(i) Underlying free surplus generated – insurance and asset management operations The 2015 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases. The 2015 CER comparative results are translated at 2016 average exchange rates.
US operations Underlying free surplus generated from in-force life business 1,866 1,426 1,608 31% 16% Investment in new business note (iii)(a) (298) (267) (301) (12)% 1%
Representing: Long-term business: Expected in-force cash flows (including expected return on
Underlying free surplus generated from in-force life business 3,983 3,255 3,550 22% 12% Investment in new business note (iii)(a) (903) (718) (792) (26)% (14)%
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Underlying free surplus generated from insurance and asset management operations note (i) 3,588 3,043 3,276 18% 10%
Group total underlying free surplus generated, including other operations 2,922 2,455 2,688 19% 9%
Net cash flows to parent company note (d) (1,236) (482) (1,718) 1,718 – External dividends – (1,267) (1,267) Exchange rate movements, timing differences and
Net movement in free surplus 1,182 100 1,282 760 2,042 Balance at 1 January 2016: Balance at beginning of year 5,642 1,124 6,766 1,224 7,990
Representing: Asia operations 2,142 – 2,142 US operations 2,418 – 2,418 UK operations 2,015 – 2,015 Other operations – 1,639 1,639
Balance at 1 January 2016:* Asia operations 1,814 – 1,814 US operations 1,733 – 1,733 UK operations 1,746 – 1,746 Other operations – 879 879 * Opening adjustments represent the impact of implementation of Solvency II at 1 January 2016 (see note 2 for details), together with the effect of a reclassification between long-term business and other operations, as discussed in note 9(v). Balance at 1 January 2016 has been presented after the opening adjustments.
Net cash flows to parent company note (d) (1,271) (354) (1,625) 1,625 – External dividends – – – (974) (974) Exchange rate movements, timing differences and
Net movement in free surplus 1,449 258 1,707 (215) 1,492 Balance at beginning of year 4,193 866 5,059 1,439 6,498
Notes (a) Free surplus invested in new business represents amounts set aside for required capital and acquisition costs. (b) Free surplus for asset management operations and the UK general insurance commission is taken to be IFRS basis post-tax earnings and shareholders’ equity, net of goodwill. Free surplus for other operations is taken to be EEV basis post-tax earnings and shareholders’ equity net of goodwill, with subordinated debt recorded as free surplus to the extent that it is classified as available capital under Solvency II.
(c) Non-operating items are principally short-term fluctuations in investment returns and the effect of changes in economic assumptions for long-term business operations. (d) Net cash flows to parent company for long-term business operations reflect the flows as included in the holding company cash flow at transaction rates. (e) Exchange rate movements, timing differences and other items represent: 2016 £m
Mark to market value movements on Jackson assets backing surplus and required capital (76) – (76) – (76)
(f) Other items include the movements in subordinated debt for Other operations, together with the effect of intra-group loans and other non-cash items. The 2015 results also included the effect of a classification change of £702 million from Other operations to UK insurance operations in order to align with Solvency II segmental reporting, with no overall effect on the Group’s EEV.
The discounted value of in-force business and required capital can be reconciled to the 2016 and 2015 totals for the emergence of free surplus as follows: 2016 £m 2015*£m
Expected period of conversion of future post-tax distributable earnings and required capital flows to free surplus 2016 total as shown above 1-5 years 6-10 years 11-15 years 16-20 years 21-40 years 40+ years 2015 £m
Expected period of conversion of future post-tax distributable earnings and required capital flows to free surplus 2015 total as shown above 1-5 years 6-10 years 11-15 years 16-20 years 21-40 years 40+ years * Asia operations exclude the cash flows in respect of the held for sale Korea life business. † In order to show the cash flows for UK insurance operations on a comparable basis, the 2015 comparative results for UK insurance operations reflect the impact of the implementation of Solvency II at 1 January 2016 (see note 2 for details).
Notes on the EEV basis results Continued 13 Sensitivity of results to alternative assumptions
Long-term expected defaults – 5 bps * In order to show the Asia long-term business on a comparable basis, the 2015 comparatives for new business contribution have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details).
Long-term expected defaults – 5 bps * The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year.
