Prudential TSR v FTSE 100 and peer group averages – total return, per cent over seven years to 31 December 2015 £100 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2015Dec 2014Dec 2013
Group Chief Executive Single Figure of total remuneration 3,737 640 5,293 5,339 9,533 8,702 13,418 5,019 7,663
The table below sets out how the change in remuneration for the Group Chief Executive between 2014 and 2015 compared to a wider employee comparator group: Salary Benefits Bonus
The employee comparator group used for the purpose of this analysis is all UK employees. This includes employees in the UK Insurance Operations business, M&G and Group Head Office, and reflects the average change in pay for employees employed in both 2014 and 2015. The salary increase includes uplifts made through the annual salary review as well as any additional changes in the year, for example to reflect promotions or role changes. The UK workforce has been chosen as the most appropriate comparator group as it reflects the economic environment for the location in which the Group Chief Executive is employed.
The Group Chief Executive’s salary, benefits and bonus percentage change has been calculated by taking the amounts received by both Tidjane Thiam and Mike Wells in this role in 2015 and calculating the percentage increase or decrease from the amount received by Tidjane Thiam in 2014. Mike Wells was required to relocate to London to assume the Group Chief Executive role and the increase in benefits received by the Group Chief Executive role reflects this relocation support.
Note All-employee pay as taken from note B3.1 to the financial statements.
Michael McLintock2 Chief Executive, M&G 35,011 £590,986 25% 31 Dec 17 100% Nic Nicandrou Chief Financial Officer 104,117 £1,757,495 25% 31 Dec 17 50% 50% Barry Stowe3 Chief Executive, PCA 56,970 £1,881,728 25% 31 Dec 17 50% 50%
2 PLTIP awards made to the Chief Executive, M&G are subject only to the TSR performance condition. The IFRS profit of M&G is a performance condition under the M&G Executive LTIP. 3 Barry Stowe, Tony Wilkey and Mike Wells received additional awards following the changes to their roles. These awards were based on a pro-rated total 2015 award in line with their revised salaries using the average share price over the three dealing days prior to the grant date. 4 Tony Wilkey's first two 2015 awards were made before he was appointed to the Board. One award was made under the Prudential LTIP and the other under the PCA LTIP. The latter has no performance conditions. All future awards will be made under the Prudential LTIP.
Performance ranges for IFRS operating profit measured on a cumulative basis over three years are set at the start of the performance period. Due to commercial sensitivities these are not published in advance but Group targets will be disclosed when awards vest.
Note The value of the award on vesting will be based on the profitability and investment performance of M&G over the performance period as described in the Directors’ remuneration policy.
Chairman’s fees As reported in last year's report, the annual fee paid to the Chairman, Paul Manduca, was increased from £600,000 to £700,000 with effect from 1 July 2015 to recognise the increased demands of the role. This fee will next be reviewed in 2016.
* Benefits include the cost of providing the use of a car and driver, medical insurance and security arrangements. † Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded figures. Total remuneration is calculated using the methodology prescribed by Schedule 8 of the Companies Act. The Chairman and Non-executive Directors are not entitled to participate in annual bonus plans or long-term incentive plans.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 121
Non-executive Directors * There were no changes of Executive Directors’ interests in ordinary shares between 31 December 2015 and 7 March 2016 with the exception of the UK-based Executive Directors due to their participation in the monthly Share Incentive Plan (SIP). Michael McLintock acquired a further 29 shares in the SIP, Nic Nicandrou acquired a further 29 shares in the SIP and Mike Wells acquired a further 30 shares in the SIP during this period.
‡ Holding requirement of the Articles of Association (2,500 ordinary shares) must be obtained within one year of appointment to the Board. The increased guidelines for Executive Directors were introduced with effect from January 2013. Executive Directors have five years from this date (or date of joining or role change, if later) to reach the enhanced guideline. The guideline for Non-executive Directors was introduced on 1 July 2011. Non-executive Directors have three years from their date of joining to reach the guideline.
5 Tidjane Thiam stepped down from the Board on 31 May 2015. Total interests in shares are shown as at this date. 6 For the 1 January 2015 figure Mike Wells’ beneficial interest in shares is made up of 222,790 ADRs (representing 445,580 ordinary shares). For the 31 December 2015 figure his beneficial interest in shares is made up of 232,594 ADRs (representing 465,188 ordinary shares) and 97 ordinary shares. 7 Tony Wilkey was appointed to the Board on 1 June 2015. Total interests in shares are shown from this date. 8 David Law was appointed to the Board on 15 September 2015. Total interests in shares are shown from this date. 9 For the 1 January 2015 figure Alice Schroeder’s beneficial interest in shares is made up of 1,250 ADRs (representing 2,500 ordinary shares). For the 31 December 2015 figure her beneficial interest in shares is made up of 4,250 ADRs (representing 8,500 ordinary shares).
Notes 1 A gain of £11,880.43 was made by directors in 2015 on the exercise of SAYE options. 2 No price was paid for the award of any option. 3 The highest and lowest closing share prices during 2015 were 1,752 pence and 1,330.5 pence respectively. 4 All exercise prices are shown to the nearest pence. 5 Pierre-Olivier Bouée and Tidjane Thiam participated in the plan during their time as Executive Directors and their options lapsed following the cessation of their employment.
6 Jackie Hunt participated in the plan during her time as an Executive Director.
The Directors' remuneration policy contains further details of the terms included in Executive Director service contracts. Details of the service contracts of each Executive Director are outlined in the table below.
Other directors served on the boards of educational, charitable and cultural organisations without receiving a fee for these services.
Notes 1 Pierre-Olivier Bouée stepped down from the Board on 31 May 2015. 2 Jackie Hunt stepped down from the Board on 3 November 2015. 3 Penny James and Tony Wilkey were appointed to the Board on 1 September 2015 and 1 June 2015 respectively. 4 Tidjane Thiam stepped down from the Board on 31 May 2015.
Letters of appointment of the Chairman and Non-executive Directors The Directors' remuneration policy contains further details on Non-executive Directors’ letters of appointment. Details of their individual appointments are outlined below: Chairman/Non-executive Director Appointment by the Board
In making decisions about the remuneration arrangements for those joining the Board, the Committee worked within the Directors’ remuneration policy approved by shareholders and was mindful of: — The skills, knowledge and experience that each new Executive Director brought to the Board; — The need to support the relocation of executives to enable them to assume their roles; and
Appointing high-calibre executives to the Board and to different roles on the Board is necessary to ensure the Company is well positioned to develop and implement its strategy and deliver long-term value. As the Company operates in an international marketplace for talent, the best internal and external candidates are sometimes asked to move location to assume their new roles. Where this happens, the Company will offer relocation support. The support offered will depend on the circumstances of each move but may include shipping services, the provision of temporary accommodation and other housing benefits. Executives may receive support with the preparation of tax returns, but no current Executive Director is tax equalised.
During the year, a relocation payment was made to Nic Nicandrou in line with a commitment made to him when he joined the Company in 2009 (and disclosed in the 2009 annual report on remuneration). Details of this payment are included in the notes to the 2015 Single Figure table.
Following his retirement from the Board, Pierre-Olivier received £72,850 in respect of salary, benefits and pension for the period from the date he ceased to be a director to his termination date on 30 June 2015 in accordance with his contract of employment. His deferred bonus awards will be released in accordance with the plan rules and remain subject to malus provisions. Pierre-Olivier did not receive a 2015 bonus. In line with market practice, the Group paid the professional legal fees incurred by him in respect of finalising his termination arrangements, which amounted to £7,551. In addition, in consideration of agreeing to a confidentiality clause, Pierre-Olivier received £1,000.
The Committee also exercised its discretion in accordance with the approved Directors’ remuneration policy and determined that Pierre-Olivier should be allowed to retain his unvested PLTIP awards granted in 2013 and 2014, but his PLTIP awards granted in 2015 should lapse. The 2013 and 2014 awards will vest in accordance with the original timetable, remain subject to malus provisions and were pro-rated for service.
Jackie Hunt Jackie Hunt stepped down from the Board on 3 November 2015. Jackie did not receive a loss-of-office payment. Her remuneration arrangements were in line with the approved Directors' remuneration policy and disclosed in stock exchange announcements and the remuneration she received in respect of her services as an Executive Director is set out in the 2015 Single Figure table.
Following her retirement from the Board, Jackie received £133,924 in respect of salary, benefits and pension for the period from the date she ceased to be a director to the end of the year in accordance with her contract of employment. Her deferred bonus awards will be released in accordance with the plan rules and remain subject to malus provisions. In line with market practice, the Group paid the professional legal fees incurred by her in respect of finalising her termination arrangements, which amounted to £17,400.
The Committee also exercised its discretion in accordance with the approved Directors’ remuneration policy and determined that Jackie should be allowed to retain her unvested GPSP and PLTIP awards granted in 2013 and 2014, but her PLTIP awards granted in 2015 should lapse. The 2013 and 2014 awards will vest in accordance with the original timetable, remain subject to malus and were pro-rated for service.
Notes 1 The number of shares vesting include accrued dividend shares. 2 The share price used to calculate the value was the average share price for the three months up to 31 December 2015, being £15.12.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 125
Other directors A number of former directors receive retiree medical benefits for themselves and their partner (where applicable). This is consistent with other senior members of staff employed at the same time. A de minimis threshold of £10,000 has been set by the Committee; any payments or benefits provided to a past director under this amount will not be reported.
To approve the Directors’ remuneration report 1,711,107,495 93.81 112,901,645 6.19 1,824,009,140 124,526,722
Executive Directors Executive Directors’ remuneration packages were reviewed in 2015, with changes effective from 1 January 2016. When the Committee took these decisions, it considered the salary increases awarded to other employees in 2015 and the expected increases in 2016. The external market reference points used to provide context to the Committee were identical to those used for 2015 salaries.
Non-executive Directors Non-executive Directors' fees were reviewed in 2015 with changes effective from 1 July 2015 as set out in the ‘Non-executive fee’ section. The next review will be effective 1 July 2016.
Notes 1 The awards for Barry Stowe and Mike Wells were made in ADRs (1 ADR = 2 ordinary shares). The figures in the table are represented in terms of ordinary shares. 2 A DRIP dividend equivalent was accumulated on these awards. 3 The PCA LTIP is an arrangement for executives and senior management of PCA. Tony Wilkey was a participant of this plan until his appointment to the Board on 1 June 2015 and will no longer be eligible to new awards from this date.
Face value of conditional share awards outstanding at 1 January 2015
Deferred 2012 Group deferred bonus plan award 2013 5,542 135 5,677 31 Dec 15 1,083
Deferred 2013 Group deferred bonus plan award 2014 4,764 116 4,880 31 Dec 16 1,317
Deferred 2014 Group deferred bonus plan award 2015 3,850 93 3,943 31 Dec 17 1,672
Deferred 2012 annual incentive award 2013 39,674 972 40,646 31 Dec 15 1,055
Deferred 2013 annual incentive award 2014 102,130 2,506 104,636 31 Dec 16 1,317
Deferred 2014 annual incentive award 2015 113,518 2,786 116,304 31 Dec 17 1,672
Deferred 2013 PCA deferred bonus plan award 2014 69,571 1,260 70,831 31 Dec 16 1,317
Notes 1 The deferred share awards for Barry Stowe and Mike Wells were made in ADRs (1 ADR = 2 ordinary shares). The figures in the table are represented in terms of ordinary shares.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 129
It is important that all employees are offered the opportunity to own shares in Prudential, connecting them both to the success of the Company and to the interests of other shareholders. Executive Directors are invited to participate in these plans on the same basis as other staff in their location.
Details of Executive Directors’ rights under the SAYE scheme are set out in the ‘Statement of directors’ shareholdings’.
Releases from the Prudential Long Term Incentive Plan and GPSP are satisfied using new issue shares rather than by purchasing shares in the open market. Shares relating to options granted under all-employee share plans are also satisfied by new issue shares. The combined dilution from all outstanding shares and options at 31 December 2015 was 0.1 per cent of the total share capital at the time. Deferred shares will continue to be satisfied by the purchase of shares in the open market.
) basis results 7 A dditional inform ation 5 132 Index to Group IFRS financial statements 282 Parent company financial statements 284 Notes on the parent company financial statements 292 Statement of directors’ responsibilities in respect of the Annual Report and of the financial statements 293 Independent auditor’s report to the members of
Primary statements 133 Consolidated income statement 134 Consolidated statement of comprehensive income 135 Consolidated statement of changes in equity: 2015 137 Consolidated statement of financial position 139 Consolidated statement of cash flows
Section D: Other notes 270 D1 Sale of Japan life business 270 D2 Contingencies and related obligations 272 D3 Post balance sheet events 272 D4 Related party transactions 272 D5 Commitments 272 D6 Investments in subsidiary undertakings, joint ventures and associates
Net unrealised valuation movements on securities of US insurance operations classified as available-for-sale: Net unrealised holding (losses) gains arising during the year (1,256) 1,039 Less: net gains included in the income statement on disposal and impairment (49) (83)
Net unrealised valuation movements, net of related change in amortisation of deferred acquisition costs and related tax – – – – (629) (629) – (629)
Net unrealised valuation movements, net of related change in amortisation of deferred acquisition costs and related tax – – – – 565 565 – 565
Shareholders’ share of actuarial gains and losses on defined benefit pension schemes, net of tax – – (10) – – (10) – (10)
Intangible assets attributable to with-profits funds: Goodwill in respect of acquired subsidiaries for venture fund and other investment purposes C5.2(a) 185 186 Deferred acquisition costs and other intangible assets C5.2(b) 50 61
Investments of long-term business and other operations: Investment properties C14 13,422 12,764 Investment in joint ventures and associates accounted for using the equity method D6 1,034 1,017 Financial investments:*
Assets held for sale D1 2 824 Cash and cash equivalents 7,782 6,409
Liabilities Policyholder liabilities and unallocated surplus of with-profits funds: Insurance contract liabilities 260,753 250,038 Investment contract liabilities with discretionary participation features 42,959 39,277 Investment contract liabilities without discretionary participation features 18,806 20,224 Unallocated surplus of with-profits funds 13,096 12,450
Other borrowings: Operational borrowings attributable to shareholder-financed operations C6.2(a) 1,960 2,263 Borrowings attributable to with-profits operations C6.2(b) 1,332 1,093
Cash flows from operating activities Profit before tax (being tax attributable to shareholders’ and policyholders’ returns) note (i) 3,321 3,154 Non-cash movements in operating assets and liabilities reflected in profit before tax: Other non-investment and non-cash assets (1,063) (1,521) Policyholder liabilities (including unallocated surplus) 6,067 27,292 Other liabilities (including operational borrowings) 1,761 3,797
Cash flows from investing activities Purchases of property, plant and equipment C13 (256) (172) Proceeds from disposal of property, plant and equipment 30 10 Acquisition of subsidiaries and intangibles (286) (535) Sale of businesses 43 152
Issue of subordinated debt, net of costs 590 – Redemption of subordinated debt – (445) Interest paid (288) (330)
Interest paid (9) (9) Equity capital: Issues of ordinary share capital 7 13 Dividends paid (974) (895)
Notes (i) This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders. (ii) Other non-cash items consist of the adjustment of non-cash items to profit before tax. (iii) Structural borrowings of shareholder-financed operations exclude borrowings to support short-term fixed income securities programmes, non-recourse
(iv) Interest paid on structural borrowings of with-profits operations relate solely to the £100 million 8.5 per cent undated subordinated guaranteed bonds, which contribute to the solvency base of the Scottish Amicable Insurance Fund (SAIF), a ring-fenced sub-fund of the PAC with-profits fund. Cash flows in respect of other borrowings of with-profits funds, which principally relate to consolidated investment funds, are included within cash flows from operating activities.
Except for the adoption of the new and amended accounting standards for Group IFRS reporting as described in note A2, the accounting policies applied by the Group in determining the IFRS basis results in this report are the same as those previously applied in the Group’s consolidated financial statements for the year ended 31 December 2014.
Exchange rates The exchange rates applied for balances and transactions in currency other than the presentational currency of the Group, pounds sterling (GBP) were: Closing rate at
The exchange movement arising during 2015 recognised in other comprehensive income is: Asia operations* (5) 109 US operations 238 243 Unallocated to a segment (central funds)† (119) (137)
The Group has adopted the annual improvements to the IFRS’s 2011-2013 cycle which were effective in 2015. Except for a change to the presentation of the Prudential Capital business as a separate reporting segment, as described in note B1.3, consideration of these improvements has had no impact on the financial statements of the Group.
The preparation of these financial statements requires Prudential to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Prudential evaluates its estimates, including those related to long-term business provisioning and the fair value of assets. The table below sets out items that require the Group to make critical estimates and judgements in applying the relevant accounting policy: Critical accounting estimates and assumptions Accounting policy reference
b Basis of consolidation The Group consolidates those investees it is deemed to control. The Group has control over an investee if all three of the following are met: (1) it has power over an investee; (2) it is exposed to, or has rights to, variable returns from its involvement with the investee; and (3) it has ability to use its power over the investee to affect its own returns.
Jackson’s separate account assets Jackson offers variable contracts that invest contract holders’ premiums, at the contract holders’ direction, in investment vehicles (‘Separate Accounts’) that invest in equity, fixed income, bonds and money market mutual funds. The contract holder retains the underlying returns and the ownership risks related to the separate accounts and its underlying investments. The shareholders’ economic interest in separate accounts is limited to the administrative fees charged. The separate accounts are set up as separate regulated entities governed by a Board of Governors or trustees for which the majority of the members are independent of Jackson or any affiliated entity. The independent members represent contract holders’ interest and are responsible for any decision making that impacts contract holders’ interest and governs the operational activities of the entities’ advisers, including asset managers managing the investment vehicles. Accordingly, the Group does not control these vehicles. These investments are carried at fair value through profit or loss within financial investments in the consolidated statement of financial position.
Other structured entities The Group holds investments in mortgage-backed securities, collateralised debt obligations and similar asset-backed securities that are actively traded in a liquid market. The Group is not the sponsor of the vehicles in which it holds investments and has no administrative rights over the vehicles’ activities. The Group generates returns and retains the ownership risks commensurate to its holding and its exposure to the investments. Accordingly the Group does not have power over the relevant activities of such vehicles and all are carried at fair value through profit or loss within financial investments in the consolidated statement of financial position.
