�of�negotiations� regarding�the�UK’s�withdrawal�from� the�EU�and�the�extent�and�terms�of�any� future�access�to�the�single�EU�market� remains�to�be�agreed.�There�may�be� an�increase�in�complexity�and�costs� associated�with�operating�in�an� additional�regulatory�jurisdiction.
The resolution of several issues affecting the financial services industry could have a negative impact on Prudential’s reported results or on its relations with current and potential customers Prudential�is,�and�in�the�future�may�be,� subject�to�legal�and�regulatory�actions�in� the�ordinary�course�of�its�business,�both� in�the�UK�and�internationally�on�matters� relevant�to�the�delivery�of�customer� outcomes.�Such�actions�may�relate�to�the� application�of�current�regulations�for� example�the�Financial�Conduct�Authority’s� (FCA)�principles�and�conduct�of�business� rules�or�the�failure�to�implement�new� regulations.�These�actions�could�involve�a� review�of�types�of�business�sold�in�the�past� under�acceptable�market�practices�at�the� time,�such�as�the�requirement�in�the�UK�to� provide�redress�to�certain�past�purchasers� of�pensions�and�mortgage�endowment� policies,�changes�to�the�tax�regime� affecting�products,�and�regulatory�reviews� of�products�sold�and�industry�practices,� including,�in�the�latter�case,�lines�of� business�it�has�closed.�Current�regulatory� actions�include�the�UK�insurance�business’s� undertaking�to�the�FCA�to�review�annuities� sold�without�advice�after�1�July�2008�to�its� contract-based�defined�contribution� pension�customers.�This�will�result�in�the� UK�insurance�business�being�required�to� provide�redress�to�certain�such�customers.� A�provision�has�been�established�to�cover� the�costs�of�undertaking�the�review�and� any�related�redress�but�the�ultimate�amount� required�remains�uncertain.�
In�the�US,�there�has�been�significant� attention�on�the�different�regulatory� standards�applied�to�investment�advice� delivered�to�retail�customers�by�different� sectors�of�the�industry.�As�a�result�of� reports�relating�to�perceptions�of�industry� abuses,�there�have�been�numerous� regulatory�inquiries�and�proposals�for� legislative�and�regulatory�reforms.�This� includes�focus�on�the�suitability�of�sales�of� certain�products,�alternative�investments� and�the�widening�of�the�circumstances� under�which�a�person�or�entity�providing� investment�advice�with�respect�to�certain� employee�benefit�and�pension�plans�would� be�considered�a�fiduciary�subjecting�the� person�or�entity�to�certain�regulatory�
Prudential’s businesses are conducted in highly competitive environments with developing demographic trends and continued profitability depends upon management’s ability to respond to these pressures and trends The�markets�for�financial�services�in�the� UK,�US�and�Asia�are�highly�competitive,� with�several�factors�affecting�Prudential’s� ability�to�sell�its�products�and�continued� profitability,�including�price�and�yields� offered,�financial�strength�and�ratings,� range�of�product�lines�and�product�quality,� brand�strength�and�name�recognition,� investment�management�performance,� historical�bonus�levels,�the�ability�to�respond� to�developing�demographic�trends,� customer�appetite�for�certain�savings� products�and�technological�advances.� In�some�of�its�markets,�Prudential�faces� competitors�that�are�larger,�have�greater� financial�resources�or�a�greater�market� share,�offer�a�broader�range�of�products� or�have�higher�bonus�rates.�Further,�
Downgrades in Prudential’s financial strength and credit ratings could significantly impact its competitive position and damage its relationships with creditors or trading counterparties Prudential’s�financial�strength�and�credit� ratings,�which�are�used�by�the�market�to� measure�its�ability�to�meet�policyholder� obligations,�are�an�important�factor� affecting�public�confidence�in�Prudential’s� products,�and�as�a�result�its� competitiveness.�Downgrades�in� Prudential’s�ratings�as�a�result�of,�for� example,�decreased�profitability,�increased� costs,�increased�indebtedness�or�other� concerns�could�have�an�adverse�effect�on� its�ability�to�market�products,�retain�current� policyholders,�and�on�the�Group’s�financial� flexibility.�In�addition,�the�interest�rates� Prudential�pays�on�its�borrowings�are�
Although�Prudential’s�IT,�compliance�and� other�operational�systems,�models�and� processes�incorporate�controls�designed� to�manage�and�mitigate�the�operational�and� model�risks�associated�with�its�activities,� there�can�be�no�assurance�that�such� controls�will�always�be�effective.�Due� to�human�error�among�other�reasons,� operational�and�model�risk�incidents�do� happen�periodically�and�no�system�or� process�can�entirely�prevent�them�although� there�have�not�been�any�material�events�to� date.�Prudential’s�legacy�and�other�IT� systems�and�processes,�as�with�operational� systems�and�processes�generally,�may�be� susceptible�to�failure�or�security�breaches.�
Attempts to access or disrupt Prudential’s IT systems, and loss or misuse of personal data, could result in loss of trust from Prudential’s customers and employees, reputational damage and financial loss Prudential�and�its�business�partners�are� increasingly�exposed�to�the�risk�that� individuals�or�groups�may�attempt�to�disrupt� the�availability,�confidentiality�and�integrity� of�its�IT�systems,�which�could�result�in� disruption�to�key�operations,�make�it�difficult� to�recover�critical�services,�damage�assets� and�compromise�the�integrity�and�security� of�data�(both�corporate�and�customer).�This� could�result�in�loss�of�trust�from�Prudential’s� customers�and�employees,�reputational� damage�and�direct�or�indirect�financial�loss.� The�cyber�security�threat�continues�to� evolve�globally�in�sophistication�and� potential�significance.�Prudential’s� increasing�profile�in�its�current�markets� and�those�in�which�it�is�entering,�growing� customer�interest�in�interacting�with�their� insurance�providers�and�asset�managers� through�the�internet�and�social�media,� improved�brand�awareness�and�the� classification�of�Prudential�as�a�G-SII�could� also�increase�the�likelihood�of�Prudential� being�considered�a�target�by�cyber� criminals.�Further,�there�have�been�changes� to�the�threat�landscape�and�the�risk�from� untargeted�but�sophisticated�and� automated�attacks�has�increased.�
The failure to understand and respond effectively to the risks associated with environmental, social or governance (ESG) factors could adversely affect Prudential’s achievement of its long term strategy The�business�environment�in�which� Prudential�operates�is�continually� changing.�ESG-related�issues�may�directly� or�indirectly�impact�key�stakeholders,� ranging�from�customers�to�institutional� investors,�employees,�suppliers�and� regulators,�all�of�whom�have�expectations� in�this�area.�A�failure�to�manage�those� material�risks�which�have�ESG�implications� may�adversely�impact�on�the�reputation� and�brand�of�the�Group,�the�results�of�its� operations,�its�customers,�and�its�ability� to�deliver�on�its�long-term�strategy�and� therefore�its�long-term�success.�
Climate�change�is�one�ESG�theme�that� poses�potentially�significant�risks�to� Prudential�and�its�customers,�not�only� from�the�physical�impacts�of�climate� change,�driven�by�both�specific�short-term� climate-related�events�such�as�natural� disasters�and�longer-term�impacts,�but� also�from�transition�risks�associated� with�the�shift�to�a�low�carbon�economy.� Climate-driven�changes�in�countries�in� which�Prudential�operates�could�change� its�claims�profile.�There�is�an�increasing� expectation�from�stakeholders�for� Prudential�to�understand,�manage�and� provide�increased�transparency�of�its� exposure�to�climate-related�risks.�For� example,�the�FSB’s�Task�Force�on�Climaterelated �Disclosures�recommendations�were� published�in�2017�to�provide�a�voluntary� framework�on�corporate�climate-related� financial�disclosures�following�the�FSB’s� concern�that�there�may�be�systemic�risk� in�the�financial�system�related�to� climate�change.
Risk factors continued higher�costs�and�a�disorderly�adjustment� to�their�asset�values.�This�could�lead�to�an� adverse�impact�on�the�value�and�the�future� performance�of�the�investment�assets� of�the�Group.�The�potential�broader� economic�impact�from�this�may�impact� upon�customer�demand�for�the�Group’s� products.�Given�that�Prudential’s� investment�horizons�are�long�term,� it�is�potentially�more�exposed�to�the� long-term�impact�of�climate�change�risks.� Additionally,�Prudential’s�stakeholders� increasingly�expect�responsible�investment� principles�to�be�adopted�to�demonstrate� that�ESG�considerations�(including�climate� change)�are�effectively�integrated�into� investment�decisions�and�fiduciary�and� stewardship�duties.