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(b) Sensitivity analysis – non-economic assumptions The tables below show the sensitivity of the embedded value as at 31 December 2016 and 31 December 2015 and the new business contribution after the effect of required capital for 2016 and 2015 to: — 10 per cent proportionate decrease in maintenance expenses (a 10 per cent sensitivity on a base assumption of £10 per annum would represent an expense assumption of £9 per annum); — 10 per cent proportionate decrease in lapse rates (a 10 per cent sensitivity on a base assumption of 5 per cent would represent a lapse rate of 4.5 per cent per annum); and
† The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year.
Change representing effect on: * The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year.
Notes on the EEV basis results Continued 14 Methodology and accounting presentation
The value of future new business is excluded from the embedded value. Notwithstanding the basis of presentation of results as explained in note 14(b)(iii), no smoothing of market or account balance values, unrealised gains or investment return is applied in determining the embedded value or profit. Separately, the analysis of profit is delineated between operating profit based on longer-term investment returns and other constituent items, as explained in note 14(b)(i).
(i) Covered business The EEV results for the Group are prepared for ‘covered business’, as defined by the EEV Principles. Covered business represents the Group’s long-term insurance business, including the Group’s investments in joint venture and associate insurance operations, for which the value of new and in-force contracts is attributable to shareholders. The post-tax EEV basis results for the Group’s covered business are then combined with the post-tax IFRS basis results of the Group’s asset management and other operations. Under the EEV Principles, the results for covered business incorporate the projected margins of attaching internal asset management, as described in note 14(a)(vii).
The definition of long-term business operations comprises those contracts falling under the definition for regulatory purposes together with, for US operations, contracts that are in substance the same as guaranteed investment contracts (GICs) but do not fall within the technical definition.
A small amount of UK group pensions business is also not modelled for EEV reporting purposes.
The post-tax contribution from new business represents profits determined by applying operating assumptions as at the end of the year.
However, in determining the movements on the additional shareholders’ interest, the basis for calculating the EEV result for Jackson acknowledges that, for debt securities backing liabilities, the aggregate EEV results reflect the fact that the value of in-force business instead incorporates the discounted value of future spread earnings. This value is not affected generally by short-term market movements on securities that, broadly speaking, are held for the longer term.
(iv) Financial options and guarantees Nature of financial options and guarantees in Prudential’s long-term business Asia operations Subject to local market circumstances and regulatory requirements, the guarantee features described below in respect of UK business broadly apply to similar types of participating contracts principally written in Hong Kong, Singapore and Malaysia. Participating products have both guaranteed and non-guaranteed elements.
UK insurance operations For covered business, the only significant financial options and guarantees in the UK insurance operations arise in the with-profits fund.
With-profits products provide returns to policyholders through bonuses that are smoothed. There are two types of bonus – annual and final. Annual bonuses are declared once a year and, once credited, are guaranteed in accordance with the terms of the particular product. Unlike annual bonuses, final bonuses are guaranteed only until the next bonus declaration. The PAC with-profits fund also held a provision on the Solvency II basis of £62 million at 31 December 2016 (Pillar I Peak 2 basis at 31 December 2015: £47 million) to honour guarantees on a small number of guaranteed annuity option products.
Assumptions specific to the stochastic calculations reflect local market conditions and are based on a combination of actual market data, historic market data and an assessment of long-term economic conditions. Common principles have been adopted across the Group for the stochastic asset models, for example, separate modelling of individual asset classes but with an allowance for correlation between the various asset classes. Details of the key characteristics of each model are given in notes 15(iv), (v) and (vi).
For with-profits business written in a segregated life fund, as is the case in Asia and the UK, the capital available in the fund is sufficient to meet the required capital requirements. Following the implementation of Solvency II which became effective on 1 January 2016, a portion of future shareholder transfers expected from the with-profits fund is recognised within net worth, together with the associated capital requirements.
For shareholder-backed business the following capital requirements apply: — Asia operations: the level of required capital has been set to an amount at least equal to the higher of local statutory requirements and the internal target; — US operations: the level of required capital has been set at 250 per cent of the risk-based capital (RBC) required by the National Association of Insurance Commissioners (NAIC) at the Company Action Level (CAL); and
— UK insurance operations: the capital requirements are set at the Solvency II Solvency Capital Requirement (SCR) for shareholderbacked business as a whole; for 2015, the capital requirements were set to an amount at least equal to the higher of Solvency I Pillar I and Pillar II requirements for shareholder-backed business as a whole.