The table below provides aggregate carrying amounts of the investments in unconsolidated structured entities reported in the Group’s statement of financial position: OEICs/UTs
Statement of financial position line items Equity securities and portfolio holdings in
IFRS 4 permits the continued usage of previously applied Generally Accepted Accounting Practices (GAAP) for insurance contracts and investment contracts with discretionary participating features. Accordingly, except for UK regulated with-profits funds which were measured under FRS 27 as discussed below, the modified statutory basis of reporting as set in the Statement of Recommended Practice issued by Association of British Insurers (ABI SORP) was adopted by the Group on first time adoption of IFRS in 2005. FRS 27 and the ABI SORP were withdrawn in the UK for the accounting periods beginning in or after 2015. As used in these consolidated financial statements, the terms ‘FRS 27’ and the ‘ABI SORP’ refer to the requirements of these pronouncements prior to their withdrawal. For investment contracts that do not contain discretionary participating features, IAS 39 is applied and, where the contract includes an investment management element, IAS 18, ‘Revenue’, applies.
i Insurance contracts Asia insurance operations The policyholder liabilities for businesses in Asia are determined in accordance with methods prescribed by local GAAP adjusted to comply, where necessary, with the modified statutory basis. Refinements to the local reserving methodology are generally treated as changes in estimates, dependent on their nature. For the operations in India, Taiwan and, up until 2015, Japan, the local GAAP is not appropriate as a starting point in the context of the modified statutory basis, and, instead, the accounting for insurance contracts is based on US GAAP. For these operations the business written is primarily non-participating linked and participating business. The future policyholder benefit provisions for non-participating linked business are determined using the net level premium method, with an allowance for surrenders, maintenance and claim expenses. Rates of interest used in establishing the policyholder benefit provisions vary by operation depending on the circumstances attaching to each block of business. Where appropriate, liabilities for participating business for these operations include provisions for the policyholders’ interest in investment gains and other surpluses that have yet to be declared as bonuses. While the basis of valuation of liabilities in this business is in accordance with the requirements of the ABI SORP, it may differ from that determined on the modified statutory basis for UK operations with the same features.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 145 ii Investment contracts with discretionary participation features For investment contracts with discretionary participation features, the accounting basis is consistent with the accounting for similar with-profits insurance contracts.
iii Investment contracts without discretionary participation features The measurement of investment contracts without discretionary participation features is carried out in accordance with IAS 39 to reflect the deposit nature of the arrangement, with premiums and claims reflected as deposits and withdrawals and taken directly to the statement of financial position as movements in the financial liability balance.
Under IFRS, investment contracts (excluding those with discretionary participation features) accounted for as financial liabilities in accordance with IAS 39 which also offer investment management services, require the application of IAS 18 for the revenue attached to these services. Incremental, directly attributable acquisition costs relating to the investment management element of these contracts are capitalised and amortised in line with the related revenue. If the contracts involve up-front charges, this income is also deferred and amortised through the income statement in line with contractual service provision.
e Reinsurance The measurement of reinsurance assets is consistent with the measurement of the underlying direct insurance contracts. The treatment of any gains or losses arising on the purchase of reinsurance contracts is dependent on the underlying accounting basis of the entity concerned.
For US variable annuity business, a key assumption is the long-term investment return from the separate accounts, which is determined using a mean reversion methodology. Under the mean reversion methodology, projected returns over the next five years are flexed (subject to capping) so that, combined with the actual rates of return for the current and the previous two years the assumed long-term level of returns from the separate accounts is maintained. The projected rates of return are capped at no more than 15 per cent for each of the next five years. These returns affect the level of future expected profits through their effects on the fee income with consequential impact on the amortisation of deferred acquisition costs. The level of acquisition costs carried in the statement of financial position is also sensitive to unrealised valuation movements on debt securities held to back the liabilities and solvency capital. Further details are discussed in note C5.1(b).
As permitted by IFRS 4, Jackson uses shadow accounting to make adjustments to the deferred acquisition costs which are recognised directly in other comprehensive income. Jackson accounts for the majority of its investment portfolio on an available-for-sale basis whereby unrealised gains and losses are recognised in other comprehensive income. To the extent that recognition of unrealised gains or losses on available-for-sale securities causes adjustments to the carrying value and amortisation patterns of deferred acquisition costs and deferred income, these adjustments are recognised in other comprehensive income to be consistent with the treatment of the gains or losses on the securities. More precisely, shadow deferred acquisition costs adjustments reflect the change in deferred acquisition costs that would have arisen if the assets held in the statement of financial position had been sold, crystallising unrealised gains or losses, and the proceeds reinvested at the yields currently available in the market.
UK insurance operations For UK regulated with-profits funds where the Prudential Regulation Authority (PRA) realistic regime is applied, the basis of setting liabilities is such that it would be inappropriate for acquisition costs to be deferred, therefore these costs are expensed as incurred. The majority of the UK shareholder-backed business is individual and Group annuity business where the deferral of acquisition costs is negligible.
g Liability adequacy test The Group performs adequacy testing on its insurance liabilities to ensure that the carrying amounts (net of related deferred acquisition costs) and, where relevant, present value of acquired in-force business is sufficient to cover current estimates of future cash flows. Any deficiency is immediately charged to the income statement.
Policy fees charged on linked and unitised with-profits policies for mortality, asset management and policy administration are recognised as revenue when related services are provided. Claims paid include maturities, annuities, surrenders and deaths. Maturity claims are recorded as charges on the policy maturity date. Annuity claims are recorded when each annuity instalment becomes due for payment. Surrenders are charged to the income statement when paid and death claims are recorded when notified.
i Investment return Investment return included in the income statement principally comprises interest income, dividends, investment appreciation/ depreciation (realised and unrealised gains and losses) on investments designated as fair value through profit or loss, and realised gains and losses (including impairment losses) on items held at amortised cost and Jackson’s debt securities designated as available-for-sale. Movements in unrealised appreciation/depreciation of Jackson’s debt securities designated as available-for-sale are recorded in other comprehensive income. Interest income is recognised as it accrues, taking into account the effective yield on investments. Dividends on equity securities are recognised on the ex-dividend date and rental income is recognised on an accrual basis.
Determining the fair value of financial investments when the markets are not active The Group holds certain financial investments for which the markets are not active. These can include financial investments which are not quoted on active markets and financial investments for which markets are no longer active as a result of market conditions eg market illiquidity. When the markets are not active, there is generally no or limited observable market data to account for financial investments at fair value. The determination of whether an active market exists for a financial investment requires management’s judgement. If the market for a financial investment of the Group is not active, the fair value is determined by using valuation techniques. The Group establishes fair value for these financial investments by using quotations from independent third parties, such as brokers or pricing services, or by using internally developed pricing models. Priority is given to publicly available prices from independent sources when available, but overall the source of pricing and/or the valuation technique is chosen with the objective of arriving at a fair value measurement which reflects the price at which an orderly transaction would take place between market participants on the measurement date. The valuation techniques include the use of 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 and 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 financial investments.
A3.1 Accounting policies and use of estimates and judgements continued iii Determining impairment in relation to financial assets Available-for-sale securities The majority of Jackson’s debt securities portfolio are accounted for on an available-for-sale basis. The consideration of evidence of impairment requires management’s judgement. In making this determination the factors considered include, for example: Determining factors Consideration of evidence of impairment
The Group’s review of fair value involves several criteria, including economic conditions, credit loss experience, other issuer-specific developments and future cash flows. These assessments are based on the best available information at the time. Factors such as market liquidity, the widening of bid/ask spreads and a change in cash flow assumptions can contribute to future price volatility. If actual experience differs negatively from the assumptions and other considerations used in the consolidated financial statements, unrealised losses currently in equity may be recognised in the income statement in future periods. Additional details on the impairments of the available-for-sale securities of Jackson are described in note C3.5(d).
The risks inherent in reviewing the impairment of any investment include: the risk that market results may differ from expectations; facts and circumstances may change in the future and differ from estimates and assumptions; or the Group may later decide to sell the asset as a result of changed circumstances.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 149
iv Derivatives and hedge accounting Derivative financial instruments are used to reduce or manage investment, interest rate and currency exposures, to facilitate efficient portfolio management and for investment purposes.
The Group may designate certain derivatives as hedges. For hedges of net investments in foreign operations, the effective portion of any change in fair value of derivatives or other financial instruments designated as net investment hedges is recognised in other comprehensive income. The ineffective portion of changes in the fair value of the hedging instrument is recorded in the income statement. The gain or loss on the hedging instrument is recognised directly within the other comprehensive income of the foreign operation.
The Group does not regularly seek to apply fair value or cash flow hedging treatment under IAS 39. The Group has no fair value and cash flows hedges under IAS 39 at 31 December 2015 and 2014.
The primary areas of the Group’s continuing operations where derivative instruments are held are the UK with-profits funds and annuity business, and Jackson.
Short-term fluctuations in investment returns on assets held by with-profits fund, do not affect directly reported shareholder results. This is because (i) the unallocated surplus of with-profits funds is accounted for as a liability and (ii) excess or deficits of income and expenditure of the funds over the required surplus for distribution are transferred to or from unallocated surplus.
The aggregate of the actuarially determined service costs of the currently employed personnel and the net interest on the net defined benefit liability (asset) at the start of the period, is charged to the income statement. Actuarial and other gains and losses as a result of changes in assumptions or experience variances are recognised as other comprehensive income. Contributions to the Group’s defined contribution schemes are expensed when due.
The Company has established trusts to facilitate the delivery of Prudential plc shares under employee incentive plans and savings-related share option schemes. The cost to the Company of acquiring these treasury shares held in trusts is shown as a deduction from shareholders’ equity.
Current tax expense is charged or credited based upon amounts estimated to be payable or recoverable as a result of taxable amounts for the current year and adjustments made in relation to prior years. Prudential is subject to tax in numerous jurisdictions and the calculation of the total tax charge inherently involves a degree of estimation and judgement. The positions taken in tax returns where applicable tax regulation is subject to interpretation are recognised in full in the determination of the tax charge in the financial statements if the Group considers that it is probable that the taxation authority will accept those positions. Otherwise, provisions are established based on management’s estimate and judgement of the likely amount of the liability, or recovery.
Income and expenses of entities sold during the period are included in the income statement up to the date of disposal. The gain or loss on disposal is calculated as the difference between sale proceeds net of selling costs, less the net assets of the entity at the date of disposal adjusted for foreign exchange movements attaching to the sold entity that are required to be recycled to the income statement under IAS 21.
t Goodwill Goodwill arising on acquisitions of subsidiaries and businesses is capitalised and carried on the Group statement of financial position as an intangible asset at initial value less any accumulated impairment losses. Goodwill impairment testing is conducted annually and when there is an indication of impairment. For the purposes of impairment testing, goodwill is allocated to cash-generating units.
A3.2 New accounting pronouncements not yet effective The following standards, interpretations and amendments have been issued but are not yet effective in 2015, including those which have not yet been adopted in the EU. This is not intended to be a complete list as only those standards, interpretations and amendments that could have an impact upon the Group’s financial statements are discussed.
Accounting pronouncements endorsed by the EU but not yet effective Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38) The amendments published in May 2014 provide additional guidance on how the depreciation or amortisation of property, plant and equipment and intangible assets should be calculated. They are effective for annual periods beginning on or after 1 January 2016, with earlier application being permitted. The Group has assessed the impact of the amendments and determined that they are not likely to have a significant impact on the Group’s financial statements.
Annual improvements to IFRSs – 2012-2014 Cycle The annual improvements 2012-2014 Cycle include minor changes to four IFRSs, and is effective for annual periods beginning on or after 1 January 2016. The Group is assessing the impact of these amendments but they are not expected to have a significant impact on the Group’s financial statements.
As a result of the scope exclusion above, this standard is of particular relevance only to the revenue recognition of the Group’s asset management contracts and the measurement of the Group’s investment contracts that do not contain discretionary participating features where the contracts include an investment management element. The Group is assessing the impact of this standard but it is not expected to have a significant impact on the Group’s financial statements.
IFRS 9 ‘Financial instruments: Classification and Measurement’ In July 2014, the IASB published a complete version of IFRS 9 with the exception of macro hedge accounting. The standard becomes mandatorily effective for the annual periods beginning on or after 1 January 2018, with early application permitted and transitional rules apply. In December 2015, the IASB published for consultation an exposure draft of proposed amendments to IFRS 4 to address the temporary consequences of the different effective dates of IFRS 9 and the new insurance contracts standard. The proposals in the exposure draft includes an optional temporary exemption from applying IFRS 9 that would be available to companies whose predominant activity is to issue insurance contracts. Such a deferral would be available until the new Insurance Contracts Standard comes into effect (but it could not be used after 1 January 2021). The comment period closed on 8 February 2016.
This standard replaces the existing IAS 39 ‘Financial Instruments – Recognition and Measurement’, and will affect: — The classification and the measurement of financial assets and liabilities. Under IFRS 9, financial assets are classified under one of the following categories: amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL) based on their contractual cash flow characteristics and/or the business model in which they are held. The existing amortised cost measurement for financial liabilities is largely maintained under IFRS 9 but for financial liabilities designated at FVTPL, changes in fair value due to changes in entity’s own credit risk are to be recognised in other comprehensive income; — The calculation of the impairment charge relevant for financial assets held at amortised cost or FVOCI. A new impairment model based on an expected credit loss approach replaces the existing IAS 39 incurred loss impairment model; and
Other income and expenditure Investment return and other income 14 15 15 (7)% (7)% Interest payable on core structural borrowings (312) (341) (341) 9% 9%
Operating profit based on longer-term investment returns 4,007 3,186 3,290 26% 22% Short-term fluctuations in investment returns on shareholder-
Based on operating profit based on longer-term investment returns 125.8p 96.6p 99.5p 30% 26% Based on profit for the year 101.0p 86.9p 87.9p 16% 15%
Notes (i) The Group’s UK insurance operations transferred its general insurance business to Churchill in 2002. General insurance commission represents the
(iii) Restructuring costs are incurred in the UK and represent one-off business development expenses. (iv) Amortisation of acquisition accounting adjustments principally relate to the acquired REALIC business of Jackson. (v) In November 2014, PAC completed the sale of its 25 per cent equity stake in the PruHealth and PruProtect businesses to Discovery Group Europe Limited. (vi) On 1 January 2014, the Hong Kong branch of the Prudential Assurance Company Limited was transferred to separate subsidiaries established in Hong Kong. (vii) For definitions of AER and CER refer to note A1.
Notes (i) Asia insurance operations In Asia, the negative short-term fluctuations of £(119) million (2014: positive £178 million) primarily reflect net unrealised movements on bond holdings following
The purpose of the inclusion of this item in short-term fluctuations in investment returns is to segregate the amount included in pre-tax profit that relates to the accounting effect of market movements on both the measured value of guarantees in Jackson’s variable annuity and fixed index annuity products and on the related derivatives used to manage the exposures inherent in these guarantees. As the Group applies US GAAP for the measured value of the product guarantees this item also includes asymmetric impacts where the measurement bases of the liabilities and associated derivatives used to manage the Jackson annuity business differ as described below.
valued under the US GAAP insurance measurement basis applied for IFRS in a way that is substantially less sensitive to the effect of equity market and interest rate changes. These represent the majority of the guarantees offered by Jackson; and
The free-standing equity derivatives are held to manage equity exposures of the variable annuity guarantees and fixed index annuity embedded options. The net equity hedge result therefore includes significant accounting mismatches and other factors that detract from the presentation of an economic
The free-standing, other than equity-related derivatives, are held to manage interest rate exposures and durations within the general account and the
of the variable and fixed index annuity business, as well as the fixed annuity business guarantees and durations within the general account; – Fair value movements on Jackson’s debt securities of the general account which are recorded in other comprehensive income rather than the income
statement; and – The mixed measurement model that applies for the GMIB and its reinsurance.
Short-term fluctuations relating to debt securities Credits (charges) in the year: Losses on sales of impaired and deteriorating bonds (54) (5) Bond write downs (37) (4) Recoveries/reversals 18 19
Total charges (credits) in the year (73) 10 Less: Risk margin allowance deducted from operating profit based on longer-term investment returns note 83 78
Interest-related realised gains: Arising in the year 102 63 Less: Amortisation of gains and losses arising in current and prior years to operating profit based on longer-term investment returns (108) (87)
The debt securities of Jackson are held in the general account of the business. Realised gains and losses are recorded in the income statement with
Risk margin reserve charge to operating profit for longer-term credit related losses (103) (67) (104) (63)
Consistent with the basis of measurement of insurance assets and liabilities for Jackson’s IFRS results, the charges and credits to operating profits based on longer-term investment returns are partially offset by related amortisation of deferred acquisition costs.
In addition to the accounting for realised gains and losses described above for Jackson general account debt securities, included within the statement of other comprehensive income is a pre-tax charge for unrealised losses on debt securities classified as available-for-sale net of related change in amortisation of deferred acquisition costs of £(968) million (2014: net unrealised gains of £869 million). Temporary market value movements do not reflect defaults or impairments. Additional details of the movement in the value of the Jackson portfolio are included in note C3.3(b).
(iii) UK insurance operations The negative short-term fluctuations in investment returns for UK insurance operations of £(120) million (2014: positive £464 million) include net unrealised
The Group’s operating segments are also its reportable segments for the purposes of internal management reporting. Prior to 2015, the Group incorporated Prudential Capital into the M&G operating segment for the purposes of segment reporting. To better reflect the economic characteristics of the two businesses, the Group has in 2015 made a change to present Prudential Capital as a separate reportable segment rather than aggregating this segment within M&G.
— The costs associated with the domestication of the Hong Kong branch which became effective on 1 January 2014.
* Including the impact of short-term market effects on the carrying value of Jackson’s guarantee liabilities and related derivatives as explained below.
(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, with those of the general account, interest rate exposures. The principles for determination of the operating profit and short-term fluctuations are necessarily bespoke, as discussed in section (c) below.
(v) Other shareholder-financed business The measurement of operating profit based on longer-term investment returns reflects the particular features of long-term insurance business where assets and liabilities are held for the long-term and for which the accounting basis for insurance liabilities under current IFRS is not generally conducive to demonstrating trends in underlying performance of life businesses exclusive of the effects of shortterm fluctuations in market conditions. In determining the profit on this basis, the following key elements are applied to the results of the Group’s shareholder-financed operations.
Debt, equity-type securities and loans Longer-term investment returns comprise actual income receivable for the period (interest/dividend income) and for both debt and equity-type securities longer-term capital returns.
— The amortisation of interest-related realised gains and losses to operating results based on longer-term investment returns to the date when sold bonds would have otherwise matured.
For certain other types of non-participating business, longer-term interest rates are used to determine the movement in policyholder liabilities for determining operating results.
Embedded derivatives for variable annuity guarantee minimum income benefit The Guaranteed Minimum Income Benefit liability, which is essentially fully reinsured, subject to a deductible and annual claim limits, is accounted for in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic 944-80 Financial Services – Insurance – Separate Accounts (formerly SOP 03-1) under IFRS using ‘grandfathered’ US GAAP. As the corresponding reinsurance asset is net settled, it is considered to be a derivative under IAS 39, ‘Financial Instruments: Recognition and Measurement’, and the asset is therefore recognised at fair value. As the Guaranteed Minimum Income Benefit is economically reinsured, the mark to market element of the reinsurance asset is included as a component of short-term fluctuations in investment returns.
(iii) Other derivative value movements The principal example of non-equity based derivatives (for example, interest rate swaps and swaptions) whose value movements are excluded from operating profit, arises in Jackson. Non-equity based derivatives are primarily held by Jackson as part of a broadly-based hedging programme for features of Jackson’s bond portfolio (for which value movements are booked in the statement of comprehensive income rather than the income statement), product liabilities (for which US GAAP accounting as ‘grandfathered’ under IFRS 4 does not fully reflect the economic features being hedged), and the interest rate exposure attaching to equity-based embedded derivatives.