A�further�factor�is�the�assumption�that� Prudential�makes�about�future�expected� levels�of�the�rates�of�early�termination�of� products�by�its�customers�(known�as� persistency).�This�is�relevant�to�a�number� of�lines�of�business�in�the�Group,�especially� for�Jackson’s�portfolio�of�variable�annuities.� Prudential’s�persistency�assumptions� reflect�a�combination�of�recent�past� experience�for�each�relevant�line�of� business�and�expert�judgement,�especially� where�a�lack�of�relevant�and�credible� experience�data�exists.�Any�expected� change�in�future�persistency�is�also� reflected�in�the�assumption.�If�actual�levels� of�future�persistency�are�significantly� different�than�assumed,�the�Group’s�results� of�operations�could�be�adversely�affected.� Furthermore,�Jackson’s�variable�annuity� products�are�sensitive�to�other�types�of� policyholder�behaviour,�such�as�the� take-up�of�its�GMWB�product�features.�
In�addition,�Prudential’s�business�may�be� adversely�affected�by�epidemics�and�other� effects�that�give�rise�to�a�large�number�of� deaths�or�additional�sickness�claims,�as�well� as�increases�to�the�cost�of�medical�claims.� Significant�influenza�and�other�epidemics� have�occurred�a�number�of�times� historically�but�the�likelihood,�timing,�or� the�severity�of�future�epidemics�cannot�be� predicted.�The�effectiveness�of�external� parties,�including�governmental�and� non-governmental�organisations,�in� combating�the�spread�and�severity�of�any� epidemics�could�have�a�material�impact�on� the�Group’s�loss�experience.
Prudential operates in a number of markets through joint ventures and other arrangements with third parties, involving certain risks that Prudential does not face with respect to its consolidated subsidiaries Prudential�operates,�and�in�certain�markets� is�required�by�local�regulation�to�operate,� through�joint�ventures�and�other�similar� arrangements.�For�such�Group�operations,� management�control�is�exercised�in� conjunction�with�other�participants.�The� level�of�control�exercisable�by�the�Group� depends�on�the�terms�of�the�contractual� agreements,�in�particular,�the�allocation�of� control�among,�and�continued�cooperation� between,�the�participants.�In�addition,�the� level�of�control�exercisable�by�the�Group� could�also�be�subject�to�changes�in�the� maximum�level�of�non-domestic�ownership� imposed�on�foreign�companies�in�certain� jurisdictions.�Prudential�may�face�financial,� reputational�and�other�exposure�(including� regulatory�censure)�in�the�event�that�any� of�its�partners�fails�to�meet�its�obligations� under�the�arrangements,�encounters� financial�difficulty,�or�fails�to�comply�with� local�or�international�regulation�and� standards�such�as�those�pertaining�to�the� prevention�of�financial�crime.�In�addition,� a�significant�proportion�of�the�Group’s� product�distribution�is�carried�out�through� arrangements�with�third�parties�not� controlled�by�Prudential�and�is�therefore� dependent�upon�continuation�of�these� relationships.�A�temporary�or�permanent� disruption�to�these�distribution� arrangements,�such�as�through�significant� deterioration�in�the�reputation,�financial� position�or�other�circumstances�of�the�third� party�or�material�failure�in�controls�(such�as� those�pertaining�to�the�third-party�system� failure�or�the�prevention�of�financial�crime)� could�adversely�affect�the�results�of� operations�of�Prudential.
Prudential’s Articles of Association contain an exclusive jurisdiction provision Under�Prudential’s�Articles�of�Association,� certain�legal�proceedings�may�only�be� brought�in�the�courts�of�England�and� Wales.�This�applies�to�legal�proceedings� by�a�shareholder�(in�its�capacity�as�such)� against�Prudential�and/or�its�directors�� and/or�its�professional�service�providers.� It�also�applies�to�legal�proceedings� between�Prudential�and�its�directors�� and/or�Prudential�and�Prudential’s� professional�service�providers�that�arise� in�connection�with�legal�proceedings� between�the�shareholder�and�such� professional�service�providers.�This� provision�could�make�it�difficult�for�US� and�other�non-UK�shareholders�to�enforce� their�shareholder�rights.