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For Asia and US operations, the risk-free rates are based on 10-year local government bond yields. For UK insurance operations, following the implementation of Solvency II on 1 January 2016, the EEV risk-free rate is based on the full term structure of interest rates, ie a yield curve, rather than using a flat 15-year gilt yield (as for 2015). This yield curve is used to determine the embedded value at the end of the reporting period.
Product level betas reflect the most recent product mix to produce appropriate betas and risk discount rates for each major product grouping.
These allowances are initially reflected in determining best estimate returns and through the market risk allowance described above. However, for those businesses largely backed by holdings of debt securities these allowances in the projected returns and market risk allowances may not be sufficient and an additional allowance may be appropriate.
The practical application of the allowance for credit risk varies depending upon the type of business as described below: Asia operations For Asia operations, the allowance for credit risk incorporated in the projected rates of return and the market risk allowance are sufficient. Accordingly, no additional allowance for credit risk is required.
Allowance for non-diversifiable non-market risks The majority of non-market and non-credit risks are considered to be diversifiable. Finance theory cannot be used to determine the appropriate component of beta for non-diversifiable non-market risks since there is no observable risk premium associated with it that is akin to the equity risk premium. Recognising this, a pragmatic approach has been applied.
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(ix) Foreign currency translation Foreign currency profits and losses have been translated at average exchange rates for the year. Foreign currency assets and liabilities have been translated at year-end exchange rates. The principal exchange rates are shown in note A1 of the IFRS financial statements.
Non-operating results comprise the recurrent items of: — Short-term fluctuations in investment returns; — The mark to market value movements on core borrowings; and — The effect of changes in economic assumptions.
In addition, non-operating profit also includes the effect of adjustment to the carrying value of the held for sale Korea life business in 2016 and a reclassification of the result attributable to the held for sale Korea life business in both years (see note 17 for details).
For the purpose of determining the long-term returns for debt securities of US operations for fixed annuity and other general account business, a risk margin charge is included which reflects the expected long-term rate of default based on the credit quality of the portfolio. For Jackson, interest-related realised gains and losses are amortised to the operating results over the maturity period of the sold bonds and for equity-related investments, a long-term rate of return is assumed, which reflects the aggregation of end-of-period risk-free rates and equity risk premium. For US variable annuity separate account business, operating profit includes the unwind of discount on the opening value of in-force business adjusted to reflect end-of-period projected rates of return with the excess or deficit of the actual return recognised within non-operating profit, together with the related hedging activity.
(iii) Unwind of discount and other expected returns The unwind of discount and other expected returns is determined by reference to: — The value of in-force business at the beginning of the year (adjusted for the effect of current year economic and operating assumption changes); and
— For with-profits business, the opening value of in-force is adjusted for the effect of short-term investment volatility due to market movements (ie smoothed). In the summary statement of financial position and for total profit reporting, asset values and investment returns are not smoothed. At 31 December 2016, the shareholders’ interest in the smoothed surplus assets used for this purpose only were £77 million lower (31 December 2015: £58 million lower) than the surplus assets carried in the statement of financial position.
(iv) Effect of changes in operating assumptions Operating profit includes the effect of changes to non-economic assumptions on the value of in-force at the end of the year. For presentational purposes the effect of changes is delineated to show the effect on the opening value of in-force as operating assumption changes, with the experience variances subsequently being determined by reference to the end-of-period assumptions (see note 14(b) (v)).
(v) Operating experience variances Operating profit includes the effect of experience variances on non-economic assumptions, such as persistency, mortality and morbidity, expenses and other factors, which are calculated with reference to the end-of-period assumptions.
The risk-free rates of return for Asia operations are defined as 10-year government bond yields at the end of the year.
US 10-year treasury bond yield 2.5 2.3 Pre-tax expected long-term nominal rate of return for US equities 6.5 6.3 Expected long-term rate of inflation 3.0 2.8 Equity risk premium 4.0 4.0 S&P equity return volatilitynote (v) 18.0 18.0 * Including the proportion of variable annuity business invested in the general account and fixed index annuity business, the assumed spread margin grades up linearly by 25 basis points to a long-term assumption over five years.