Equity-type securities As at 31 December 2015, the equity-type securities for US insurance non-separate account operations amounted to £1,004 million (2014: £1,094 million). For these operations, the longer-term rates of return for income and capital applied in 2015 and 2014, which reflect the combination of the average risk-free rates over the period and appropriate risk premiums are as follows: Equity-type securities such as common and preferred stock and portfolio holdings in mutual funds 5.7% to 6.4% 6.2% to 6.7% Other equity-type securities such as investments in limited partnerships and private equity funds 7.7% to 8.4% 8.2% to 8.7%
The operating result based on longer-term investment returns reflects the impact of value movements on policyholder liabilities for annuity business in PRIL and the PAC non-profit sub-fund after adjustments to allocate the following elements of the movement to the category of ‘short-term fluctuations in investment returns’: — The impact on credit risk provisioning of actual upgrades and downgrades during the period; — Credit experience compared to assumptions; and — Short-term value movements on assets backing the capital of the business.
e Fund management and other non-insurance businesses For these businesses, the particular features applicable for life assurance noted above do not apply. For these businesses it is inappropriate to include returns in the operating result on the basis described above. Instead, it is appropriate to generally include realised gains and losses in the operating result with temporary unrealised gains and losses being included in short-term fluctuations. In some instances it may also be appropriate to amortise realised gains and losses on derivatives and other financial instruments to operating results over a time period that reflects the underlying economic substance of the arrangements.
Earned premiums, net of reinsurance 10,450 16,567 8,489 – – – – 35,506 – 35,506
Total revenue, net of reinsurance 10,215 15,785 13,235 1,237 54 843 352 41,721 (416) 41,305
Acquisition costs and other operating expenditure B3 (2,651) (1,544) (2,025) (810) (82) (832) (278) (8,222) 14 (8,208)
Finance costs: interest on core structural borrowings of shareholder-financed operations – (13) – – (17) – – (30) (282) (312)
Total charges, net of reinsurance (9,240) (14,586) (12,109) (810) (99) (832) (278) (37,954) (268) (38,222)
Tax charge attributable to policyholders’ returns (69) – (104) – – – – (173) – (173)
Profit (loss) before tax attributable to shareholders 1,036 1,199 1,075 441 (45) 11 115 3,832 (684) 3,148
Benefits and claims and movements in unallocated surplus of with-profits funds, net of reinsurance (11,247) (19,761) (19,161) – – – – (50,169) – (50,169)
Acquisition costs and other operating expenditure B3 (2,367) (795) (1,660) (843) (77) (794) (249) (6,785) 33 (6,752)
Finance costs: interest on core structural borrowings of shareholder-financed operations – (12) – – (17) – – (29) (312) (341)
Remeasurement of carrying value of Japan life business classified as held for sale (13) – – – – – – (13) – (13)
Profit (loss) before tax (being tax attributable to shareholders’ and policyholders’ returns) note (i) 1,325 257 1,756 454 17 12 90 3,911 (757) 3,154
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 165
The segmental analysis of profit (loss) before tax attributable to shareholders as represented in note B1.1 is analysed below: Insurance operations Asset management
Operating profit based on longer-term investment returns 1,050 1,431 776 446 42 12 90 3,847 (661) 3,186
Short-term fluctuations in investment returns on shareholder-backed business 178 (1,103) 464 8 (25) – – (478) (96) (574)
Amortisation of acquisition accounting adjustments (8) (71) – – – – – (79) – (79)
Profit (loss) before tax attributable to shareholders 1,220 257 1,321 454 17 12 90 3,371 (757) 2,614 * Includes the results of the sold PruHealth and PruProtect businesses.
(ii) Interest income includes £3 million (2014: £3 million) accrued in respect of impaired securities. (iii) Fee income includes £19 million (2014: £23 million) relating to financial instruments that are not held at fair value through profit or loss. These fees primarily
Revenue from external customers: Total revenue from external customers 10,685 17,327 9,989 – 38,001 9,719 16,111 8,509 – 34,339 * Eliminated on consolidation.
Revenue from external customers comprises: Earned premiums, net of reinsurance 35,506 32,033 Fee income from investment contract business and asset management (presented as ‘Other income’) 2,495 2,306
Revenue (excluding NPH broker-dealer fees) 1,237 54 321 352 1,964 2,008 NPH broker-dealer fees note (i) – – 522 – 522 503
Charges (excluding NPH broker-dealer fees) (810) (99) (310) (278) (1,497) (1,477) NPH broker-dealer fees note (i) – – (522) – (522) (503)
Short-term fluctuations in investment returns (1) (64) – – (65) (17)
Total M&G operating profit based on longer-term investment returns 442 446
(b) The charge for non-deferred acquisition costs and the amortisation of those costs that are deferred, was £(2,845) million (2014: £(1,752) million). These amounts comprise £(2,818) million and £(27) million for insurance and investment contracts respectively (2014: £(1,714) million and £(38) million respectively).
(d) Finance costs which are represented by interest on core structural borrowings of £(312) million (2014: £(341) million) comprises £(282) million (2014: £(312) million) interest on core debt of the parent company, £(13) million (2014: £(12) million) of interest on the surplus notes of US insurance operations, and £(17) million (2014: £(17) million) on Prudential Capital’s bank loan.
(e) Movements in amounts attributable to external unit holders are in respect of those OEICs and unit trusts which are required to be consolidated and comprises a charge of £(599) million (2014: £(258) million) for UK insurance operations and a charge of £(19) million (2014: £(256) million) for Asia insurance operations.
B3.1 Staff and employment costs The average number of staff employed by the Group during the year was: Business operations: Asia operations 15,030 13,957 US operations 4,562 4,494 UK operations 5,920 5,464
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 169
Pension costs: Defined benefit schemes* (63) 66 Defined contribution schemes 67 54 * The (credit) charge incorporates the effect of actuarial gains and losses.
Share purchase plans Eligible employees outside the UK are invited to participate in arrangements similar to the Company’s HMRC-approved UK SIP, which allows the purchase of Prudential plc shares. Staff based in Ireland and Asia are eligible for the Share Participation Plan.
Eligible Jackson employees were previously granted share awards under a long-term incentive plan which rewarded the achievement of shareholder value targets. These awards were in the form of a contingent right to receive shares or a conditional allocation of shares. These share awards have vesting periods of four years and are at nil cost to the employee. Award holders do not have any right to dividends or voting rights attaching to the shares. The shares are held in the employee share trust in the form of American Depositary Receipts which are tradable on the New York Stock Exchange. The final awards under this arrangement were made in 2012.
Between £6 and £7 1.0 2.1 0.9 1.6 6.29 6.29 0.7 – 6.29 – Between £9 and £10 2.2 2.3 1.9 2.9 9.01 9.01 – – – – Between £11 and £12 4.6 2.6 3.6 4.2 11.34 11.55 – – – –
c Fair value of options and awards The fair value amounts estimated on the date of grant relating to all options (including conditional nil cost options) and awards, were determined using the Black-Scholes and the Monte Carlo option-pricing models adopting the following assumptions: Prudential LTIP (TSR)
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 171
Compensation costs for all share-based compensation plans are determined using the Black-Scholes model or Monte Carlo option-pricing model. The compensation costs for all awards and options are recognised in net income over the plans’ respective vesting periods. The Group uses the Black-Scholes model to value all options and awards other than the Prudential LTIP (TSR) for which the Group uses a Monte Carlo model in order to allow for the impact of the LTIP (TSR) performance conditions. These models are used to calculate fair values for share options and awards at the grant date based on the quoted market price of the stock at the measurement date, the amount, if any, that the employees are required to pay, the dividend yield, expected volatility, risk-free interest rates and exercise prices.
Risk-free interest rates are taken from government bond spot rates with projections for two-year, three-year and five-year terms to match corresponding vesting periods. Dividend yield is determined as the average yield over a period of 12 months up to and including the date of grant. For the Prudential LTIP (TSR), volatility and correlation between Prudential and a basket of 18 competitor companies is required. For grants in 2015, the average volatility for the basket of competitors was 20.66 per cent. Correlations for the basket are calculated for each pairing from the log of daily TSR returns for the three years prior to the valuation date. Market implied volatilities are used for both Prudential and the components of the index. Changes to the subjective input assumptions could materially affect the fair value estimate.
d Share-based payment expense charged to the income statement Total expense recognised in the year in the consolidated financial statements relating to share-based compensation is as follows: Share-based compensation expense 111 99 Amount accounted for as equity-settled 110 93 Carrying value at 31 December of liabilities arising from share-based payment transactions 6 16 Intrinsic value of above liabilities for which rights had vested at 31 December 6 9
B3.3 Key management remuneration Key management constitutes the directors of Prudential plc as they have authority and responsibility for planning, directing and controlling the activities of the Group.
Total key management remuneration is analysed in the following table: Salaries and short-term benefits 17.1 15.9 Post-employment benefits 1.1 1.0 Share-based payments 15.5 16.2
In addition, there were fees incurred of £0.1 million (2014: £0.1 million) for the audit of pension schemes.
b UK insurance operations Annuity business Allowance for credit risk For IFRS reporting, the results for UK shareholder-backed annuity business are particularly sensitive to the allowances made for credit risk. The allowance is reflected in the deduction from the valuation rate of interest for discounting projected future annuity payments to policyholders that would have otherwise applied. Credit risk allowance comprises (i) an amount for long-term best estimate defaults, and (ii) additional provisions for credit risk premium, downgrade resilience and short-term defaults.
The weighted components of the bond spread over swap rates for shareholder-backed fixed and linked annuity business for PRIL, the principal company which writes the UK’s shareholder-backed business, based on the asset mix at these dates are shown below.
rating published by Moody’s, Standard & Poor’s and Fitch. (iii) Additional provisions comprise credit risk premium, which is derived from Moody’s data from 1970 to 2009, an allowance for a one-notch downgrade of the
portfolio subject to credit risk and an additional allowance for short-term defaults. The prudent Pillar 1 regulatory basis reflects the overriding objective of maintaining sufficient provisions and capital to ensure payments to policyholders
can be made. The approach for IFRS aims to establish liabilities that are closer to ‘best estimate’.
Movement in the credit risk allowance for PRIL The movement during 2015 of the average basis points allowance for PRIL on Pillar 1 regulatory and IFRS bases are as follows: Pillar 1 regulatory
Total allowance for credit risk at 31 December 2015 55 43
Other assumption changes For the shareholder-backed business, in addition to the movement in the credit risk allowance discussed above, the net effect of routine changes to assumptions in 2015, was a credit of £31 million (2014: £28 million).
B5: Tax charge continued a Total tax charge by nature of expense continued The current tax charge of £734 million includes £35 million (2014: £37 million) in respect of the tax charge for the Hong Kong operation. The Hong Kong current tax charge is calculated as 16.5 per cent for all periods on either (i) 5 per cent of the net insurance premium or (ii) the estimated assessable profits, depending on the nature of the business written.
b Reconciliation of effective tax rate For the purposes of explaining the relationship between tax expense and accounting profit, it is appropriate to consider the sources of profit and tax by reference to those that are attributable to shareholders and policyholders. A reconciliation of the tax charge on profit attributable to shareholders is provided below.
Taxation charge: Variance from expected tax charge 283 – 283 196 – 196 * For the column entitled ‘Attributable to policyholders’, the profit before tax represents income, before tax attributable to policyholders and unallocated surplus of with-profits funds and unit-linked policies. This income is after deduction of charges for policyholder benefits and movements on unallocated surplus which are determined net of tax. Accordingly, the apparent 100 per cent effective tax rate shown above reflects the basis of accounting for unallocated surplus coupled with the IFRS requirements in respect of presentation of all pre-tax profits and all tax charges irrespective of policyholder and shareholder economic interest.
Operating profit based on longer-term investment returns 1,209 1,691 1,195 (88) 4,007
Tax at the expected rate 249 420 215 (32) 852 Effects of recurring tax reconciliation items: Income not taxable or taxable at concessionary rates (42) (10) (2) (9) (63) Deductions not allowable for tax purposes 15 5 7 6 33 Items related to taxation of life insurance businesses (20) (113) – – (133) Deferred tax adjustments 10 – – (11) (1) Effect of results of joint ventures and associates (37) – – (13) (50) Irrecoverable withholding taxes – – – 28 28
Effects of non-recurring tax reconciliation items: Adjustments to tax charge in relation to prior years (2) (1) 3 (7) (7) Movements in provisions for open tax matters 7 – – (26) (19) Impact of changes in local statutory tax rates (1) – 2 – 1
Including non-recurring tax reconciling items 16% 29% 22% 60% 23% Excluding non-recurring tax reconciling items 16% 29% 21% (8)% 24%
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 177
Short-term fluctuations in investment returns on shareholder-backed business B1.2 (737) 202 (535) (21.0)p (20.9)p
Based on operating profit based on longer-term investment returns 3,186 (724) 2,462 96.6p 96.5p
Costs of domestication of Hong Kong branch (5) 1 (4) (0.2)p (0.2)p
Earnings per share are calculated based on earnings attributable to ordinary shareholders, after related tax and non-controlling interests. The weighted average number of shares for calculating earnings per share, which excludes those held in employee share trusts and consolidated unit trusts and OEICs, is set out as below: millions millions
Dividend per share Interim and special dividends are recorded in the period in which they are paid. Final dividends are recorded in the period in which they are approved by shareholders. The final dividend for the year ended 31 December 2014 of 25.74 pence per ordinary share was paid to eligible shareholders on 21 May 2015 and the 2015 interim dividend of 12.31 pence per ordinary share was paid to eligible shareholders on 25 September 2015. From 2016, Prudential will make twice-yearly interim dividend payments to replace final/interim dividend.
The second interim ordinary and special dividend for the year ended 31 December 2015 of 26.47 pence and 10.00 pence per ordinary share respectively, will be paid on 20 May 2016 in sterling to shareholders on the principal register and the Irish branch register at 6.00pm BST on 29 March 2016 (Record Date), and in Hong Kong dollars to shareholders on the Hong Kong branch register at 4.30pm Hong Kong time on the Record Date (HK Shareholders). Holders of US American Depositary Receipts (US Shareholders) will be paid their dividends in US dollars on or about 27 May 2016. The second interim ordinary and special dividend will be paid on or about 27 May 2016 in Singapore dollars to shareholders with shares standing to the credit of their securities accounts with The Central Depository (Pte.) Limited (CDP) at 5.00pm Singapore time on the Record Date (SG Shareholders). The dividend payable to the HK Shareholders will be translated using the exchange rate quoted by the WM Company at the close of business on 8 March 2016. The exchange rate at which the dividend payable to the SG Shareholders will be translated into Singapore dollars, will be determined by CDP.
Intangible assets attributable to with-profits funds: Goodwill in respect of acquired subsidiaries for venture fund and other investment purposes C5.2(a) – – 185 185 – – – 185
Assets held for sale – – 2 2 – – – 2 Cash and cash equivalents note (ii) 2,064 1,405 2,880 6,349 1,054 379 – 7,782
Core structural borrowings of shareholder-financed operations: Subordinated debt – – – – – 4,018 – 4,018
Liabilities held for sale – – – – – – – –
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 181 b Position as at 31 December 2014
Investments of long-term business and other operations: Investments in joint ventures and associates accounted for using the equity method 374 – 536 910 107 – – 1,017 Financial investments: Equity securities and portfolio
Assets held for sale D1 819 – 5 824 – – – 824 Cash and cash equivalents note (ii) 1,684 904 2,457 5,045 1,044 320 – 6,409
Borrowings attributable to with-profits operations C6.2(b) – – 1,093 1,093 – – – 1,093
Liabilities held for sale D1 770 – – 770 – – – 770
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 183
(ii) Cash and cash equivalents consist of cash at bank and in hand, deposits held at call with banks, treasury bills and other short-term highly liquid investments with less than 90 days’ maturity from the date of acquisition. The component breakdown is as follows: Cash equivalents 2,752 1,243
Of the total cash and cash equivalents, £365 million (2014: £304 million) is held centrally and considered to be available for general use by the Group. The remaining funds are considered not to be available for general use by the Group, and include funds held for the benefit of policyholders.
(iii) Other liabilities comprise: Creditors arising from direct insurance and reinsurance operations 1,828 1,431 Interest payable 70 59 Other items* 2,690 2,615 * Of the £2,690 million (2014: £2,615 million) other items as at 31 December 2015, £2,347 million (2014: £2,201 million) related to liabilities for funds withheld under reinsurance arrangement of the REALIC business.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 185
Unallocated surplus of with-profits funds 13,096 – – – – – 13,096 12,450
To show the statement of financial position by reference to the differing degrees of policyholder and shareholder economic interest of the different types of business, the analysis below is structured to show the assets and liabilities of each segment by business type.
Intangible assets attributable to with-profits funds: Deferred acquisition costs and other
Liabilities Policyholder liabilities and unallocated surplus of with-profits funds: Contract liabilities (including amounts in respect of contracts classified as investment contracts under IFRS 4) 19,642 13,355 9,519 42,516 40,068
Assets Intangible assets attributable to shareholders: Deferred acquisition costs and other intangibles note (vi) – 6,168 6,168 5,197
Deferred tax assets – 2,448 2,448 2,343 Other non-investment and non-cash assets note (ii) – 7,205 7,205 6,617 Investments of long-term business and other operations: Financial investments: Equity securities and portfolio holdings in unit trusts note (iii) 91,022 194 91,216 82,081
Deferred tax liabilities – 2,086 2,086 2,308 Other non-insurance liabilities note (v) – 6,263 6,263 5,079
C2.2 US insurance operations continued Notes (i) These amounts are for separate account assets and liabilities for all variable annuity products comprising those with and without guarantees. Assets and
liabilities attaching to variable annuity business that are not held in the separate account, eg, in respect of guarantees are shown within other business. (ii) Included within other non-investment and non-cash assets of £7,205 million (2014: £6,617 million) were balances of £6,211 million (2014: £5,979 million)
for reinsurers’ share of insurance contract liabilities. Of the £6,211 million as at 31 December 2015, £5,388 million related to the reinsurance ceded by the REALIC business (2014: £5,174 million). Jackson holds collateral for certain of these reinsurance arrangements with a corresponding funds withheld liability. As of 31 December 2015, the funds withheld liability of £2,347 million (2014: £2,201 million) was recorded within other non-insurance liabilities.
(iii) Equity securities and portfolio holdings in unit trusts include investments in mutual funds, the majority of which are equity-based. (iv) Other investments comprise: Derivative assets* 905 916 Partnerships in investment pools and other† 810 754 * After taking account of the derivative liabilities of £249 million (2014: £251 million), which are included in other non-insurance liabilities, the derivative position for US operations is a net asset of £656 million (2014: £665 million).
(vi) Under IFRS 4, adequacy testing of liabilities, net of deferred acquisition costs is required. The practical application for Jackson is in the context of the deferred acquisition cost asset and the liabilities for Jackson’s insurance contracts being determined in accordance with US GAAP. The liabilities include those in respect of the separate accounts (which naturally reflect separate account assets), policyholder account values, and guarantees measured as described in note C4.2. Under US GAAP, most of Jackson’s products are accounted for under Accounting Standard no. 97 of the Financial Accounting Standards Board (FAS 97) whereby deferred acquisition costs are amortised in line with expected gross profits. Recoverability of the deferred acquisition costs in the balance sheet is tested against the projected value of future profits using current estimates and therefore no additional liability adequacy test is required by IFRS 4. The DAC recoverability test is performed in line with US GAAP requirements which in practice is at the grouped level of those contracts managed together.