Changes in tax legislation may result in adverse tax consequences Tax�rules,�including�those�relating�to�the� insurance�industry,�and�their�interpretation� may�change,�possibly�with�retrospective� effect,�in�any�of�the�jurisdictions�in�which� Prudential�operates.�Significant�tax� disputes�with�tax�authorities,�and�any� change�in�the�tax�status�of�any�member� of�the�Group�or�in�taxation�legislation�or� its�scope�or�interpretation�could�affect� Prudential’s�financial�condition�and�results� of�operations.
A Actual exchange rates (AER) Actual historical exchange rates for the specific accounting period, being the average rates over the period for the income statement and the closing rates at the balance sheet date for the balance sheet.
Annual premium equivalent (APE) A measure of new business activity that is calculated as the sum of annualised regular premiums from new business plus 10 per cent of single premiums on new business written during the period.
B Back book of business The insurance policies sold in past periods that are still in force and hence are still recorded on the insurer’s balance sheet.
Bonuses Bonuses refer to the non-guaranteed benefit added to participating life insurance policies and are the way in which policyholders receive their share of the profits of the policies. There are normally two types of bonus: — Regular bonus: expected to be added every year during the term of the policy. It is not guaranteed that a regular bonus will be added each year, but once it is added, it cannot be reversed, also known as annual or reversionary bonus; and
Discretionary participation features (DPF) A contractual right to receive, as a supplement to guaranteed benefits, additional benefits: — That are likely to be a significant portion of the total contractual benefits; — Whose amount or timing is contractually at the discretion of the issuer; and
E Endowment product An ordinary individual life insurance product that provides the insured party with various guaranteed benefits if it survives specific maturity dates or periods stated in the policy. Upon the death of the insured party within the coverage period, a designated beneficiary receives the face value of the policy.
Fixed indexed annuities (FIA) These are similar to fixed annuities in that the contract holder pays the insurer a premium, which is credited to the contract holders’ account and, periodically, interest is credited to the contract holders’ account and administrative charges are deducted, as appropriate. An annual minimum interest rate may be guaranteed, although actual interest credited may be higher and is linked to an equity index over its indexed option period.
H Health and protection These comprise health and personal accident insurance products, which provide morbidity or sickness benefits and include health, disability, critical illness and accident coverage. Health and protection products are sold both as standalone policies and as riders that can be attached to life insurance products. Health and protection riders are presented together with ordinary individual life insurance products for purposes of disclosure of financial information.
M Market value reduction (MVR) A reduction applied to the payment on with-profits bonds when policyholders surrender in adverse market conditions.
Persistency The percentage of policies remaining in force from period to period.
Present value of new business premiums (PVNBP) The present value of new business premiums is calculated as equalling single premiums plus the present value of expected premiums of new regular premium business, allowing for lapses and other assumptions made in determining the EEV new business contribution.
R Regular premium product A life insurance product with regular periodic premium payments.
Risk margin reserve (RMR) An RMR 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.
Time value of options and guarantees (TVOG) The value of financial options and guarantees comprises two parts, the intrinsic value and the time value. The intrinsic value is given by a deterministic valuation on best estimate assumptions. The time value is the additional value arising from the variability of economic outcomes in the future.
V Variable annuity (VA) (US) An annuity whose value is determined by the performance of underlying investment options that frequently includes securities. A variable annuity’s value is not guaranteed and will fluctuate, depending on the value of its underlying investments. The holder of a variable annuity assumes the investment risk and the funds backing a variable annuity are held in the insurance companies separate account. VAs are similar to unit-linked annuities in the UK.
Annual General Meeting The 2019 Annual General Meeting (AGM) will be held in the Churchill Auditorium at The QEII Centre, Broad Sanctuary, Westminster, London SW1P 3EE on 16 May 2019 at 11.00am.
Documents on display The terms and conditions of all Directors’ appointments are available for inspection at the Company’s registered office during normal business hours and at the AGM.
Share capital Issued share capital The issued share capital as at 31 December 2018 consisted of 2,593,044,409 (2017: 2,587,175,445) ordinary shares of 5 pence each, all fully paid up and listed on the London Stock Exchange and the Hong Kong Stock Exchange. As at 31 December 2018, there were 47,260 (2017: 48,086) accounts on the register. Further information can be found in note C10 on page 291.