Overseas equities 6.2 to 9.4 6.3 to 9.4 15-year gilt yield 1.7 2.4 Corporate bonds 3.5 4.1
(iv) Asia operations — The stochastic cost of guarantees is primarily of significance for the Hong Kong, Malaysia, Singapore and Taiwan operations; — The principal asset classes are government and corporate bonds; — The asset return models are similar to the models as described for UK insurance operations below; and — The volatility of equity returns ranges from 18 per cent to 35 per cent, and the volatility of government bond yields ranges from 0.9 per cent to 2.3 per cent for both years.
(vi) UK insurance operations — Interest rates are projected using a stochastic interest rate model calibrated to the current market yields; — Equity returns are assumed to follow a log-normal distribution; — The corporate bond return is calculated based on a risk-free return plus a mean-reverting spread; — Property returns are also modelled on a risk-free return plus a risk premium with a stochastic process reflecting total property returns; and
— The standard deviation of equities and property ranges from 15 per cent to 20 per cent for both years.
Expense assumptions Expense levels, including those of service companies that support the Group’s long-term business operations, are based on internal expense analysis investigations and are appropriately allocated to acquisition of new business and renewal of in-force business. Exceptional expenses are identified and reported separately. For mature business, it is Prudential’s policy not to take credit for future cost reduction programmes until the savings have been delivered. For businesses which are currently sub-scale (China, Malaysia Takaful and Taiwan), expense overruns are reported where these are expected to be short-lived.
Asia operations: Hong Kong 16.5 per cent on 5 per cent of premium income Indonesia 25.0 Malaysia 2015: 25.0; from 2016: 24.0 Singapore 17.0
US operations 35.0 UK operations* 2015: 20.0; from 2017: 19.0; from 2020: 17.0 * The Finance Bill included a reduction in the UK corporate tax rate from 18 per cent to 17 per cent effective from 1 April 2020. The impact of this reduction on the UK in-force business is shown in note 5(iv)(b).
Group total excluding UK bulk annuities† 27,841 26,179 3,536 2,697 6,320 5,315 45,392 39,275
SE Asia operations including Hong Kong 2,186 1,551 2,856 2,148 3,075 2,304 17,224 12,759 China note (ii) 124 308 187 111 199 142 880 739 Taiwan 36 45 146 127 150 131 499 442 India note (iii) 51 34 170 132 175 135 668 488
UK and Europe insurance operations Individual annuities 546 565 – – 55 57 546 565 Bonds 3,834 3,327 – – 384 333 3,835 3,328 Corporate pensions 110 175 121 135 132 152 479 600 Individual pensions 2,532 1,185 35 32 289 150 2,681 1,295 Income drawdown 1,649 1,024 – – 165 102 1,649 1,024 Other products 1,165 679 21 12 135 80 1,323 749
Notes (i) The tables shown above are provided as an indicative volume measure of transactions undertaken in the reporting period that have the potential to generate profits for shareholders. The amounts shown are not, and not intended to be, reflective of premium income recorded in the IFRS income statement. A reconciliation of APE and gross earned premiums on an IFRS basis is provided in Note II(i) within the unaudited financial information.
In November 2016, the Group reached an agreement to sell the life insurance subsidiary in Korea, PCA Life Insurance, to Mirae Asset Life Insurance for KRW 170 billion (£114 million at 31 December 2016 closing exchange rate). Completion of the transaction is subject to regulatory approval.
In order to facilitate comparisons of the Group’s retained businesses, the EEV basis operating profit excludes the contribution from the Korea life business. The 2015 comparative results have been similarly adjusted. For 2016, the post-tax result for the year of £5 million, including short-term fluctuations in investment returns and the effect of changes in economic assumptions, together with the £(415) million adjustment to the carrying value have given rise to an aggregate loss of £(410) million. The 2015 amount of £39 million represents the previously reported profit after tax for this business.
The tables below show the results of the held for sale Korea life business which were included in the Group’s results for half year 2016 and full year 2015.