(vii) Changes in shareholders’ equity: Operating profit based on longer-term investment returns B1.1 1,691 1,431 Short-term fluctuations in investment returns B1.2 (424) (1,103) Amortisation of acquisition accounting adjustments arising from the purchase of REALIC (68) (71)
Profit for the year (as above) 963 249 Items recognised in other comprehensive income: Exchange movements 230 235 Unrealised valuation movements on securities classified as available-for-sale: Unrealised holding (losses) gains arising during the year (1,256) 1,039 Less: net gains included in the income statement on disposal and impairment (49) (83)
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 189
C2.3 UK insurance operations Of the total investments of £165 billion in UK insurance operations, £104 billion of investments are held by Scottish Amicable Insurance Fund and the PAC with-profits sub-fund. Shareholders are exposed only indirectly to value movements on these assets.
Assets Intangible assets attributable to shareholders: Deferred acquisition costs and other intangible assets – – – 83 83 83 86
Properties held for sale – 2 – – – 2 5
Notes (i) 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. SAIF is a separate sub-fund within the PAC long-term business fund. (ii) The PAC with-profits sub-fund (WPSF) mainly contains with-profits business but it also contains some non-profit business (unit-linked, term assurances and
† Partnerships in investment pools and other comprise mainly investments held by the PAC with-profits fund. These investments are primarily investments in limited partnerships and additionally, investments in property funds.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 191
Notes (i) Intra-group debt represented by operational borrowings at Group level, which are in respect of Prudential Capital’s short-term fixed income security
programme and comprise: Commercial Paper 1,107 1,704 Medium Term Notes 598 300
Intangible assets attributable to with-profits funds: In respect of acquired subsidiaries for venture fund and other investment purposes – – 185 185 Deferred acquisition costs and other intangible assets – – 50 50
Other non-investment and non-cash assets: Property, plant and equipment – – 1,197 1,197 Reinsurers’ share of insurance contract liabilities – – 7,903 7,903 Deferred tax assets – – 2,819 2,819 Current tax recoverable – – 477 477 Accrued investment income – – 2,751 2,751 2,751
Equity securities and portfolio holdings in unit trusts 157,453 – – 157,453 157,453
Liabilities Policyholder liabilities and unallocated surplus of with-profits funds: Insurance contract liabilities – – 260,622 260,622 Investment contract liabilities with discretionary participation features note (iii) – – 42,959 42,959 Investment contract liabilities without discretionary
Core structural borrowings of shareholder-financed operations – – 5,011 5,011 5,419 Other borrowings: note (v)
Intangible assets attributable to with-profits funds: In respect of acquired subsidiaries for venture fund and other investment purposes – – 186 186 Deferred acquisition costs and other intangible assets – – 61 61
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 195
Liabilities Policyholder liabilities and unallocated surplus of with-profits funds: Insurance contract liabilities – – 250,038 250,038 Investment contract liabilities with discretionary participation features note (iii) – – 39,277 39,277 Investment contract liabilities without discretionary
Core structural borrowings of shareholder-financed operations – – 4,304 4,304 4,925 Other borrowings: note (v)
Notes (i) Assets carried at cost or amortised cost are subject to impairment testing where appropriate under IFRS requirements. This category also includes assets which
are valued by reference to specific IFRS standards such as reinsurers’ share of insurance contract liabilities, deferred tax assets and investments accounted for under the equity method.
included in borrowings. (vi) See note C3.5(b) for details of the derivative assets included. The balance also contains the PAC with-profits fund’s participation in various investment funds
and limited liability property partnerships. (vii) Assets and liabilities held for sale are valued at fair value less costs to sell.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 197
Total financial investments, net of derivative liabilities 18,917 60,022 3,015 81,954
Other financial liabilities held at fair value – (322) (2,347) (2,669)
Total financial instruments at fair value 172,184 94,321 3,760 270,265 * Loans in the above table are those classified as fair value through profit or loss in note C3.1.
Liabilities Investment contract liabilities without discretionary participation features – – (2,820) (2,820) Core structural borrowings of shareholder-financed operations – (5,419) – (5,419) Operational borrowings attributable to shareholder-financed operations – (1,956) (4) (1,960) Borrowings attributable to the with-profits funds – (1,270) (74) (1,344) Obligations under funding, securities lending and sale and repurchase
C3.2 Group assets and liabilities – measurement continued c Valuation approach for level 2 fair valued assets and liabilities A significant proportion of the Group’s level 2 assets are corporate bonds, structured securities and other non-national government debt securities. These assets, in line with market practice, are generally valued using independent pricing services or third-party broker quotes. These valuations are determined using independent external quotations from multiple sources and are subject to a number of monitoring controls, such as monthly price variances, stale price reviews and variance analysis on prices achieved on subsequent trades.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 201 d Fair value measurements for level 3 fair valued assets and liabilities Reconciliation of movements in level 3 assets and liabilities measured at fair value The following table reconciles the value of level 3 fair valued assets and liabilities at 1 January 2015 to that presented at 31 December 2015.
Total financial investments, net of derivative liabilities 7,252 177 191 822 (1,102) (168) 205 206 (92) 7,491
Total financial investments, net of derivative liabilities 6,763 589 149 446 (693) (175) 194 13 (34) 7,252
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 which reflects the price at which an orderly transaction would take place between market participants on the measurement date.
Included within these amounts were loans of £2,183 million at 31 December 2015 (2014: £2,025 million), measured as the loan outstanding balance, attached to REALIC and held to back the liabilities for funds withheld under reinsurance arrangements. The funds withheld liability of £2,347 million at 31 December 2015 (2014: £2,201 million) was also classified within level 3, accounted for on a fair value basis being equivalent to the carrying value of the underlying assets.
(b) Private equity and venture investments of £852 million (2014: £1,002 million) which were valued internally based on management information available for these investments. These investments were principally held by consolidated investment funds which are managed on behalf of third parties.
(c) Liabilities of £(1,013) million (2014: £(1,269) million) for the net asset value attributable to external unit holders in respect of the consolidated investment funds, which are non-recourse to the Group. These liabilities are valued by reference to the underlying assets.
(e) Other sundry individual financial investments of £56 million (2014: £3 million).
(b) A net liability of £(106) million (2014: net asset of £144 million) was held to support non-linked shareholder-backed business. If the value of all the level 3 instruments held to support non-linked shareholder-backed business valued internally was varied downwards by 10 per cent, the change in valuation would be £11 million (2014: £14 million), which would reduce shareholders’ equity by this amount before tax. Of this amount, a decrease of £10 million (2014: a decrease of £13 million) would pass through the income statement substantially as part of short-term fluctuations in investment returns outside of operating profit and a £1 million decrease (2014: a decrease of £1 million) would be included as part of other comprehensive income, being unrealised movements on assets classified as available-for-sale.
During 2015, the transfers between levels within the Group’s portfolio were primarily transfers from level 1 to level 2 of £648 million and transfers from level 2 to level 1 of £283 million. These transfers which relate to equity securities and debt securities arose to reflect the change in the observability of the inputs used in valuing these securities.
In the tables below, with the exception of some mortgage-backed securities, Standard & Poor’s (S&P) ratings have been used where available. For securities where S&P ratings are not immediately available, those produced by Moody’s and then Fitch have been used as an alternative.
In addition to the debt securities shown above, the assets held for sale on the consolidated statement of financial position at 31 December 2014 in respect of Japan life business included a debt securities balance of £351 million.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 205 b US insurance operations i Overview
Residential mortgage-backed securities (RMBS) 1,284 1,567 Commercial mortgage-backed securities (CMBS) 2,403 2,343 Other debt securities 633 608
Movements in unrealised gains and losses on available-for-sale securities There was a movement in the statement of financial position value for debt securities classified as available-for-sale from a net unrealised gain of £1,840 million to a net unrealised gain of £592 million as analysed in the table below. This decrease reflects the effects of increasing long-term interest rates and credit spreads.
Fair value (as included in the footnote above in the overview table and the statement of financial position) 33,984 32,897 * Book value represents cost/amortised cost of the debt securities. † Translated at the average rate of US$1.53: £1.00.
Below 80%: Residential mortgage-backed securities – sub-prime 4 (1) 4 (1) Commercial mortgage-backed securities – – 10 (3) Other asset-backed securities 9 (7) 9 (6)
c Age analysis of unrealised losses for the periods indicated The following table shows 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: Noninvestment
Further, the following table shows the age analysis as at 31 December 2015, of the securities whose fair values were below 80 per cent of the book value: Age analysis Fair value Unrealised loss Fair value Unrealised loss
† The amounts within ‘Other’ which are not rated by S&P, Moody’s nor Fitch, nor are MBS securities using the revised regulatory ratings, have the following NAIC classifications: For some mortgage-backed securities within Jackson, the table above includes these securities using the regulatory ratings detail issued by the NAIC. These regulatory ratings levels were established by an external third party, BlackRock Solutions.
The majority of unrated debt security investments were held in SAIF and the PAC with-profits fund and relate to convertible debt and other investments which are not covered by ratings analysts nor have an internal rating attributed to them. Of the £4,190 million for PRIL and other annuity and long-term business investments for non-linked shareholder-backed business which are not externally rated, £1,256 million were internally rated AA+ to AA-, £1,808 million A+ to A-, £988 million BBB+ to BBB-, £60 million BB+ to BB- and £78 million that were internally rated B+ and below or unrated.
With-profits operations: Asia insurance operations note (i) 262 228 UK insurance operations (2015: 52% AAA, 20% AA) note (iii) 4,600 5,126
Notes (i) Asia insurance operations The Asia insurance operations’ exposure to asset-backed securities is primarily held by the with-profits operations. Of the £262 million, 84 per cent
(iii) UK insurance operations The majority of holdings of the shareholder-backed business relates to the UK market and primarily relates to investments held by PRIL. Of the holdings of the
with-profits operations, £1,140 million (2014: £1,333 million) relates to exposure to the US markets with the remaining exposure being primarily to the UK market. (iv) Asset management operations Asset management operations’ exposure to asset-backed securities is held by Prudential Capital with no sub-prime exposure. Of the £911 million, 95 per cent
The tables above exclude assets held to cover linked liabilities and those of the consolidated unit trusts and similar funds. In addition, the tables above exclude the proportionate share of sovereign debt holdings of the Group’s joint venture operations.
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The amounts included in the statement of financial position are analysed as follows: Insurance operations: Asia note (a) 1,084 1,014 US note (b) 7,418 6,719 UK note (c) 3,571 4,254
Asset management operations note (d) 885 854 a Asia insurance operations The loans of the Group’s Asia insurance operations comprise: Mortgage loans* 130 88 Policy loans* 721 672 Other loans† 233 254
Total US insurance operations loans 2,183 5,235 7,418 2,025 4,694 6,719 * All of the mortgage loans are commercial mortgage loans which are collateralised by properties. The property types are industrial, multi-family residential, suburban office, retail and hotel.
The US insurance operations’ commercial mortgage loan portfolio does not include any single-family residential mortgage loans and is therefore not exposed to the risk of defaults associated with residential sub-prime mortgage loans. The average loan size is £8.6 million (2014: £7.2 million). The portfolio has a current estimated average loan to value of 45 per cent (2014: 59 per cent).
C3.4 Loans portfolio continued c UK insurance operations The loans of the Group’s UK insurance operations comprise: SAIF and PAC WPSF Mortgage loans* 727 1,145 Policy loans 8 10 Other loans† 1,324 1,510
Obligations under funding, securities lending and sale and repurchase agreements 3,765 3,765 – – – – – – 3,765
Net asset value attributable to unit holders of consolidated unit trusts and similar funds 7,357 7,357 – – – – – – 7,357
The maturity profile above excludes certain corporate unit-linked business with gross policyholder liabilities of £11 billion (2014: £13 billion) which have no stated maturity but which are repayable on demand.
Financial assets that would have been past due or impaired had the terms not been renegotiated amounted to £16 million (2014: £13 million).
The exchange risks inherent in these exposures are mitigated through the use of derivatives, mainly forward currency contracts (note 3.5(b) below).
The amount of exchange gain recognised in the income statement in 2015, except for those arising on financial instruments measured at fair value through profit or loss, is £138 million (2014: £89 million gain). This constitutes £1 million loss (2014: £1 million loss) on Medium Term Notes liabilities and £139 million of net gain (2014: £90 million net gain), mainly arising on investments of the PAC with-profits fund. The gains/losses on Medium Term Notes liabilities are fully offset by value movements on cross-currency swaps, which are measured at fair value through profit or loss.
The total fair value balances of derivative assets and liabilities as at 31 December 2015 were as follows: Asia insurance operations
The derivative assets are included in ‘other investments’ in the statement of financial position and are used for efficient portfolio management to obtain cost effective and efficient management of exposure to various markets in accordance with the Group’s investment strategies and to manage exposure to interest rate, currency, credit and other business risks. The Group also uses interest rate derivatives to reduce exposure to interest rate volatility. In particular: — UK with-profits funds use derivatives for efficient portfolio management or reduction in investment risks. For UK annuity business derivatives are used to assist with asset and liability cash flow matching; — US operations and some of the UK operations hold large amounts of interest-rate sensitive investments that contain credit risks on which a certain level of default is expected. These businesses have purchased some swaptions to manage the default risk on certain underlying assets and hence reduce the amount of regulatory capital held to support the assets; and
— Some products, especially in the US, have guarantee features linked to equity indices. A mismatch between guaranteed product liabilities and the performance of the underlying assets exposes the Group to equity index risk. In order to mitigate this risk, the relevant business units purchase swaptions, equity options and futures to better match asset performance with liabilities under equity-indexed products.
C3.5 Financial instruments – additional information continued Hedging The Group has formally assessed and documented the effectiveness of the following hedges under IAS 39.
Net investment hedges At 31 December 2015, the Group has designated perpetual subordinated capital securities totalling US$2.8 billion (2014: US$2.8 billion) as a net investment hedge to hedge the currency risks related to the net investment in Jackson. The carrying value of the subordinated capital securities was £1,895 million as at 31 December 2015 (2014: £1,789 million). The foreign exchange loss of £104 million (2014: loss of £96 million) on translation of the borrowings to pounds sterling at the statement of financial position date is recognised in the translation reserve in shareholders’ equity. This net investment hedge was 100 per cent effective.
Collateral and pledges under derivative transactions At 31 December 2015, the Group had pledged £1,622 million (2014: £1,411 million) for liabilities and held collateral of £1,865 million (2014: £2,388 million) in respect of over-the-counter derivative transactions.
These transactions are conducted under terms that are usual and customary to collateralised transactions including, where relevant, standard securities lending and repurchase agreements.
The following tables present the gross and net information about the Group’s financial instruments subject to master netting arrangements: Gross amount presented in the
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 217
d Impairment of financial assets In accordance with the Group’s accounting policy set out in note A3.1j(iii), impairment reviews were performed for available-for-sale securities and loans and receivables. In addition, impairment reviews were undertaken for the reinsurers’ share of insurance contract liabilities.
In 2015, the Group realised gross losses on sales of available-for-sale securities of £85 million (2014: £35 million) with 57 per cent (2014: 68 per cent) of these losses related to the disposal of fixed maturity securities of the top 10 individual issuers, which were disposed of as part of risk reduction programmes intended to limit future credit loss exposure. Of the £85 million (2014: £ 35 million), £54 million (2014: £5 million) relates to losses on sales of impaired and deteriorating securities.
For 2015, the amount of gross unrealised losses for fixed maturity securities classified as available-for-sale under IFRS in an unrealised loss position was £673 million (2014: £180 million). Notes B1.2 and C3.3 provide further details on the impairment charges and unrealised losses of Jackson’s available-for-sale securities.
The 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
Comprising: Policyholder liabilities on the consolidated statement of financial position 31,910 107,411 134,632 273,953 Unallocated surplus of with-profits funds on the consolidated statement of financial position 77 – 11,984 12,061 Group’s share of policyholder liabilities of joint ventures* 3,159 – – 3,159
Reallocation of unallocated surplus for the domestication of the Hong Kong branch† 1,690 – (1,690) –
Comprising: Policyholder liabilities on the consolidated statement of financial position 38,705 126,746 144,088 309,539 Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,102 – 10,348 12,450 Group’s share of policyholder liabilities of joint ventures* 4,215 – – 4,215
Average policyholder liability balances * The Group’s investment in joint ventures are accounted for on an equity method basis in the Group’s balance sheet. The Group’s share of the policyholder liabilities as shown above relate to the joint venture life businesses in China, India and of the Takaful business in Malaysia.
‡ The policyholder liabilities of the Asia insurance operations of £41,255 million (2014: £38,705 million), shown in the table above, is after deducting the intra-group reinsurance liabilities ceded by the UK insurance operations of £1,261 million (2014: £1,363 million) to the Hong Kong with-profits business. Including this amount total Asia policyholder liabilities are £42,516 million (2014: £40,068 million).
§ Averages have been based on opening and closing balances and adjusted for acquisitions, disposals and corporate transactions in the year and exclude unallocated surplus of with-profits funds.
C4.1 Movement and duration of liabilities continued The items above represent the amount attributable to changes in policyholder liabilities and unallocated surplus of with-profits funds as a result of each of the components listed. The policyholder liabilities shown include investment contracts without discretionary participation features (as defined in IFRS 4) and their full movement in the year. The items above are shown gross of external reinsurance.
Comprising: Policyholder liabilities on the consolidated statement of financial position 22,195 126,746 55,009 203,950 Group’s share of policyholder liabilities relating to joint ventures 4,215 – – 4,215
2015. The increase reflects positive net flows (premiums net of upfront charges less surrenders, withdrawals, maturities and deaths) of £7.6 billion in 2015 (2014: £9.6 billion), driven by strong inflows of £8.5 billion in the US and £1.9 billion in Asia, together with a positive £7.2 billion increase from foreign exchange effects following a strengthening of the US dollar.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 221 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, and unallocated surplus of with-profits funds is provided below: Insurance contract liabilities Unallocated surplus of
The reinsurance asset for Jackson as shown in the table above primarily relates to certain fully collateralised former REALIC business retained by Swiss Re through 100 per cent reinsurance agreements. Apart from the reinsurance of REALIC business, the principal reinsurance ceded by Jackson outside the Group is on term life insurance, direct and assumed accident and health business and GMIB variable annuity guarantees. Net commissions received on ceded business and claims incurred ceded to external reinsurers totalled £41 million and £442 million respectively during 2015 (2014: £35 million and £398 million respectively). There were no deferred gains or losses on reinsurance contracts in either 2015 or 2014.
In each of 2015 and 2014, the Group’s UK insurance business entered into longevity reinsurance transactions on certain aspects of the UK’s annuity liabilities. Further information on these transactions is provided in note B4(b). The gains and losses recognised in profit and loss for the other reinsurance contracts written in the year were immaterial.