As at 12 March 2019, Trustees held 0.38 per cent of the issued share capital under the various plans in operation.
Rights to dividends under the various schemes are set out in the Directors’ remuneration report.
Certain restrictions may be imposed from time to time by applicable laws and regulations (for example, insider trading laws) and pursuant to the Listing Rules of both the Financial Conduct Authority and the Hong Kong Stock Exchange, as well as under the rules of some of the Group’s employee share plans.
All Directors are required to hold a minimum number of shares under guidelines approved by the Board, which they would also be expected to retain as described on page 158 of the Directors’ remuneration report.
Authority to issue shares The Directors require authority from shareholders in relation to the issue of shares. Whenever shares are issued, these must be offered to existing shareholders pro rata to their holdings unless the Directors have been given authority by shareholders to issue shares without offering them first to existing shareholders. Prudential seeks authority from its shareholders on an annual basis to issue shares up to a maximum amount, of which a defined number may be issued without pre-emption. Disapplication of statutory pre-emption procedures is also sought for rights issues. The existing authorities to issue shares and to do so without observing pre-emption rights are due to expire at the end of this year’s AGM. Relevant resolutions to authorise share capital issuances will be put to shareholders at the AGM on 16 May 2019.
Details of shares issued during 2018 and 2017 are given in note C10 on page 291.
Record date 29 March 2019 29 March 2019 29 March 2019
Payment date 17 May 2019 On or about 24 May 2019 On or about
(for hard of hearing). Lines are open from 8.30am to 5.30pm (UK), Monday to Friday. International shareholders
Hong Kong register Computershare Hong Kong Investor Services Limited, 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong.
Dividend mandates Shareholders may have their dividends paid directly to their bank or building society account. If you wish to take advantage of this facility, please call Equiniti and request a Cash Dividend Mandate form. Alternatively, shareholders may download the form from www.prudential.co.uk/investors/ shareholder-information/forms
ShareGift Shareholders who have only a small number of shares, the value of which makes them uneconomic to sell, may wish to consider donating them to ShareGift (Registered Charity 1052686). The relevant share transfer form may be downloaded from our website www.prudential.co.uk/investors/ shareholder-information/forms or from Equiniti. Further information about ShareGift may be obtained on +44 (0)20 7930 3737 or from www.ShareGift.org
It is intended that the Company’s registered office will change to 1 Angel Court, London EC2R 7AG during April 2019.
Prudential Corporation Asia 13th Floor One International Finance Centre 1 Harbour View Street Central Hong Kong www.prudentialcorporation-asia.com Tel +852 2918 6300
Any forward-looking statements contained in this Annual Report speak only as of the date on which they are made. Prudential expressly disclaims any obligation to update any of the forward-looking statements contained in this report or any other forward-looking statements it may make, whether as a result of future events, new information or otherwise except as required pursuant to the UK Prospectus Rules, the UK Listing Rules, the UK Disclosure and Transparency Rules, the Hong Kong Listing Rules, the SGX-ST listing rules or other applicable laws and regulations.
Entering the computer age Prudential has a long history of innovation. Between 1964 and 1966, Prudential installed two Ferranti ‘Orion’ computers at its head office in London, forming one of the UK’s most powerful commercial computing resources at the time. The success of the first two Orions led Prudential to install a third in 1969.
While huge by modern standards, the Orions also saved valuable space. A reel of magnetic tape weighing less than eight pounds could hold the equivalent of 500,000 punched cards, which would have required 300 square feet of storage space and weighed over a tonne.
1923 Prudential’s first overseas life branch is established in India, with the first policy being sold to a tea planter in Assam.
1999 Prudential acquires M&G, pioneer of unit trusts in the UK and a leading provider of investment products.
2000 Prudential plc is listed on the New York Stock Exchange. Prudential becomes the first UK life insurer to enter the Mainland China market through its joint venture with CITIC Group.
It is intended that the Company’s registered office will change to 1 Angel Court, London EC2R 7AG during April 2019. An announcement will be made to the market to confirm this at the relevant time.
Principal place of business in Hong Kong 13th Floor One International Finance Centre 1 Harbour View Street Central Hong Kong