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Our opinion on the EEV basis supplementary information is unmodified We have audited the EEV basis supplementary information of Prudential plc (the Company) for the year ended 31 December 2016 set out in the EEV basis results and Notes on the EEV basis results pages. The EEV basis supplementary information should be read in conjunction with the Group financial statements.
Rees Aronson for and on behalf of KPMG LLP Chartered Accountants London
II. Other information 375 a Holding company cash flow 376 b Funds under management 377 c Solvency II capital position at 31 December 2016 381 d Reconciliation of expected transfer of value of in-force business (VIF) and required capital to free surplus 386 e Foreign currency source of key metrics 387 f Option schemes 389 g Selected historical financial information of Prudential 391 h Reconciliation between IFRS and EEV shareholders’ funds 391 i Reconciliation of APE new business sales to earned premiums
Long-term business operating profit based on longer-term investment returns 1,503 2,052 799 4,354
Margin on revenues 1,643 – 179 1,822 Expenses: Expected return on shareholder assets 71 26 127 224
Long-term business operating profit based on longer-term investment returns 1,171 1,691 1,167 4,029
Margin on revenues 1,821 – 179 2,000 Expenses: Expected return on shareholder assets 79 26 127 232
Long-term business operating profit based on longer-term investment returns 1,303 1,908 1,167 4,378
Analysis of Asia operating profit drivers: — Spread income increased on a constant exchange rate basis by 17 per cent to £192 million in 2016 (AER: 29 per cent), predominantly reflecting the growth of the Asia non-linked policyholder liabilities.
— Acquisition costs increased on a constant exchange rate basis by 8 per cent to £1,285 million in 2016, (AER: 19 per cent) compared to the 19 per cent increase in APE sales (AER: 33 per cent increase), resulting in a decrease in the acquisition costs ratio. The analysis above uses shareholder acquisition costs as a proportion of total APE sales. If with-profits APE sales were excluded from the denominator the acquisition cost ratio would become 70 per cent, which is broadly in line with the 69 per cent on a constant exchange rate basis in 2015.
— Administration expenses increased on a constant exchange rate basis by 13 per cent to £832 million in 2016 (AER: 24 per cent) as the business continues to expand. On a constant exchange rate basis, the administration expense ratio has increased from 279 basis points in 2015 to 287 basis points in 2016, the result of changes in country and product mix.
— Insurance margin represents operating profits from insurance risks, including variable annuity guarantees and other sundry items. Insurance margin of £888 million in 2016 was broadly in line with last year on a constant exchange rate basis, with higher income from the variable annuity guarantees offset by a decline in the contribution from the closed books of acquired business.
Total operating profit before acquisition costs and DAC adjustments 2,685 2,685 2,412 2,412 2,721 2,721
Other DAC adjustments – amortisation of previously deferred acquisition costs: (Accelerated)/
c) Life and other business includes the profits from the REALIC business and other closed life books. Revenue allocated to this product line includes spread income and premiums and policy charges for life protection, which are included in insurance margin after claim costs. Insurance margin forms the vast majority of revenue.
— The lower 2016 insurance margin mainly reflects the more positive experience variance seen in 2015 compared to 2016, together with the fall in annual mortality profits following the extension of our longevity reinsurance programme in 2015 and 2016.
— The 2016 provision for the cost of undertaking a review of past non-advised annuity sales and potential redress of £175 million is explained in note C11, ‘Provisions’.
Notes to sources of earnings tables (i) The ratio for acquisition costs is calculated as a percentage of APE sales including with-profits sales. Acquisition costs include only those relating to shareholder-backed business. (ii) Margin represents the operating return earned in the year as a proportion of the relevant class of policyholder liabilities excluding unallocated surplus. (iii) The 2015 comparative information has been presented at AER and CER so as to eliminate the impact of exchange translation. CER results are calculated by translating prior year results using the current year foreign exchange rates. All CER profit figures have been translated at current year average rates. For Asia CER average liability calculations, the policyholder liabilities have been translated using current year opening and closing exchange rates. For the US CER average liability calculations, the policyholder liabilities have been translated at the current year month end closing exchange rates. See also Note A1.
(v) The DAC adjustments contain a credit of £28 million in respect of joint ventures and associate in 2016 (2015: AER credit of £3 million). (vi) In order to show the Asia long-term business on a comparable basis, the 2015 comparative results exclude the contribution from the held for sale Korea life business.