Comprising: Policyholder liabilities on the consolidated statement of financial position 13,138 11,918 6,854 31,910 Unallocated surplus of with-profits funds on the consolidated statement of financial position 77 – – 77 Group’s share of policyholder liabilities relating to joint ventures* – 1,847 1,312 3,159
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 223
at the closing spot rates as at 31 December 2015. Differences upon retranslation are included in foreign exchange translation differences. (b) On 1 January 2014, following consultation with the policyholders of PAC and regulators and court approval, the Hong Kong branch of PAC was transferred
Expected maturity: iii Summary policyholder liabilities (net of reinsurance) and unallocated surplus At 31 December 2015, the policyholder liabilities and unallocated surplus for Asia operations of £43.8 billion (2014: £40.8 billion), net of reinsurance of £798 million (2014: £488 million), excluding joint ventures, comprised the following: Hong Kong 16,234 13,748
Net flows note (b) 7,974 289 8,263 Transfers from general to separate account 1,395 (1,395) – Investment-related items and other movements note (c) 1,963 1,749 3,712 Foreign exchange translation differences note (a) 4,728 2,632 7,360
of US$1.47/£1.00 (2014: US$1.56/£1.00). Differences upon retranslation are included in foreign exchange translation differences. (b) Net flows for the year were £8,476 million compared with £8,263 million in 2014, reflecting continued strong in-flows into the variable annuity business. (c) Negative investment-related items and other movements in variable annuity separate account liabilities of £4,351 million for 2015 primarily reflects the
C4.1(d) UK 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 insurance operations from the beginning of the year to the end of the year is as follows: SAIF and PAC with-profits
Reallocation of unallocated surplus for the domestication of the Hong Kong branch note (a) (1,690) – – (1,690)
to separate subsidiaries established in Hong Kong. From this date the unallocated surplus of the Hong Kong with-profits business is reported within the Asia insurance operations segment.
(c) Investment-related items and other movements of £2,319 million mainly reflects investment return earned in the year, attributable to policyholders.
C4.1 Movement and duration of liabilities continued ii Duration of liabilities With the exception of most unitised with-profits bonds and other whole-of-life contracts, the majority of the contracts of the UK insurance operations have a contract term. In effect, the maturity term of the other contracts reflects the earlier of death, maturity or the policy lapsing. In addition, as described in note A3.1, with-profits contract liabilities include projected future bonuses based on current investment values. The actual amounts payable will vary with future investment performance of SAIF and the WPSF.
C4.2 Products and determining contract liabilities a Asia Features of products and guarantees The life insurance products offered by the Group’s Asia operations include a range of with-profits and non-participating term, whole life, endowment and unit-linked policies. The Asia operations also offer health, disability, critical illness and accident coverage to supplement its core life products.
Whole-of-life contracts with floor levels of policyholder benefits that accrue at rates set at inception and do not vary subsequently with market conditions are written in the Korea life operations though this is not to a significant extent as Korea has a much higher proportion of linked and health business. The Korea business has non-linked liabilities and linked liabilities at 31 December 2015 of £625 million and £2,187 million respectively (2014: £596 million and £2,109 million respectively).
For the countries which apply local GAAP adjusted to comply, where necessary, with modified statutory basis, the approach to determining the contract liabilities is 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.
A risk-based capital framework applying the gross premium valuation method is adopted by Singapore, Malaysia, Thailand and Indonesia. In applying this approach, an overlay constraint to the method is applied such that no negative reserves are derived at an individual policyholder level.
In the Philippines, the local regulator requires insurers to adopt the gross premium valuation method for traditional business from 30 June 2016 onwards. The Company decided to early adopt this requirement for IFRS reporting for the 2015 year end.
For India, Taiwan and, until its sale in 2015, Japan, US GAAP is applied for measuring insurance assets and liabilities. For these countries, the future policyholder benefit provisions for non-linked business are determined using the net level premium method, with an allowance for surrenders, maintenance and claims expenses. Rates of interest used in establishing the policyholder benefit provisions vary by operation depending on the circumstances attaching to each block of business.
b US Features of products and guarantees Jackson provides long-term savings and retirement products to retail and institutional customers throughout the US and offers the products discussed below: i Fixed annuities Fixed interest rate annuities At 31 December 2015, fixed interest rate annuities accounted for 9 per cent (2014: 9 per cent) of policy and contract liabilities of Jackson. Fixed interest rate annuities are primarily deferred annuity products that are used for asset accumulation in retirement planning and for providing income in retirement. They permit tax-deferred accumulation of funds and flexible payout options.
Approximately 62 per cent (2014: 57 per cent) of the fixed interest rate annuities Jackson wrote in 2015 provide for a market value adjustment (‘MVA’), that could be positive or negative, on surrenders in the surrender period of the policy. This formula-based adjustment approximates the change in value that assets supporting the product would realise as interest rates move up or down. The minimum guaranteed rate is not affected by this adjustment. While the MVA feature minimises the surrender risk associated with certain fixed annuities, Jackson still bears a portion of the surrender risk on policies without this feature, and the investment risk on all fixed interest rate annuities.
ii Variable annuities At 31 December 2015, variable annuities accounted for 70 per cent (2014: 69 per cent) of Jackson’s policy and contract liabilities. Variable annuities are deferred annuities that have the same tax advantages and payout options as fixed interest rate and fixed index annuities. They are also used for asset accumulation in retirement planning and to provide income in retirement.
The primary differences between variable annuities and fixed interest rate or fixed index annuities are investment risk and return. If a policyholder chooses a variable annuity, the rate of return depends upon the performance of the selected fund portfolio. Policyholders may allocate their investment to either the fixed account or a selection of variable accounts. Investment risk on the variable account is borne by the policyholder, while investment risk on the fixed account is borne by Jackson through guaranteed minimum fixed rates of return. At 31 December 2015, 6 per cent (2014: 5 per cent) of variable annuity funds were in fixed accounts. Jackson had variable annuity funds in fixed accounts totalling £5.5 billion (2014: £4.4 billion) with minimum guaranteed rates ranging from 1.0 per cent to 3.0 per cent and a 1.70 per cent average guaranteed rate (2014: 1.0 per cent to 3.0 per cent and a 1.81 per cent average guaranteed rate).
Jackson issues variable annuity contracts where it contractually guarantees to the policyholder a return of no less than 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 the contract anniversary. These guarantees include benefits that are payable in the event of death (guaranteed minimum death benefit (GMDB)), at annuitisation (guaranteed minimum income benefit (GMIB)), upon the depletion of funds (guaranteed minimum withdrawal benefit (GMWB)) or at the end of a specified period (guaranteed minimum accumulation benefit (GMAB)). Jackson hedges these risks using equity options and futures contracts as described in note C7.3. The GMAB and GMIB are no longer offered, with the existing GMIB coverage being substantially reinsured.
iv Institutional products Jackson’s institutional products consist of traditional guaranteed investment contracts (‘GICs’), funding agreements (including agreements issued in conjunction with Jackson’s participation in the US Federal Home Loan Bank programme) and Medium Term Note funding agreements. At 31 December 2015, institutional products accounted for 3 per cent of policy and contract liabilities (2014: 3 per cent). Under a traditional GIC, the policyholder makes a lump sum deposit. The interest rate paid is fixed and established when the contract is issued. If deposited funds are withdrawn earlier than the specified term of the contract, an adjustment is made that approximates a market value adjustment.
v Aggregate account values The table below shows the distribution of account values for fixed annuities (fixed interest rate and fixed index), the fixed account portion of variable annuities, and interest sensitive life business within the range of minimum guaranteed interest rates as described in notes (i) to (iii) above as at 31 December 2015 and 2014: Fixed annuities and the fixed account portion of variable
With minor exceptions, all of Jackson’s contracts are accounted for as investment contracts as defined for US GAAP purposes by applying in the first instance a retrospective deposit method to determine the liability for policyholder benefits. This is then augmented by potentially three additional amounts, namely: — Any amounts that have been assessed to compensate the insurer for services to be performed over future periods (ie deferred income); — Any amounts previously assessed against policyholders that are refundable on termination of the contract; and — Any probable future loss on the contract (ie premium deficiency).
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The direct Guaranteed Minimum Income Benefit liability is determined by estimating the expected value of the annuitisation benefits in excess of the projected account balance at the date of annuitisation and recognising the excess ratably over the accumulation period based on total expected assessments. The assumptions used for calculating the direct Guaranteed Minimum Income Benefit liability at 31 December 2015 and 2014 are consistent with those used for calculating the Guaranteed Minimum Death Benefit and ‘for life’ Guaranteed Minimum Withdrawal Benefit liabilities.
Guaranteed Minimum Withdrawal Benefit ‘not for life’ features are considered to be embedded derivatives under IAS 39. Therefore, provisions for these benefits are recognised at fair value. The change in these guaranteed benefit reserves, along with claim payments and associated fees included in reserves, are included along with the hedge results in short-term fluctuations, resulting in removal of the market impact from the operating profit based on longer-term investment returns.
i With-profits products and PAC with-profits sub-fund The WPSF mainly contains with-profits business but it also contains some non-profit business (unit-linked, term assurances and annuities). The WPSF’s profits are apportioned 90 per cent to its policyholders and 10 per cent to shareholders as surplus for distribution is determined via the annual actuarial valuation.
Application of significant judgement The application of the above method for determining bonuses requires the PAC Board to apply significant judgement in many respects, including in particular the following: — Determining what constitutes fair treatment of customers: Prudential is required by UK law and regulation to consider the fair treatment of its customers in setting bonus levels. The concept of determining what constitutes fair treatment, while established by statute, is not defined; — Smoothing of investment returns: This is an important feature of with-profits products. Determining when particular circumstances, such as a significant rise or fall in market values, warrant variations in the standard bonus smoothing limits that apply in normal circumstances requires the PAC Board of Directors to exercise significant judgement; and
Prudential’s approach, in applying significant judgement and discretion in relation to determining bonus rates, is consistent conceptually with the approach adopted by other firms that manage a with-profits business and is also consistent with the requirements of the Principles and Practices of Financial Management (PPFM) that are applied in the management of their with-profits funds.
The principles contain an explanation of how it determines regular and final bonus rates within the discretionary framework that applies to all with-profits policies, subject to the general legislative requirements applicable. Its purpose is therefore to: — Explain the nature and extent of the discretion available; — Show how competing or conflicting interests or expectations of different groups and generations of policyholders, and policyholders and shareholders are managed so that all policyholders and shareholders are treated fairly; and
— Provide a knowledgeable observer (eg a financial adviser) with an understanding of the material risks and rewards from starting and continuing to invest in a with-profits policy with Prudential.
Net income of the fund before movement in unallocated surplus 2,325 2,096 Movement in unallocated surplus (168) (84)
The Group’s main exposure to guaranteed annuities in the UK is through SAIF and a provision of £412 million was held in SAIF at 31 December 2015 (2014: £549 million) to honour the guarantees. As SAIF is a separate sub-fund solely for the benefit of policyholders of SAIF, this provision has no impact on the financial position of the Group’s shareholders’ equity.
For those contracts where the level of insurance risk is insignificant, the assets and liabilities arising under the contracts are distinguished between those that relate to the financial instrument liability and acquisition costs and deferred income that relate to the component of the contract that relates to investment management. Acquisition costs and deferred income are recognised consistent with the level of service provision in line with the requirements of IAS 18.
v Effect of changes in assumptions used to measure insurance assets and liabilities Credit risk There has been no change of approach in the setting of assumption levels of credit risk in 2015 and 2014. However, changes in the portfolio have given rise to altered levels of credit risk allowance as set out in note B4(b).
For the with-profits sub-fund, the aggregate effect of assumption changes in 2015 was a net charge to unallocated surplus of £114 million (2014: net charge of £86 million).
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 237 b Deferred acquisition costs and other intangible assets attributable to shareholders The deferred acquisition costs and other intangible assets attributable to shareholders comprise: Deferred acquisition costs related to insurance contracts as classified under IFRS 4 6,948 5,840 Deferred acquisition costs related to investment management contracts, including life assurance contracts classified as financial instruments and investment management contracts under IFRS 4 74 87
Disposals and transfers – – – – (8) (8) (6) Exchange differences and other movements 4 323 – – (16) 311 334 Amortisation of DAC related to net unrealised valuation movements on Jackson’s available-for-sale securities recognised within other comprehensive income† – 337 – – – 337 (87)
* PVIF and other intangibles include amounts in relation to software rights with additions of £34 million, amortisation of £29 million and a balance at 31 December 2015 of £71 million.
Total DAC for US operations 6,148 5,177 * Consequent upon the negative unrealised valuation movement in 2015 of £1,305 million (2014: positive unrealised valuation movement of £956 million), there is a gain of £337 million (2014: a charge of £87 million) for altered shadow DAC amortisation booked within other comprehensive income. These adjustments reflect movement from period to period, in the changes to the pattern of reported gross profits that would have occurred if the assets reflected in the statement of financial position had been sold, crystallising the unrealised gains and losses, and the proceeds reinvested at the yields currently available in the market. At 31 December 2015, the cumulative shadow DAC balance as shown in the table above was negative £268 million (2014: negative £584 million).
C5.1 Intangible assets attributable to shareholders continued Overview of the deferral and amortisation of acquisition costs for Jackson Under IFRS 4, the Group applies ‘grandfathered’ US GAAP for measuring the insurance assets and liabilities of Jackson. In the case of Jackson term business, acquisition costs are deferred and amortised in line with expected premiums. For annuity and interest-sensitive life business, acquisition costs are deferred and amortised in line with a combination of historical and future expected gross profits on the relevant contracts. For fixed and fixed index annuity and interest-sensitive life business, the key assumption is the long-term spread between the earned rate on investments and the rate credited to policyholders, which is based on an annual spread analysis. Expected gross profits also depend on mortality assumptions, assumed unit costs and terminations other than deaths (including the related charges), all of which are based on a combination of actual experience of Jackson, industry experience and future expectations. A detailed analysis of actual mortality, lapse and expense experience is performed using internally developed experience studies.
Sensitivity of amortisation charge The amortisation charge to the income statement is reflected in both operating profit and short-term fluctuations in investment returns. The amortisation charge to the operating profit in a reporting period comprises: i A core amount that reflects a relatively stable proportion of underlying premiums or profit; and ii An element of acceleration or deceleration arising from market movements differing from expectations.
In periods where the cap and floor feature of the mean reversion technique are not relevant, the technique operates to dampen the second element above. Nevertheless, extreme market movements can cause material acceleration or deceleration of amortisation in spite of this dampening effect.
In 2015, the DAC amortisation charge for operating profit was determined after including a charge for accelerated amortisation of £2 million (2014: charge for accelerated amortisation of £13 million). The 2015 amount primarily reflects the offsetting impacts of the separate account performance of negative 2 per cent, which is lower than the assumed level for the year, and the effect of releasing the 2012 fund returns of 11 per cent from the mean reversion formula.
As noted above, the application of the mean reversion formula has the effect of dampening the impact of equity market movements on DAC amortisation while the mean reversion assumption lies within the corridor. In 2016, it would take approximate movements in separate account values of more than either negative 17 per cent or positive 67 per cent for the mean reversion assumption to move outside the corridor.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 239
Exchange differences 330 – 315 – Change in shadow DAC related to movement in unrealised appreciation of Jackson’s securities classified as available-for-sale note (i) 337 – (87) –
Note (i) All of the additions are through internal development. The carrying amount of the balance comprises the following gross and accumulated amortisation amounts: Gross amount 144 234 Accumulated amortisation (70) (147)
All the goodwill relates to the UK insurance operations segment. The venture fund investments consolidated by the Group relates to investments of the PAC with-profits fund which are managed by M&G for which the goodwill is shown in the table above. Goodwill is tested for impairment of these investments by comparing the investment’s carrying value including goodwill with its recoverable amount (fair value less costs to sell).
Notes (i) The above costs relate to non-participating business written by the PAC with-profits sub-fund. As the with-profits contracts are accounted for under the
for a fixed period of time. The distribution rights amounts are amortised over the term of the distribution contracts.
Holding company operations: US$1,000m 6.5% Notes 678 641 US$250m 6.75% Notes note (v) 170 160 US$300m 6.5% Notes note (v) 203 193 US$700m 5.25% Notes note (v) 472 444 US$550m 7.75% Notes note (v) 372 351
Holding company total 4,567 3,869 Prudential Capital bank loan note (iii) 275 275 Jackson US$250m 8.15% Surplus Notes 2027 note (vii) 169 160
Notes (i) The Group has designated all US$2.8 billion (2014: US$2.8 billion) of its subordinated debt as a net investment hedge under IAS 39 to hedge the currency risks
related to the net investment in Jackson. (ii) The senior debt ranks above subordinated debt in the event of liquidation. (iii) The Prudential Capital bank loan of £275 million has been made in two tranches: a £160 million loan maturing on 20 December 2017 and a £115 million loan
also maturing on 20 December 2017. These two tranches are currently drawn at a cost of 12-month £LIBOR plus 0.40 per cent. (iv) In June 2015, the Company issued core structural borrowings of £600 million 5.00 per cent subordinated notes due in 2055. The proceeds net of discount
of £14 million with interest payable at three-month £LIBOR plus 1.2 per cent. (vii) Jackson’s borrowings are unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims of Jackson.
Commercial Paper 1,107 1,704 Medium Term Notes 2015 – 300 Medium Term Notes 2018 note (ii) 598 –
(iii) Other borrowings mainly include amounts whose repayment to the lender is contingent upon future surplus emerging from certain contracts specified under the arrangement. If insufficient surplus emerges on those contracts, there is no recourse to other assets of the Group and the liability is not payable to the degree of shortfall. In addition, other borrowings include senior debt issued through the Federal Home Loan Bank of Indianapolis (FHLB), secured by collateral posted with the FHLB by Jackson.
(iv) In all instances the holders of the debt instruments issued by these subsidiaries and funds do not have recourse beyond the assets of those subsidiaries and funds.
Non-recourse borrowings of consolidated investment funds* 1,158 924 £100m 8.5% undated subordinated guaranteed bonds of Scottish Amicable Finance plc† 100 100 Other borrowings (predominantly obligations under finance leases) 74 69 * 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
The most significant items for which the IFRS shareholders’ profit or loss and shareholders’ equity for the Group’s life assurance business is sensitive to, are shown in the following tables. The distinction between direct and indirect exposure is not intended to indicate the relative size of the sensitivity.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 243
Credit risk Interest rate risk Profit and loss and shareholders’ equity are volatile for these risks as they affect the values of derivatives and embedded derivatives and impairment losses. In addition, shareholders’ equity is volatile for the incidence of these risks on unrealised appreciation of fixed income securities classified as available-for-sale under IAS 39
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 245
The pre-tax impacts, if they arose, would mostly be recorded within the category short-term fluctuations in investments returns in the Group’s segmental analysis of profit before tax.
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 those countries, such as those 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.
Jackson’s main exposures are to market risk through its exposure to interest rate risk and equity risk. Approximately 92 per cent (2014: 94 per cent) of its general account investments support fixed interest rate and fixed index annuities, variable annuity fixed account deposits and guarantees, life business and surplus and 8 per cent (2014: 6 per cent) support institutional businesses. All of these types of business contain considerable interest rate guarantee features and, consequently, require that the assets that support them are primarily fixed income or fixed maturity.
Jackson’s derivative programme is used to manage interest rate risk associated with a broad range of products and equity market risk attaching to its equity-based products. Movements in equity markets, interest rates and credit spreads materially affect the carrying value of derivatives which are used to manage the liabilities to policyholders and backing investment assets. Combined with the use of US GAAP measurement (as ‘grandfathered’ under IFRS 4) for the insurance contracts assets and liabilities which is largely insensitive to current period market movements, the Jackson total profit (ie including short-term fluctuations in investment returns) is sensitive to market movements. In addition to these effects the Jackson shareholders’ equity is sensitive to the impact of interest rate and credit spread movements on the value of fixed income securities. Movements in unrealised appreciation on these securities are included as movement in shareholders’ equity (ie outside the income statement).
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 247
Credit default swaps These swaps, represent agreements under which Jackson has purchased default protection on certain underlying corporate bonds held in its portfolio. These contracts allow Jackson to sell the protected bonds at par value to the counterparty if a default event occurs in exchange for periodic payments made by Jackson for the life of the agreement. Jackson does not write default protection using credit derivatives.
C7.3 US insurance operations continued i Sensitivity to equity risk At 31 December 2015 and 2014, 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
† Ranges shown based on simple interest. The upper limits of 5 per cent or 8 per cent simple interest are approximately equal to 4 per cent and 6 per cent respectively, on a compound interest basis over a typical 10-year bonus period. For example 1 + 10 x 0.05 is similar to 1.04 growing at a compound rate of 4 per cent for a further nine years.
Account balances of contracts with guarantees were invested in variable separate accounts as follows: Mutual fund type: Money market 832 675
At 31 December 2015, 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.
The directional movements in the sensitivities reflect the hedging programme in place at 31 December 2015 and 2014.
C7.3 US insurance operations continued ii Sensitivity to interest rate risk Notwithstanding the market risk exposure previously described, 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 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 Guaranteed Minimum Withdrawal Benefit features attached to variable annuity business (other than ‘for life’ components) are accounted for as embedded derivatives which are fair valued and, therefore, will be sensitive to changes in interest rate.
Related effect on charge for deferred tax 621 296 (220) (392) 489 242 (173) (306)
Total net effect on shareholders’ equity 904 607 (750) (1,331) 1,027 633 (760) (1,367)
These sensitivities are shown only for interest rates in isolation and do not include other movements in credit risk that may affect credit spreads and valuations of debt securities. Similar to sensitivity to equity risk, the sensitivity movements provided in the table above are at a point in time and reflect the hedging programme in place on the balance sheet date, while the actual impact on financial results would vary contingent upon a number of factors.
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 2015, the average and closing rates were US$1.53 (2014: US$1.65) and US$1.47 (2014: US$1.56) to £1.00 sterling, respectively. A 10 per cent increase (weakening of the dollar) or decrease (strengthening of the dollar) in these rates would reduce or increase profit before tax attributable to shareholders, profit for the year and shareholders’ equity attributable to US insurance operations respectively as follows: A 10% increase in US$:£ exchange rates
With-profits business SAIF Shareholders have no interest in the profits of the ring-fenced fund of SAIF but are entitled to the asset management fees paid on the assets of the fund.
With-profits sub-fund business The shareholder results of the UK with-profits business (including non-participating annuity business of the with-profits sub-fund) are only sensitive to market risk through the indirect effect of investment performance on declared policyholder bonuses.
The shareholder results of the UK with-profits fund correspond to the shareholders’ share of the cost of bonuses declared on the with-profits business which is currently one-ninth of the cost of bonuses declared. Investment performance is a key driver of bonuses, and hence the shareholders’ share of the cost of bonuses. Due to the ‘smoothed’ basis of bonus declaration, the sensitivity to investment performance in a single year is low relative to movements in the period-to-period performance. However, over multiple periods, it is important as it may affect future expected shareholder transfers.
Mortality and other insurance risk are relatively minor factors in the determination of the bonus rates. Adverse persistency experience can affect the level of profitability from with-profits but in any given one year, the shareholders’ share of cost of bonus may only be marginally affected. However, altered persistency trends may affect future expected shareholder transfers.
C7.4 UK insurance operations continued Shareholder-backed annuity business The principal items affecting the IFRS results of the UK shareholder-backed annuity business are mortality experience and assumptions, and credit risk. The assets covering the liabilities are principally debt securities and other investments that are held to match the expected duration and payment characteristics of the policyholder liabilities. These liabilities are valued for IFRS reporting purposes by applying discount rates that reflect the market rates of return attaching to the covering assets.
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 the 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 and lapse 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 which provide low levels of mortality cover, the profits are relatively insensitive to changes in mortality experience.
Sensitivity to interest rate risk and other market risk By virtue of the fund structure, product features and basis of accounting, the policyholder liabilities of the UK insurance operations are, except annuity business, not generally exposed to interest rate risk. At 31 December 2015 annuity liabilities accounted for 98 per cent (2014: 98 per cent) of UK shareholder-backed business liabilities. For annuity business, liabilities are exposed to interest rate risk. However, the net exposure to the Prudential Assurance Company with-profits sub-fund (for its non-profit annuity business) and shareholders (for annuity liabilities of Prudential Retirement Income Limited and the non-profit sub-fund) is very substantially ameliorated by virtue of the close matching of assets with appropriate duration. The level of matching from period to period can vary depending on management actions and economic factors so it is possible for a degree of mis-matching profits or losses to arise.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 253
The estimated sensitivity of the UK non-linked shareholder-backed business (principally annuities business) to a movement in interest rates is as follows: A decrease of 2%
Net sensitivity of profit after tax and shareholders’ equity 1,722 731 (589) (1,090) 1,607 650 (505) (928)
A 10 or 20 per cent increase in their value would have an approximately equal and opposite effect on profit and shareholders’ equity to the sensitivities shown above. The market risk sensitivities shown above reflect the impact of temporary market movements, and, therefore the primary effect of such movements would, in the Group’s segmental analysis of profits, be included within the short-term fluctuations in investment returns.
C8.1 Deferred tax The statement of financial position contains the following deferred tax assets and liabilities in relation to: Deferred tax assets Deferred tax liabilities
The deferred tax asset at 31 December 2015 and 2014 arises in the following parts of the Group: Asia insurance operations 66 84 US insurance operations 2,448 2,343 UK insurance operations
SAIF 1 – PAC with-profits fund (including non-profit annuity business) 83 71
UK insurance operations 128 1 to 10 years – – Other operations 157 1 to 10 years 5 1 to 3 years
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 255
Under the IAS 19 ‘Employee Benefits’ valuation basis, the Group applies the principles of IFRIC 14, ‘IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’, whereby a surplus is only recognised to the extent that the Company is able to access the surplus either through an unconditional right of refund to the surplus or through reduced future contributions relating to ongoing service, which have been substantively enacted or contractually agreed. Further, the IFRS financial position recorded, reflects the higher of any underlying IAS 19 deficit and any obligation for committed deficit funding where applicable.
Economic surplus (deficit) (including investment in Prudential insurance policies) 169 (82) 75 (1) 161 130 (144) 60 (1) 45
IAS 19 pension asset (liability) on the Group statement of financial position note (iv) 169 (82) (2) (1) 84 130 (144) (72) (1) (87)
economic benefit (impact) of the Company from the difference between future ongoing contributions to the scheme and estimated accrued cost of service. No deficit or other funding is required for PSPS. Deficit funding, where applicable, is apportioned in the ratio of 70/30 between the PAC with-profits fund and shareholder-backed operations following detailed considerations in 2005 of the sourcing of previous contributions. Employer contributions for ongoing service of current employees are apportioned in the ratio relevant to current activity.
(ii) The deficit of SASPS has been allocated 40 per cent to the PAC with-profits fund and 60 per cent to the shareholders’ fund as at 31 December 2015 (2014: approximately 50/50).
(iv) At 31 December 2015, the PSPS pension asset of £169 million (2014: £130 million) and the other schemes’ pension liabilities of £85 million (2014: £217 million) are included within ‘Other debtors’ and ‘Provisions’ respectively on the consolidated statement of financial position.
C9: Defined benefit pension schemes continued a Background and summary economic and IAS 19 financial positions continued Triennial actuarial valuations The last completed actuarial valuation of PSPS was as at 5 April 2014 by CG Singer, Fellow of the Institute of Actuaries, of Towers Watson Limited. This valuation was finalised in the first half of 2015 and demonstrated the scheme to be 107 per cent funded by reference to the Scheme Solvency Target that forms the basis of the scheme’s funding objective. The contributions into the scheme are payable at the minimum level required under the scheme rules. Excluding expenses, the contributions are payable at approximately £6 million per annum for ongoing service of active members of the scheme. No deficit or other funding is required. Deficit funding for PSPS, when applicable, is apportioned in the ratio of 70/30 between the PAC with-profits fund and shareholder-backed operations based on the sourcing of previous contributions. Employer contributions for ongoing service of current employees are apportioned in the ratio relevant to current activity.
Defined benefit pension schemes in the UK are generally required to be subject to full actuarial valuations every three years in order to assess the appropriate level of funding for schemes in relation to their commitments. These valuations include assessments of the likely rate of return on the assets held within the separate trustee administered funds.
Mortality assumptions: The tables used for PSPS pensions in payment at 5 April 2014 were: Base post-retirement mortality For current male (female) pensioners 113% (108%) of the mortality rates of the 2000 series mortality tables (PNMA00/PNFA00), published by the Continuous Mortality Investigation Bureau (CMI).
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 257
All three of the Group’s UK defined benefit pension schemes (the PSPS, SASPS and M&GGPS) are final salary schemes, which are closed to new entrants.
The Trustee sets the general investment policy and specifies any restrictions on types of investment and the degrees of divergence permitted from the benchmark, but delegates the responsibility for selection and realisation of specific investments to the Investment Managers. The Trustee consults the Principal Employer, the Prudential Assurance Company, on the investment principles, but the ultimate responsibility for the investment of the assets of the scheme lies with the Trustee.
The PSPS scheme has entered into a derivatives based strategy to match the duration and inflation profile of its liabilities. This involved a reallocation from other investments to other assets with an interest and inflation swap overlay. As at 31 December 2015, the nominal value of the interest and inflation-linked swaps amounted to £0.7 billion (2014: £0.8 billion) and £3.4 billion (2014: £3.0 billion) respectively. The SASPS and M&GGPS use very limited or no derivatives to manage their risks.
b Assumptions The actuarial assumptions used in determining benefit obligations and the net periodic benefit costs for the years ended 31 December were as follows: Discount rate* 3.8 3.5 Rate of increase in salaries 3.0 3.0 Rate of inflation†
Retail prices index (RPI) 3.0 3.0 Consumer prices index (CPI) 2.0 2.0
The calculations are based on current mortality estimates with an allowance made for future improvements in mortality. The allowance made is in line with a custom calibration and was updated in 2014 to reflect the 2012 mortality model from the Continuous Mortality Investigation Bureau of the Institute and Faculty of Actuaries (CMI). For the PSPS immediate annuities in payment, in 2015 and 2014, a long-term improvement rate of 1.75 per cent per annum and 1.25 per cent per annum were applied for males and females, respectively.
C9: Defined benefit pension schemes continued c Estimated pension scheme surpluses and deficits continued Movements on the pension scheme deficit determined on the economic basis are as follows, with the effect of the application of IFRIC 14 being shown separately: Surplus (deficit) in schemes at
Less: amount attributable to PAC with-profits fund (525) (38) (78) (17) (658)
Shareholders’ share: Gross of tax surplus (deficit) 230 (2) 37 38 303
Less: amount attributable to PAC with-profits fund (19) (20) (29) (17) (85)
Shareholders’ share: Gross of tax surplus (deficit) 26 (10) 22 38 76
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 259
The movements in the IAS 19 pension schemes’ surplus and deficit between scheme assets and liabilities as consolidated in the financial statements were: Attributable to policyholders and shareholders
Net surplus (deficit), end of year 7,819 (6,858) 961 (800) 161 (77) 84 2014 £m Net deficit, beginning of year 6,944 (6,298) 646 (602) 44 (114) (70)
Net surplus (deficit), end of year 8,067 (7,312) 755 (710) 45 (132) (87)
(iii) Total employer contributions expected to be paid into the Group defined benefit schemes for the year ending 31 December 2016 amounts to £45 million (2015: £45 million).
(iv) The actuarial gains and losses attributable to policyholders and shareholders as shown in the table above are analysed as follows: Actuarial and other gains and losses Return on the scheme assets less amount included in interest income (278) 1,037 Losses on changes in demographic assumptions (3) (9) Gains (losses) on changes in financial assumptions 371 (939) Experience gains (losses) on scheme liabilities 25 (27)
The sensitivity of the underlying pension scheme liabilities as shown above does not directly equate to the impact on the profit or loss attributable to shareholders or shareholders’ equity due to the effect of the application of IFRIC 14 on PSPS and the allocation of a share of the interest in financial position of the PSPS and SASPS to the PAC with-profits fund as described above.
Impact of sensitivity on scheme liabilities on IAS 19 basis 2015 20142015 2014
Discount rate 3.8% 3.5% Increase by 0.2% Decrease in scheme liabilities by: Other schemes 4.6% 4.9%
Mortality rate Increase life expectancy Increase in scheme liabilities by: by 1 year PSPS 3.2% 3.3%
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 261
At 31 December 2015, there were options outstanding under save as you earn schemes to subscribe for shares as follows: Number of shares to subscribe for
Transactions by Prudential plc and its subsidiaries in Prudential plc shares The Group buys and sells Prudential plc shares (‘own shares’) either in relation to its employee share schemes or via transactions undertaken by authorised investment funds that the Group is deemed to control. The cost of own shares of £219 million as at 31 December 2015 (2014: £195 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery of shares under employee incentive plans. At 31 December 2015, 10.5 million (2014: 10.3 million) Prudential plc shares with a market value of £161 million (2014: £153 million) were held in such trusts all of which are for employee incentive plans. The maximum number of shares held during 2015 was 10.5 million which was in December 2015.
The Group has consolidated a number of authorised investment funds where it is deemed to control these funds under IFRS. Some of these funds hold shares in Prudential plc. The total number of shares held by these funds at 31 December 2015 was 6.1 million (2014: 7.5 million) and the cost of acquiring these shares of £54 million (2014: £67 million) is included in the cost of own shares. The market value of these shares as at 31 December 2015 was £94 million (2014: £112 million). During 2015, these funds made net disposals of 1,402,697 Prudential shares (2014: net additions of 405,940) for a net decrease of £13 million to book cost (2014: net increase of £7 million).
All share transactions were made on an exchange other than the Stock Exchange of Hong Kong. Other than set out above the Group did not purchase, sell or redeem any Prudential plc listed securities during 2015 or 2014.
This statement sets out the estimated capital position of the Group’s subsidiaries, by life assurance and asset management operations by reference to the local regulations as at 31 December 2015.
C11.1 Life assurance business a Summary statement The Group’s estimated capital position for its life assurance subsidiaries as at 31 December 2015 with reconciliations to shareholders’ equity is shown below. The available capital for the Group’s life assurance operations is determined by reference to local regulations, to meet risk and regulatory requirements. For the UK life assurance operations, the estimated capital position as shown below is by reference to the requirements under the Solvency I basis.
Pension liability difference between IAS 19 and regulatory basis – (127) – – – (127) (47)
Valuation difference on non-profit annuity liabilities within WPSF between IFRS basis and regulatory basis – (113) – – – (113) (251)
(iv) The investment and policyholder liabilities valuation difference between IFRS and regulatory bases for Jackson is mainly due to not all investments being carried at fair value under the regulatory basis and also due to the valuation difference on annuity reserves.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 263 b Reconciliation to the Group total shareholders’ equity The table below reconciles shareholders’ equity held in life assurance operations as shown in the table in note (a) to the Group total shareholders’ equity as at 31 December 2015: Group shareholders’ equity Total life assurance operations 12,526 Parent company and shareholders’ equity of other subsidiaries note (i) 429
i Asia insurance operations The available capital shown above of £5,177 million (2014: £4,823 million) represents the excess of local regulatory basis assets over liabilities before deduction of required capital of £1,622 million (2014: £1,514 million).
The businesses in Asia are subject to local capital requirements in the jurisdictions in which they operate. For material Asia operations, the details of the basis of determining regulatory capital and regulatory capital requirements are as follows: Hong Kong For non-participating business, mathematical reserves are generally calculated using a modified net premium approach with no allowance for future discontinuance. The underlying assumptions are based on a best estimate basis with prudent margins for adverse deviations. Cash flows are discounted at a valuation interest rate based on a blend between the risk-adjusted portfolio yield and reinvestment rate.
The capital requirement for solvency margin calculation varies by underlying risk and duration of liabilities but is generally determined as 4 per cent of mathematical reserves plus 0.3 per cent of the capital at risk.
For non-participating business, gross premium reserves are determined using best estimate assumptions along with provisions for risk margin for adverse deviations. For linked business, the value of units is held together with a non-unit reserve calculated in accordance with standard actuarial methodology.
A registered insurer incorporated in Singapore is required at all times to maintain a minimum level of paid-up ordinary share capital and to ensure that its financial resources are not less than the greater of (i) the total risk requirement arising from the assets and liabilities of the insurer calculated in accordance with the Singapore Insurance Act; or (ii) a minimum amount of 5 million Singapore Dollars. The regulator also has the authority to direct that the insurer satisfy additional capital adequacy requirements in addition to those set forth under the Singapore Insurance Act if it considers such additional requirements appropriate.
The risk-free rate is derived from the greater of the current yield curve of Thai government bonds and the weighted-average yield curve of the current and prior seven quarters of Thai government bonds, as with a greater weighting on the current quarter.
For linked business, the value of units is held together with the non-unit reserves calculated in accordance with the local regulator’s standard actuarial methodology.
The capital requirement is determined as 4 per cent of reserves plus a specified percentage of 0.1 per cent of sums at risk for policies with original term less than or equal to five years or 0.3 per cent of sums at risk for policies with original term of more than five years. An additional capital requirement of Vietnamese Dong 300 billion is also required for companies transacting pension business.
Jackson’s Risk-Based Capital ratio is significantly in excess of regulatory requirements. At 31 December 2015, Jackson had a permitted practice in effect as granted by the local regulator allowing Jackson to carry certain interest rate swaps at book value, as if statutory hedge accounting were in place, instead of at fair value as would have been otherwise required. Jackson is required to demonstrate the effectiveness of its interest rate swap programme pursuant to the Michigan Insurance Code. The total effect of this permitted practice, net of tax, was to decrease statutory surplus by £241 million at 31 December 2015.
Michigan insurance law specifically allows value of business acquired as an admitted asset as long as certain criteria are met. US NAIC standards limit the admitted amount of goodwill/value of business acquired generally to 10 per cent of capital and surplus. At 31 December 2015, Jackson reported £222 million of statutory basis value of business acquired as a result of the REALIC acquisition, which is fully admissible under Michigan insurance law.
Available capital of the with-profits sub-fund and Scottish Amicable Insurance Fund of £7.7 billion (2014: £7.2 billion) as shown in the table in section (a) above represents the excess of assets over liabilities on the PRA realistic basis. Unlike the previously discussed FRS 27 basis, realistic liabilities on the regulatory basis include the shareholders’ share of future bonuses. These amounts are shown before deduction of the risk capital margin as set on the PRA basis which is estimated to be £1.0 billion at 31 December 2015 (2014: £1.0 billion).
Other UK life assurance subsidiaries and funds The available capital of £3,761 million (2014: £3,297 million) under the Solvency I basis as shown in the table in section (a) above reflects the excess of regulatory basis assets over liabilities of the subsidiaries and funds, before deduction of the capital resources requirement of £1,555 million (2014: £1,552 million).