I(b) Asia operations – analysis of IFRS operating profit by territory Operating profit based on longer-term investment returns for Asia operations is analysed as follows: 2016 £m AER
The strain reflects the aggregate of the pre-tax regulatory basis strain to net worth after IFRS adjustments for deferral of acquisition costs and deferred income where appropriate. (ii) Other non-recurrent items of £67 million in 2016 (2015: £62 million) represent a number of items, including a gain from entering into a reinsurance contract in the year. (iii) In order to show the Asia long-term business on a comparable basis, the 2015 comparative results exclude the contribution from the held for sale Korea life business.
Operating income before performance-related fees 923 353 118 235 1,629 Performance-related fees 33 7 – – 40
Operating income (net of commission) note (i) 956 360 118 235 1,669
Average funds under management £250.4bn £109.0bn Margin based on operating income* 37bps 32bps Cost/income ratio† 59% 56%
Operating profit based on longer-term investment returns 442 115 19 11 587
I(d) Contribution to UK Life financial metrics from specific management actions undertaken to position the balance sheet more efficiently under the new Solvency II regime During 2016 management actions were taken to improve the solvency of UK insurance operations and to mitigate market risks. These actions included extending the reinsurance of longevity risk to cover a further £5.4 billion of IFRS annuity liabilities. As at 31 December 2016, the total IFRS annuity liabilities subject to longevity reinsurance were £14.4 billion. Management actions also repositioned the fixed income asset portfolio to improve the trade-off between yield and credit risk and to increase the proportion of the annuity business that benefits from the matching adjustment under Solvency II.
During 2015, longevity risk of £6.4 billion on a Pillar 1 basis was reinsured. In addition, a number of other management actions were also taken to reposition the fixed income portfolio and improve matching adjustment efficiency.
Expected in-force and return on net worth 334 359 693 620
Other management actions to improve solvency 137 88 225 75 Provision for the review of past annuity sales – (145) (145) –
Underlying free surplus generated from in-force business 555 352 907 878
Unwind of discount and other expected return 205 240 445 488
Changes in operating assumptions and experience variances 23 32 55 116
Asia net remittances to the Group Asia paid to the Group: Long-term business 546 494 Other operations 81 74
Group invested in Asia: Long-term business (10) (5) Other operations (including funding of regional head office costs) (101) (96)
Operating holding company cash flow before dividend 1,302 1,271 Dividend paid (1,267) (974)
Cash and short-term investments at end of year3 2,626 2,173 *The holding company cash flow differs from the IFRS cash flow statement, which includes all cash flows in the period including those relating to both policyholder and shareholder funds. The holding company cash flow is therefore a more meaningful indication of the Group’s central liquidity.
Business area: Asia operations 69.6 54.0 US operations 173.3 134.6 UK operations 185.0 168.4
Prudential Group funds under management note (i) 427.9 357.0 External funds note (ii) 171.4 151.6
(ii) External funds shown above as at 31 December 2016 of £171.4 billion (2015: £151.6 billion) comprise £182.5 billion (2015: £162.7 billion) of funds managed by M&G and Eastspring Investments as shown in note (b) below less £11.1 billion (2015: £11.1 billion) that are classified within Prudential Group’s funds.
External funds under management 45.7 36.3 136.8 126.4 Internal funds under management 72.2 52.8 128.1 119.7
Estimated Group shareholder Solvency II capital position* 31 Dec 2016 £bn 31 Dec 2015 £bn
* The Group shareholder capital position excludes the contribution to Own Funds and the Solvency Capital Requirement from ring-fenced With-Profit Funds and staff pension schemes in surplus. The 31 December 2016 estimated solvency position includes the impact of recalculated transitionals at the valuation date which has reduced the Group shareholder surplus from £12.9 billion to £12.5 billion.
– No diversification benefits are taken into account between Jackson and the rest of the Group. — Matching adjustment for UK annuities and volatility adjustment for US dollar denominated Hong Kong with-profits business, based on approvals from the Prudential Regulation Authority and calibrations published by the European Insurance and Occupational Pensions Authority; and
— UK transitional measures, which have been recalculated at the valuation date, reducing the estimated Group shareholder surplus from £12.9 billion to £12.5 billion. The formal Quantitative Reporting Templates (Solvency II regulatory templates) will include transitional measures without this recalculation.
— The contribution to Own Funds and the Solvency Capital Requirement from pension funds in surplus.
Analysis of movement in Group capital position A summary of the estimated movement in Group Solvency II surplus from £9.7 billion at year end 2015 to £12.5 billion at year end 2016 is set out in the table below. The movement from the previously reported economic capital basis solvency surplus at 31 December 2014 to the Solvency II surplus at 31 December 2015 is included for comparison.
Analysis of movement in Group shareholder surplus Full year 2016 £bn
Estimated Solvency II surplus at 1 January 2016/economic capital surplus at 1 January 2015 9.7 9.7 Underlying operating experience 2.3 2.0 Management actions 0.4 0.4
Non-operating experience (including market movements) (1.1) (0.6) Other capital movements Subordinated debt issuance 1.2 0.6 Foreign currency translation impacts 1.6 0.2 Dividends paid (1.3) (1.0) Methodology and calibration changes Changes to Own Funds (net of transitionals) and SCR calibration strengthening (0.3) (0.2) Effect of partial derecognition of Asia Solvency II surplus – (1.4) Estimated Solvency II surplus at end of period 12.5 9.7
The estimated movement in Group Solvency II surplus over 2016 is driven by: — Operating experience of £2.7 billion: generated by in-force business and new business written in 2016 and also the impact of one-off management optimisations implemented in 2016; — Non-operating experience of £(1.1) billion: mainly arising from negative market experience during 2016, allowing for the recalculation of UK transitional measures at the valuation date; — Other capital movements: comprising a gain from foreign currency translation effects and the issuance of debt during 2016 offset by a reduction in surplus from payment of dividends; and
— Methodology and calibration changes £(0.3) billion: reflecting model changes during 2016 and true-ups relating to opening balance estimates.
50 basis points reduction in interest rates2,3 (0.6) (9)% (1.1) (14)% 100 basis points increase in interest rates3 1.0 13% 1.1 17% 100 basis points increase in credit spreads4 (1.1) (3)% (1.2) (6)%
The Group is positioned to withstand significant deteriorations in market conditions and we continue to use market hedges to manage some of this exposure across the Group, where we believe the benefit of the protection outweighs the cost. The sensitivity analysis above allows for predetermined management actions and those taken to date, but does not reflect all possible management actions which could be taken in the future.
On the same basis as above, the estimated UK shareholder Solvency II surplus at 31 December 2016 was £4.6 billion, after allowing for recalculation of transitional measures as at 31 December 2016. This relates to shareholder-backed business including future with-profits shareholder transfers, but excludes the shareholders’ share of the estate in line with Solvency II requirements.
Estimated UK with-profits Solvency II capital position 31 Dec 2016 £bn £bn
A reconciliation between the IFRS unallocated surplus and Solvency II Own Funds for UK with-profits business is as follows: Reconciliation of UK with-profits funds £bn £bn
(i) Expected transfer of value of in-force business (VIF) and required capital to free surplus 2016 £m
† Asia operations exclude the cash flows in respect of the held for sale Korea life business.
‡ Other items represent the impact of the time value of options and guarantees on new business, foreign exchange effects and other non-modelled items. Foreign exchange effects arise as EEV new business profit amounts are translated at average exchange rates and the expected free surplus generation uses year end closing rates.
II(d) Reconciliation of expected transfer of value of in-force business (VIF) and required capital to free surplus continued The undiscounted expected free surplus generation from all in-force business at 31 December 2016 shown below can be reconciled to the amount that was expected to be generated as at 31 December 2015 as follows: Group £m £m £m £m £m £m Other £m Total £m 2015 expected free surplus generation for years 2016 to 2055: Effect of Solvency II implementation† 46 55 49 45 43 48 1,350 1,636
Add: Expected free surplus to be generated in year 2056* – – – – – – 394 394
Non-operating and other movements – (2) (2) (7) (9) (18) (503) (465)
£m £m £m £m £m £m Other £m Total £m 2015 expected free surplus generation for years 2016 to 2055
Less: Amounts expected to be realised in the current year (532) – – – – – – (532) Add: Expected free surplus to be generated in year 2056* – – – – – – 36 36
Operating movements – (17) (11) (9) (4) (6) Non-operating and other movements – 100 96 68 53 33 (169) 134 2016 expected free surplus generation for years 2017 to 2056 – 675 669 636 622 606 10,575 13,783 * Excluding 2016 new business. † In order to show the cash flows for UK insurance operations on a comparable basis, the 2015 comparative results for UK insurance operations reflect the impact of the implementation of
Solvency II at 1 January 2016 (see note 2 for details). ‡ The contribution from the Korea life business has been removed from expected free surplus generation following its reclassification as held for sale.