Any excess of assets over liabilities of the PAC with-profits fund is retained within that fund. The retention of the capital enables it to support with-profits and other business of the fund by, for example, providing the benefits associated with smoothing and guarantees. It also provides investment flexibility for the fund’s assets by meeting the regulatory capital requirements that demonstrate solvency and by absorbing the costs of significant events or fundamental changes in its long-term business without affecting the bonus and investment policies.
The concept of long-term fund as described above was abolished under the Solvency II regime, which came into effect on 1 January 2016. The PAC with-profits funds will still be treated as ring-fenced structures under the new regime. Therefore the consideration of an ‘established surplus’ that needs to be formally transferred no longer exists. However companies as a whole will be required to meet the new capital requirements. Further information on the Solvency II capital requirements is provided in the Strategic Report.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 267
Provision in respect of defined benefit pension schemes C9 85 217 Other provisions (see below) 519 507
regulatory and other provisions of £79 million (2014: £57 million). Staff benefits are generally expected to be paid out within the next three years.
Arising on acquisitions of subsidiaries* 52 84 136 – 1 1
Capital expenditure: property, plant and equipment by segment The capital expenditure of £216 million (2014: £141 million) arose as follows: £143 million in UK, £20 million in US and £35 million in Asia in insurance operations with the remaining balance of £18 million arising from asset management operations and unallocated corporate expenditure (2014: £82 million in UK, £16 million in US, £20 million in Asia and £23 million in other operations).
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 269
Investment properties principally relate to the PAC with-profits fund and are carried at fair value. A reconciliation of the carrying amount of investment properties at the beginning and end of the year is set out below: Additions: Resulting from property acquisitions 680 669 Resulting from expenditure capitalised 77 59
The 2015 income statement includes rental income from investment properties of £769 million (2014: £729 million) and direct operating expenses including repairs and maintenance arising from these properties of £42 million (2014: £41 million).
Investment properties of £5,468 million (2014: £5,263 million) are held under finance leases. A reconciliation between the total of future minimum lease payments at the statement of financial position date, and their present value is shown below.
Contingent rent is that portion of the lease payments that is not fixed in amount but is based on the future value of a factor that changes other than with the passage of time. There was no contingent rent recognised as income or expense in 2015 and 2014.
The Group’s policy is to let investment properties to tenants through operating leases. Minimum future rentals to be received on non-cancellable operating leases of the Group’s freehold investment properties are receivable in the following periods: Less than 1 year 309 314
Adjustment for remeasurement of the carrying value to fair value less costs to sell (124)
On completion of the sale, the cumulative foreign exchange translation loss of the Japan life business of £46 million, that had arisen from 2004 (the year of the Group’s conversion to IFRS) to disposal was recycled from other comprehensive income through the profit and loss account in 2015 as required by IAS 21. This amount is included within ‘Cumulative exchange loss on the sold Japan life business recycled from other comprehensive income’ in the supplementary analysis of profit of the Group as shown in note B1.1. The adjustment has no net effect on shareholders’ equity.
The Group is involved in a number of litigation and regulatory issues. These include civil proceedings involving Jackson, which appear to be substantially similar to other class action litigation brought against many life insurers in the US, alleging misconduct in the sale of insurance products. While the outcome of such litigation and regulatory issues cannot be predicted with certainty, the Company believes that their ultimate outcome will not have a material adverse effect on the Group’s financial condition, results of operations, or cash flows.
At 31 December 2015, Jackson has unfunded commitments of £299 million (2014: £332 million) related to its investments in limited partnerships and £64 million (2014: £73 million) related to commercial mortgage loans and other fixed maturities. These commitments were entered into in the normal course of business and the directors do not expect a material adverse impact on the operations to arise from them.
In 1997, the business of Scottish Amicable Life Assurance Society, a mutual society, was transferred to PAC with the creation of a separate sub-fund, SAIF within PAC’s long-term business fund containing all the with-profits business and all other pension business that was transferred. No new business has been or will be written in the sub-fund, and it is managed to ensure that all the invested assets are distributed to SAIF policyholders over the lifetime of SAIF policies. With the exception of certain amounts in respect of the unitised with-profits life business, all future earnings arising in SAIF are retained for SAIF policyholders. Any excess (deficiency) of revenue over expense within SAIF during a period is attributable to the policyholders of the fund. Shareholders have no interest in the profits of SAIF but are entitled to the asset management fees paid on this business.
SAIF with-profits policies contain minimum levels of guaranteed benefit to policyholders. In addition, certain pensions products have guaranteed annuity rates at retirement (see below). Should the assets of SAIF be inadequate to meet the guaranteed benefit obligations of the policyholders of SAIF, the PAC long-term fund would be liable to cover any such deficiency in the first instance.
In addition, Prudential has put in place intra-group arrangements to formalise undertakings by Prudential to the regulators of the Hong Kong subsidiaries, which from 1 January 2014, contain the domesticated branch business from PAC regarding their solvency levels. In addition, the scheme of transfer of the Hong Kong branch includes short-term support arrangements between Prudential and PAC to underpin similar arrangements between PAC and the newly domesticated business. It is considered unlikely that support will need to be provided under these arrangements.
The costs associated with the pension mis-selling review have been met from the inherited estate (see above) and, accordingly have not been charged to the asset shares used in the determination of policyholder bonus rates. Hence policyholders’ pay-out values have been unaffected by pension mis-selling.
In 1998, Prudential stated that deducting mis-selling costs from the inherited estate (see above) would not impact its bonus or investment policy and it gave an assurance that if this unlikely event were to occur, it would make available support to the fund from shareholder resources for as long as the situation continued, so as to ensure that policyholders were not disadvantaged. This review was completed on 30 June 2002 with the assurance continuing to apply to any policy in force at 31 December 2003, both for premiums paid before 1 January 2004, and for subsequent regular premiums (including future fixed, retail price index or salary related increases and Department of Work and Pensions rebate business). The assurance has not applied to new business since 1 January 2004.
In addition, there are no material transactions between the Group’s joint ventures which are accounted for on an equity method basis and other Group companies.
Executive officers and directors of the Company may, from time to time, purchase insurance, asset management or annuity products marketed by Group companies in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with other persons.
In 2015 and 2014, other transactions with directors were not deemed to be significant both by virtue of their size and in the context of the directors’ financial positions. All these transactions are on terms broadly equivalent to those that prevail in arm’s-length transactions.
Operating leases and capital commitments The Group leases various offices to conduct its business. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.
D6: Investments in subsidiary undertakings, joint ventures and associates a Dividend restrictions and minimum capital requirements Certain Group subsidiaries and joint ventures are subject to restrictions on the amount of funds they may transfer in the form of cash dividends or otherwise to the parent company.
The Group capital position statement for life assurance businesses is set out in note C11.1, showing the available capital reflecting the excess of regulatory basis over liabilities for each fund or group of companies determined by reference to the local regulation of the subsidiaries as at 31 December 2015. In addition, disclosure is also provided in note C11.1 of the local capital requirement of the principal funds and companies.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 273 b Investments in joint ventures and associates Joint ventures represent arrangements where the controlling parties through contractual or other agreement have the rights to the net assets of the arrangements. The Group has shareholder-backed joint venture insurance and asset management businesses in China with CITIC Group, and in India with ICICI Bank. In addition, there is an asset management joint venture in Hong Kong with Bank of China International Holdings Limited (BOCI) and Takaful general and life insurance joint venture in Malaysia.
The investments in these joint ventures have the same accounting year end as the Group, except for joint ventures in India. Although these entities have reporting periods ending 31 March, 12 months of financial information up to 31 December is recorded. Accordingly, the information covers the same period as that of the Group.
c Related undertakings In accordance with Section 409 of the Companies Act 2006, a list of Prudential Group’s subsidiaries, joint ventures, associates and significant holdings (being holdings more than 20 per cent) along with the country of incorporation, the classes of shares held and the effective percentage of equity owned at 31 December 2015 is disclosed below.
Direct subsidiary undertakings of the parent company, Prudential plc (shares held directly or via nominees): Name Classes of shares held Proportion held Country of incorporation
M&G Group Limited Ordinary shares 100.00% United Kingdom Prudential (US Holdco 1) Limited Ordinary shares 100.00% United Kingdom Prudential Capital Holding Company Limited Ordinary shares 100.00% United Kingdom Prudential Corporation Asia Limited Ordinary shares 100.00% Hong Kong Prudential Financial Services Limited Ordinary shares 100.00% United Kingdom Prudential Group Holdings Limited Ordinary shares 100.00% United Kingdom Prudential Property Services Limited Ordinary shares 100.00% United Kingdom Prudential US Limited Ordinary shares 100.00% United Kingdom The Prudential Assurance Company Limited Ordinary shares 100.00% United Kingdom
AGR Holdco Ltd Ordinary shares 43.06% United Kingdom Allied Life Brokerage Agency, Inc Ordinary shares 100.00% USA Bird GP 1 Limited Ordinary shares 100.00% United Kingdom BOCHK Aggressive Growth Fund Ordinary shares 54.69% Hong Kong BOCHK Balanced Growth Fund Ordinary shares 39.05% Hong Kong BOCHK China Equity Fund Ordinary shares 64.15% Hong Kong BOCHK Conservative Growth Fund Ordinary shares 43.44% Hong Kong BOCI – Prudential Asset Management Limited Ordinary shares 36.00% Hong Kong BOCI – Prudential Trustee Limited Ordinary shares 36.00% Hong Kong Bracknell Boulevard Management Company Limited Ordinary shares 29.10% United Kingdom Brooke (Holdco 1) Inc. Ordinary shares 100.00% USA Brooke Holdings (UK) (in liquidation) Ordinary shares 100.00% United Kingdom Brooke Holdings LLC Ordinary shares 100.00% USA Brooke Life Insurance Company Ordinary shares 100.00% USA BWAT Retail Nominee (1) Limited Ordinary shares 50.00% United Kingdom BWAT Retail Nominee (2) Limited Ordinary shares 50.00% United Kingdom Calera Capital Partners IV – A AIV I, L.P. Limited partnership interest 32.87% USA Calvin F1 GP Limited Ordinary shares 100.00% United Kingdom Calvin F2 GP Limited Ordinary shares 100.00% United Kingdom Canada Property (Trustee) No 1 Limited Ordinary shares 100.00% Jersey Canada Property Holdings Limited Ordinary shares 100.00% United Kingdom Carraway Guildford (Nominee A) Limited Ordinary shares 100.00% Jersey Carraway Guildford (Nominee B) Limited Ordinary shares 100.00% Jersey Carraway Guildford General Partner Limited Ordinary shares 100.00% United Kingdom Carraway Guildford Investments Unit Trust Units 100.00% Jersey Carraway Guildford Limited Partnership Limited partnership interest 100.00% United Kingdom CCC Investment S.à.r.l. Ordinary shares 52.24% Luxembourg Centaurus Retail LLP Limited partnership interest 50.00% United Kingdom Central Square Leeds Limited Ordinary shares 100.00% United Kingdom Centre Capital Non-Qualified Investors IV AIV Orion, L.P. Membership interest 76.75% USA Centre Capital Non-Qualified Investors IV AIV-ELS, L.P. Membership interest 76.53% USA Centre Capital Non-Qualified Investors IV AIV-RA, L.P. Membership interest 71.43% USA Centre Capital Non-Qualified Investors IV, L.P. Membership interest 75.47% USA Centre Capital Non-Qualified Investors V AIV-ELS LP Membership interest 73.16% USA Centre Capital Non-Qualified Investors V LP Membership interest 67.47% USA CEP IV-A Chicago AIV Limited Partnership Membership interest 31.92% USA CEP IV-A CWV AIV Limited Partnership Membership interest 31.92% USA CEP IV-A Indy AIV Limited Partnership Membership interest 31.92% USA CEP IV-A NMR AIV Limited Partnership Membership interest 31.92% USA CEP IV-A WBCT AIV Limited Partnership Membership interest 31.91% USA CF European Qualified Investor Scheme Ordinary shares 97.57% United Kingdom CF Japanese Qualified Investor Scheme Ordinary shares 97.68% United Kingdom CF North American Qualified Investor Scheme Ordinary shares 98.22% United Kingdom CF Prudential Pacific Markets Trust Fund Ordinary shares 97.42% United Kingdom CF UK Growth Qualified Investor Scheme Ordinary shares 98.47% United Kingdom Cimbria Holdings Limited Ordinary shares 41.78% Denmark CITIC – CP Asset Management Co. Limited Ownership interest 26.95% China CITIC – Prudential Fund Management Company Limited Ownership interest 49.00% China CITIC – Prudential Life Insurance Company Limited Ownership interest 50.00% China Creatrade Luxembourg S.à.r.l Ordinary shares 52.27% Luxembourg Cribbs Causeway JV Limited Ordinary shares 50.00% United Kingdom Cribbs Causeway Merchants Association Ltd Limited by guarantee United Kingdom Cribbs Mall Nominee (1) Limited Ordinary shares 100.00% United Kingdom Curian Capital, LLC Membership interest 100.00% USA Curian Clearing LLC (Michigan) Membership interest 100.00% USA Daisy 2015 Topco Limited Ordinary shares 24.08% United Kingdom
Investment Centers of America, Inc. Ordinary shares 100.00% USA Ivy TopCo Limited Ordinary shares 35.43% Guernsey Jackson National Asset Management LLC Capital contribution 100.00% USA Jackson National Life (Bermuda) Limited Ordinary shares 100.00% Bermuda Jackson National Life Distributors LLC Membership interest 100.00% USA Jackson National Life Insurance Company Ordinary shares 100.00% USA Jackson National Life Insurance Company of New York Ordinary shares 100.00% USA Jefferies Capital Partners V, L.P. Limited partnership interest 21.92% USA JNL PPM America Strategic Income Fund Ordinary shares 100.00% USA Kalle Luxembourg S.à.r.l. Ordinary shares 37.74% Luxembourg Lion Credit Opportunity Fund III Ordinary shares 29.10% Ireland Lion Credit Opportunity Fund XII Ordinary shares 38.94% Ireland LIPP S.à r.l. (in liquidation) Ordinary shares 100.00% Luxembourg Livicos Limited Ordinary shares 100.00% Ireland M&G (Guernsey) Limited Ordinary shares 100.00% Guernsey M&G Alternatives Investment Management Limited Ordinary shares 100.00% United Kingdom M&G Asia Property Fund Ordinary shares 34.06% Luxembourg M&G Dividend Fund Ordinary shares 55.17% United Kingdom M&G Emerging Markets Bond Fund Ordinary shares 46.36% United Kingdom M&G Episode Defensive Fund Ordinary shares 94.87% United Kingdom M&G Episode Macro Fund Ordinary shares 59.00% United Kingdom M&G European Credit High Yield Investments Fund Ordinary shares 100.00% Luxembourg M&G European Credit Investments Fund Ordinary shares 100.00% Luxembourg M&G European Fund Ordinary shares 63.69% United Kingdom M&G European Property Fund Ordinary shares 38.23% Luxembourg M&G European Strategic Value Fund Ordinary shares 96.84% United Kingdom M&G Financial Services Limited Ordinary shares 100.00% United Kingdom M&G Founders 1 Limited Ordinary shares 100.00% United Kingdom M&G General Partner Inc. Ordinary shares 100.00% Cayman Islands M&G Gilt Fixed Interest Fund Ordinary shares 31.51% United Kingdom M&G Global Corporate Bond Fund Ordinary shares 82.30% United Kingdom M&G Global Credit Investments Fund Ordinary shares 100.00% Luxembourg M&G Global Growth Fund Ordinary shares 43.19% United Kingdom M&G Global Leaders Fund Ordinary shares 40.96% United Kingdom M&G IMPPP 1 Limited Ordinary shares 100.00% United Kingdom M&G International Investments Limited Ordinary shares 100.00% United Kingdom M&G International Investments Nominees Limited Ordinary shares 100.00% United Kingdom M&G International Investments Switzerland AG Ordinary shares 100.00% Switzerland M&G Investment Management Limited Ordinary shares 100.00% United Kingdom M&G Investments (Hong Kong) Limited Ordinary shares 100.00% Hong Kong M&G Investments (Singapore) Pte. Ltd. Ordinary shares 100.00% Singapore M&G Limited Ordinary shares 100.00% United Kingdom M&G Managed Growth Fund Ordinary shares 26.62% United Kingdom M&G Management Services Limited Ordinary shares 100.00% United Kingdom M&G Nominees Limited Ordinary shares 100.00% United Kingdom M&G Pan European Dividend Fund Ordinary shares 67.64% United Kingdom M&G Platform Nominees Limited Ordinary shares 100.00% United Kingdom M&G Property Portfolio Ordinary shares 67.39% United Kingdom M&G Property Portfolio Feeder Ordinary shares 27.15% United Kingdom M&G Real Estate (Luxembourg) S.A. Ordinary shares 100.00% Luxembourg M&G Real Estate Asia Holding Company Pte. Ltd Ordinary shares 100.00% Singapore M&G Real Estate Asia Pte. Ltd Ordinary shares 100.00% Singapore M&G Real Estate Debt Fund LP Limited partnership interest 29.15% Guernsey
National Planning Insurance Agency, Inc. (Texas) (in liquidation) Ordinary shares 100.00% USA NB Distressed Debt New global shares 25.66% Guernsey North Sathorn Holdings Company Limited Ordinary shares 100.00% Thailand Nova Sepadu Sdn. Bhd. Ordinary shares 51.00% Malaysia Oaktree Business Park Limited Ordinary shares 12.50% United Kingdom Old Hickory Fund I, LLC Membership interest 100.00% USA Optimus Point Management Company Limited Ordinary shares 99.95% United Kingdom Orizon Luxembourg S.à.r.l Ordinary shares 78.49% Luxembourg Pacus (UK) Limited Ordinary shares 100.00% United Kingdom Park Avenue (Singapore Two) (in liquidation) Ordinary shares 100.00% Gibraltar PCA IP Services Limited Ordinary shares 100.00% Hong Kong PCA Life Assurance Co. Ltd. Ordinary shares 99.79% Taiwan PCA Life Insurance Co. Ltd. Ordinary shares 100.00% Korea PCA Reinsurance Co. Ltd. Ordinary shares 100.00% Labuan, Malaysia PGDS (UK One) Limited Ordinary shares 100.00% United Kingdom PGDS (US One) LLC Membership interest 100.00% USA Phase One Imaging Holdings Ltd Ordinary shares 30.54% United Kingdom Piccard at Rockville, LLC Membership interest 100.00% USA Pinewood Limited Ordinary shares 20.00% Malaysia PPM America Capital Partners II, LLC Membership interest 63.45% USA
PPM America Capital Partners III, LLC Membership interest 60.50% USA PPM America Capital Partners IV, LLC Membership interest 34.50% USA PPM America Capital Partners V, LLC Membership interest 34.00% USA PPM America Capital Partners, LLC Membership interest 19.38% USA PPM America Private Equity Fund II LP Limited partnership interest 100.00% USA PPM America Private Equity Fund III LP Limited partnership interest 100.00% USA PPM America Private Equity Fund IV LP Limited partnership interest 100.00% USA PPM America Private Equity Fund LP Limited partnership interest 100.00% USA PPM America Private Equity Fund V LP Limited partnership interest 100.00% USA PPM America, Inc. Ordinary shares 100.00% USA PPM Capital (Holdings) Limited Ordinary shares 100.00% United Kingdom PPM Finance, Inc. Ordinary shares 100.00% USA PPM Holdings, Inc. Ordinary shares 100.00% USA PPM Managers GP Limited Ordinary shares 100.00% United Kingdom PPM Ventures (Asia) Limited (in liquidation) Ordinary shares 100.00% Hong Kong PPMC First Nominees Limited Ordinary shares 100.00% United Kingdom PPS Five Limited (in liquidation) Ordinary shares 100.00% United Kingdom PPS Nine Limited (in liquidation) Ordinary shares 100.00% United Kingdom PPS Twelve Limited (in liquidation) Ordinary shares 100.00% United Kingdom Property Partners (Two Rivers) Limited Ordinary shares 50.00% United Kingdom Pru Life Insurance Corporation of U.K. Ordinary shares 100.00% Philippines Prudence Foundation Limited Limited by guarantee 100.00% Hong Kong Prudential (Cambodia) Life Assurance Plc. Ordinary shares 100.00% Cambodia Prudential (Gibraltar) Limited (in liquidation) Ordinary shares 100.00% Gibraltar Prudential (Netherlands One) Limited (in liquidation) Ordinary shares 100.00% United Kingdom Prudential (Netherlands) B.V. (in liquidation) Ordinary shares 100.00% Netherlands Prudential/M&G UKCF GP Limited Ordinary shares 100.00% United Kingdom Prudential Africa Holdings Limited Ordinary shares 100.00% United Kingdom Prudential Africa Services Limited Ordinary shares 100.00% Kenya Prudential Annuities Limited (in liquidation) Ordinary shares 100.00% United Kingdom Prudential Assurance Company Singapore (Pte) Limited Ordinary shares 100.00% Singapore Prudential Assurance Malaysia Berhad Ordinary shares 51.00% Malaysia Prudential Assurance Uganda Limited Ordinary shares 100.00% Uganda Prudential Australia One Limited (in liquidation) Ordinary shares 100.00% United Kingdom Prudential BSN Takaful Berhad Ordinary shares 49.00% Malaysia Prudential Capital (Singapore) Pte. Ltd Ordinary shares 100.00% Singapore Prudential Capital Public Limited Company Ordinary shares 100.00% United Kingdom Prudential Corporate Pensions Trustee Limited Ordinary shares 100.00% United Kingdom Prudential Corporation Australasia Holdings Pty Limited Ordinary shares 100.00% Australia Prudential Corporation Holdings Limited Ordinary shares 100.00% United Kingdom Prudential Development Management Limited Ordinary shares 100.00% United Kingdom Prudential Distribution Limited Ordinary shares 100.00% United Kingdom Prudential Dublin Investment Ltd Ordinary shares 100.00% Ireland Prudential Dynamic 0-30 Portfolio Ordinary shares 27.61% United Kingdom Prudential Dynamic 10-40 Portfolio Ordinary shares 32.39% United Kingdom Prudential Dynamic 20-55 Portfolio Ordinary shares 36.79% United Kingdom Prudential Dynamic 40-80 Portfolio Ordinary shares 39.69% United Kingdom Prudential Dynamic 60-100 Portfolio Ordinary shares 41.59% United Kingdom Prudential Dynamic Focused 0-30 Portfolio Ordinary shares 66.84% United Kingdom Prudential Dynamic Focused 10-40 Portfolio Ordinary shares 65.29% United Kingdom Prudential Dynamic Focused 20-55 Portfolio Ordinary shares 48.25% United Kingdom Prudential Dynamic Focused 40-80 Portfolio Ordinary shares 86.96% United Kingdom Prudential Dynamic Focused 60-100 Portfolio Ordinary shares 94.18% United Kingdom Prudential Equity Release Mortgages Limited Ordinary shares 100.00% United Kingdom Prudential Europe Assurance Holdings Limited (in liquidation) Ordinary shares 100.00% United Kingdom Prudential Financial Planning Limited Ordinary shares 100.00% United Kingdom Prudential Five Limited Ordinary shares 100.00% United Kingdom Prudential General Insurance Hong Kong Limited Ordinary shares 100.00% Hong Kong Prudential GP Limited Ordinary shares 100.00% United Kingdom Prudential Greenfield GP LLP Limited partnership interest 100.00% United Kingdom Prudential Greenfield GP1 Limited Ordinary shares 100.00% United Kingdom Prudential Greenfield GP2 Limited Ordinary shares 100.00% United Kingdom Prudential Greenfield LP Limited partnership interest 100.00% United Kingdom
Prudential Greenfield SLP GP LLP Limited partnership interest 100.00% United Kingdom Prudential Group Pensions Limited Ordinary shares 100.00% United Kingdom Prudential Group Secretarial Services Limited Ordinary shares 100.00% United Kingdom Prudential Holborn Life Limited Ordinary shares 100.00% United Kingdom Prudential Holdings Limited Ordinary shares 100.00% United Kingdom Prudential Hong Kong Limited Ordinary shares 100.00% Hong Kong Prudential International Assurance plc Ordinary shares 100.00% Ireland Prudential International Management Services Limited Ordinary shares 100.00% Ireland Prudential International Staff Pensions Limited Ordinary shares 100.00% United Kingdom Prudential Investments (Luxembourg) 2 S.à r.l. Ordinary shares 100.00% Luxembourg Prudential IP Services Limited Ordinary shares 100.00% United Kingdom Prudential Lalondes Limited (in liquidation) Ordinary shares 100.00% United Kingdom Prudential Life Assurance (Lao) Company Limited Ordinary shares 100.00% Laos Prudential Life Assurance (Thailand) Public Company Limited Ordinary shares 99.93% Thailand Prudential Life Assurance Kenya Limited Ordinary shares 100.00% Kenya Prudential Life Insurance Ghana Limited Ordinary shares 100.00% Ghana Prudential Lifetime Mortgages Limited Ordinary shares 100.00% United Kingdom Prudential M&G UK Companies Financing Fund LP Limited partnership interest 34.42% United Kingdom Prudential Mauritius Holdings Limited Ordinary shares 100.00% Mauritius Prudential Pensions Limited Ordinary shares 100.00% United Kingdom Prudential Polska sp.z.oo Ordinary shares 100.00% Poland Prudential Portfolio Management Group Limited Ordinary shares 100.00% United Kingdom Prudential Portfolio Managers (South Africa) (Pty) Limited Ordinary shares 49.99% South Africa Prudential Process Management Services India Private Limited Ordinary shares 100.00% India Prudential Properties Trusty Pty Limited Unclassified shares 100.00% Australia Prudential Property Holding Limited Ordinary shares 100.00% United Kingdom Prudential Property Investment Managers Limited Ordinary shares 100.00% United Kingdom Prudential Property Investments Limited Ordinary shares 100.00% United Kingdom Prudential Property Services (Bristol) Limited (in liquidation) Ordinary shares 100.00% United Kingdom Prudential Real Estate Investments 1 Limited Ordinary shares 100.00% United Kingdom Prudential Real Estate Investments 2 Limited Ordinary shares 100.00% United Kingdom Prudential Real Estate Investments 3 Limited Ordinary shares 100.00% United Kingdom Prudential Retirement Income Limited Ordinary shares 100.00% United Kingdom Prudential Services Asia Sdn. Bhd. Ordinary shares 100.00% Malaysia
Prudential Services Limited Ordinary shares 100.00% United Kingdom Prudential Services Singapore Pte. Ltd. Ordinary shares 100.00% Singapore Prudential Singapore Holdings Pte. Limited Ordinary shares 100.00% Singapore Prudential Staff Pensions Limited Ordinary shares 100.00% United Kingdom Prudential Trustee Company Limited Ordinary shares 100.00% United Kingdom Prudential UK Services Limited Ordinary shares 100.00% United Kingdom Prudential Unit Trusts Limited Ordinary shares 100.00% United Kingdom Prudential Vietnam Assurance Private Limited Ownership interest 100.00% Vietnam Prudential Vietnam Finance Company Limited Ownership interest 100.00% Vietnam Prutec Limited Ordinary shares 100.00% United Kingdom PT. Prudential Life Assurance Ordinary shares 94.62% Indonesia PT. Eastspring Investments Indonesia Ordinary shares 99.95% Indonesia PVFC Financial Limited Ordinary shares 100.00% Hong Kong PVM Partnerships Limited Ordinary shares 100.00% United Kingdom REALIC of Jacksonville Plans, Inc. Ordinary shares 100.00% USA Reeds Rains Prudential Limited (in liquidation) Ordinary shares 100.00% United Kingdom Reksa Dana Eastspring IDR Fixed Income Fund (NDEIFF) Ordinary shares 97.49% Indonesia Rhodium Investment Fund Ordinary shares 100.00% Singapore Rift GP 1 Limited Ordinary shares 100.00% United Kingdom Rift GP 2 Limited Ordinary shares 100.00% United Kingdom ROP, Inc Ordinary shares 100.00% USA SBP Management Limited Ordinary shares 27.70% United Kingdom ScotAm Pension Trustees Limited Ordinary shares 100.00% United Kingdom
D6: Investments in subsidiary undertakings, joint ventures and associates continued c Related undertakings continued
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 281
St Edward Homes Limited Ordinary shares 100.00% United Kingdom Stableview Limited Ordinary shares 100.00% United Kingdom Staple Limited Ordinary shares 100.00% Thailand Staple Nominees Limited Ordinary shares 100.00% United Kingdom Thanachart Life Assurance Public Company Limited (in liquidation) Ordinary shares 99.93% Thailand The Car Auction Unit Trust Ordinary shares 50.00% Guernsey The First British Fixed Trust Company Limited Ordinary shares 100.00% United Kingdom The Forum, Solent, Management Company Limited Ordinary shares 100.00% United Kingdom The Green (Solihull) Management Company Ltd Ordinary shares 100.00% United Kingdom The Heights Management Company Limited Ordinary shares 50.00% United Kingdom The Hub (Witton) Management Company Limited Ordinary shares 100.00% United Kingdom The St Edward Homes Partnership Limited partnership interest 49.95% United Kingdom The Strand Property Unit Trust Units 50.00% Jersey The Two Rivers Trust Units 50.00% Jersey Two Snowhill Birmingham S.à.r.l. Ordinary shares 100.00% Luxembourg US Strategic Income Bond Fund D USD Acc Ordinary shares 100.00% Luxembourg US Total Return Bond Fund D USD Acc Ordinary shares 100.00% Luxembourg VFL International Life Company SPC, Ltd Ordinary shares 100.00% Cayman Islands Warren Farm Office Village Limited Ordinary shares 100.00% United Kingdom Wessex Gate Limited Ordinary shares 100.00% United Kingdom Westwacker Limited Ordinary shares 100.00% United Kingdom Wynnefield Private Equity Partners I, L.P. Limited partnership interest 99.00% USA Wynnefield Private Equity Partners II, LP Limited partnership interest 99.00% USA
Amounts owed to subsidiary undertakings (2,711) (1,108) Tax payable (20) (55) Deferred tax liability 6 (9) (8) Sundry creditors – (3) Accruals and deferred income (56) (39)
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; — The effects of new but not yet effective IFRSs; and — An additional balance sheet for the beginning of the earliest comparative period following the retrospective change in accounting policy to adopt FRS 101.
As the consolidated financial statements of the Group include the equivalent disclosure, the Company has also applied the exemptions available under FRS 101 in respect of the following disclosures: — IFRS 2 ‘Share-based Payment’ in respect of Group-settled share-based payments; and — Disclosure required by IFRS 7 ‘Financial Instrument Disclosures’ and IFRS 13 ‘Fair Value Measurement’.
Pensions The Company assumes a portion of the pension surplus or deficit of the Group’s main pension scheme, the Prudential Staff Pension Scheme (‘PSPS’). Upon adoption of FRS 101, the Company applies the requirements of IAS 19 ‘Employee Benefit’ (as revised in 2011) for the accounting of its interest in the PSPS surplus or deficit. Further details are disclosed in note 9.
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 equitysettled 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.
Profit after tax Profit for the financial year of the Company (including dividends from subsidiaries) in accordance with FRS 101 and IFRS 920 1,463 Share in the IFRS result of the Group, net of distributions to the Company * 1,659 753
The profit for the financial year of the Company in accordance with IFRS includes dividends received in the year from subsidiary undertakings of £985 million and £1,774 million for the years ended 31 December 2015 and 2014, respectively.
Other movements comprise £7 million in respect of share-based payments, reflecting the value of payments settled by the Company for employees of its subsidiary undertakings, less £34 million relating to cash received from subsidiaries in respect of share awards.
Subsidiary undertakings of the Company at 31 December 2015 are listed in note D6 of the Group financial statements.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 287 6 Deferred tax assets and liabilities
Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying temporary differences can be deducted.
Floating Rate Notes note (iv) – – 200 200 200 200 Medium Term Notes 2015 note (v) – – – 300 – 300 Medium Term Notes 2018 note (vi) – – 598 – 598 –
to by a Group subsidiary and accordingly have been eliminated on consolidation in the Group financial statements. These Notes were originally issued in October 2008 and have been continually reissued upon their maturity.
(v) In November 2015, the Company repaid £300 million Medium Term Notes at maturity. (vi) In January 2015 and in November 2015, the Company issued £300 million Medium Term Notes which will mature in January 2018 and November 2018
Derivative financial instruments are held to manage certain macroeconomic exposures. The change in fair value of the derivative financial instruments of the Company was a loss before tax of £7 million (2014: loss before tax of £115 million).
A description of the regulatory framework in which the Scheme operates, the governance of the Scheme, and the risks to which the Scheme exposes the Company is provided in note C9. The most recent full valuation has been updated to 31 December 2015 applying the principles prescribed by IAS 19. The actuarial assumptions used in determining the IAS 19 benefit obligations and the net periodic costs and sensitivity of IAS 19 benefit obligation to changes in the actuarial assumptions are also provided in note C9.
Underlying surplus in the Scheme 969 840 Effect of the application of IFRIC 14 for de-recognition of surplus (800) (710)
Actuarial gains (losses) note (ii) (248) 312 64 (64) – Contributions paid by the employer note (iii) 11 – 11 11 Contributions paid by the employee 1 (1) – – Benefits paid (270) 270 – –
Actuarial gains (losses) note (ii) 927 (830) 97 (82) 15 Contributions paid by the employer note (iii) 11 – 11 11 Contributions paid by the employee 1 (1) – – Benefits paid (240) 240 – –
Notes (i) The weighted average duration of the benefit obligations of the Scheme is 17 years (2014: 17 years). The following table provides an expected maturity analysis
b Information on transactions of the directors with the Group is given in note D4 of the Group financial statements. c The Company employs no staff. d Fees payable to the Company’s auditor for the audit of the Company’s annual accounts were £0.1 million (2014: £0.1 million) and for other services were £0.2 million (2014: £0.1 million). e In certain instances, the Company has guaranteed that its subsidiaries will meet their obligations when they fall due for payment.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 291 14 Explanation of transition to FRS 101
As stated in note 2, these are the Company’s first financial statements prepared in accordance with FRS 101. The accounting policies set out in note 3 have been applied in preparing the financial statements for the year ended 31 December 2015, the comparative information presented in these financial statements for the year ended 31 December 2014 and in the preparation of an opening FRS 101 statement of financial position at 1 January 2014.
Profit on ordinary activities before tax 1,385 3 1,388 Tax credit on profit on ordinary activities 75 – 75
Notes: (1) The change in the presentation of the pension asset on the balance sheet from net to gross of related deferred tax liability at 31 December 2014 was £8 million. (2) The replacement of expected return on scheme assets under FRS 17 with an amount based on the liability discount rate under IAS 19 in the determination
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 IFRS 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 are responsible for keeping adequate accounting records that are sufficient to show and explain the parent company’s transactions and disclose, with reasonable accuracy at any time, the financial position of the parent company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
The directors of Prudential plc, whose names and positions are set out on pages 71 to 75 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 Company 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
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 293
Opinions and conclusions arising from our audit 1. Our opinion on the financial statements is unmodified We have audited the financial statements of Prudential plc for the year ended 31 December 2015 set out on pages 133 to 291. In our opinion: — The financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2015 and of the Group’s profit for the year then ended; — The Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union; — The parent company financial statements have been properly prepared in accordance with UK Accounting Standards including FRS 101 Reduced Disclosure Framework; and
2. Our assessment of risks of material misstatement In arriving at our audit opinion above on the financial statements, the risks of material misstatement that had the greatest effect on our audit, which are unchanged from 2014 including the level of risk associated with them, were as follows: Valuation of investments (2015: £351,979 million, 2014: £337,454 million) Refer to page 89 (Audit Committee report), page 147 (accounting policy) and pages 196 to 218 (financial disclosures)
Policyholder liabilities (2015: £322,518 million, 2014: £309,539 million) Refer to page 89 (Audit Committee report), page 144 (accounting policy) and pages 219 to 235 (financial disclosures)
The risk – The Group has significant insurance liabilities representing 86 per cent of the Group’s total liabilities. This is an area that involves significant judgement over uncertain future outcomes, mainly the ultimate total settlement value of long-term policyholder liabilities. Economic assumptions, such as investment return and associated discount rates, and operating assumptions such as mortality and persistency (including consideration of policyholder behaviour) are the key inputs used to estimate these long-term liabilities.
The valuation of the insurance liabilities in relation to the UK annuity business requires the exercise of significant judgement over the setting of mortality and credit risk assumptions.
— Consideration of the appropriateness of the mortality assumptions used in the valuation of the UK annuity liabilities by reference to company and industry data on historical mortality experience and expectations of future mortality improvements, including evaluation of the choice of the Continuous Mortality Investigation (‘CMI’) model and the parameters used in relation to this. Our work on the credit risk assumptions primarily considered the appropriateness of the methodology and assumptions by reference to industry practice and our expectation derived from market experience. We utilised the results of KPMG benchmarking of assumptions and actuarial market practice to inform our challenge of management’s assumptions in both areas.
The risk – DAC represents 1.8 per cent of the total assets and involves judgement in the identification of, and the extent to which, certain acquisition costs can be deferred, and assessment of recoverability of the asset. The DAC associated with the US business, which represents 88 per cent of total DAC, involves the greatest judgement in terms of measurement and recoverability. The amortisation and recoverability assessment of the US DAC asset is related to the achieved and projected future profit profile. This involves making assumptions about future investment returns and the consequential impact on fee income.
— Audits of account balances that correspond to the risks of material misstatement identified above in relation to Prudential Capital and the insurance operations in China, Taiwan and Vietnam. The account balances audited are investments, policyholder liabilities and deferred acquisition costs.
Audit for group reporting (2014: 92%) Audit of account balances (2014: 2%) Analysis at group level (2014: 6%)
Audit for group reporting (2014: 91%) Audit of account balances (2014: 2%) Analysis at group level (2014: 7%)
Audit for group reporting (2014: 89%) Audit of account balances (2014: 1%) Analysis at group level (2014: 10%)
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 back. The Group audit team approved the component materialities, which were set as £110 million for key reporting components in Asia and £140 million for all other key reporting components listed above (2014: £110 million–£140 million), having regard to the size and risk profile of the Group.