Transfer to free surplus in 2016 1,157 1,223 680 3,060 Expected return on free assets 39 47 13 99 Changes in operating assumptions and
The equivalent discounted amounts of the undiscounted expected transfers from in-force business and required capital into free surplus shown previously are as follows: Expected period of emergence 2016 £m
Expected period of emergence Risk margin release Amortisation of transitional Other* Total UK
Total UK free surplus expected to emerge in the next 40 years (note B(i)) 13,783 * Including other UK business lines and other cash flows from annuity business.
The UK annuity risk margin release and related transitional amortisation, together with associated tax reconcile to the amounts shown in the Group Solvency II balance sheet (note II(c) of the IFRS additional unaudited financial information) as follows: Risk margin release £bn
Risk margin release and transitional for other business operations (pre-tax) 2.9 (0.4)
Notes (1) US$ linked comprising the Hong Kong and Vietnam operations where the currencies are pegged to the US dollar and the Malaysia and Singapore operations where the currencies are managed against a basket of currencies including the US dollar.
(2) Includes long-term, asset management business and other businesses. (3) For operating profit and shareholders’ funds, UK sterling includes amounts in respect of central operations as well as UK insurance operations and M&G. (4) For shareholders’ funds, the US$ grouping includes US$ denominated core structural borrowings. Sterling operating profits include all interest payable as sterling denominated, reflecting interest rate currency swaps in place.
The total number of securities available for issue under the scheme is 3,490,434 which represents 0.135 per cent of the issued share capital at 31 December 2016.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £14.40.
The weighted average fair value of options granted under the plan in the period was £3.02.
The total number of securities available for issue under the scheme is 247,789 which represents 0.010 per cent of the issued share capital at 31 December 2016.
II(g) Selected historical financial information of Prudential The following table sets forth Prudential’s selected consolidated financial data for the periods indicated. Certain data is derived from Prudential’s audited consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and as adopted by the European Union (EU) and European Embedded Value (EEV).
Operating earnings per share (in pence) 131.3p 124.6p 95.7p 90.4p 76.4p
Operating profit based on longer-term investment returnsnote 2 5,497 4,840 4,108 4,224 3,161
Operating earnings per share (in pence) 214.7p 189.6p 161.2p 165.8p 124.4p
Notes 1 This measure is the formal profit (loss) before tax measure under IFRS but is not the result attributable to shareholders. 2 Operating profits are determined on the basis of including longer-term investment returns. EEV and IFRS operating profits are stated after excluding the effect of short-term fluctuations in investment returns against long-term assumptions, gain on dilution of Group’s holdings, the costs arising from the domestication of the Hong Kong business, profit (loss) attaching to the sale of Japan life and profit (loss) attaching to the held for sale Korea life business. Separately on the IFRS basis, operating profit also excludes amortisation of acquisition accounting adjustments. In addition, for EEV basis results, operating profit excludes the effect of changes in economic assumptions, the market value movement on core borrowings and in 2012, the gain arising on the acquisition of REALIC.
II(h) Reconciliation between IFRS and EEV shareholders’ funds The table below shows the reconciliation of EEV shareholders’ funds and IFRS shareholders’ funds at the end of the year: EEV shareholders’ funds 38,968 32,359 Less: Value of in-force business of long-term business note (a) (24,937) (22,431) Deferred acquisition costs assigned zero value for EEV purposes 9,170 7,010
Notes (a) The EEV shareholders’ funds comprises the present value of the shareholders’ interest in the value of in-force business, net worth of long-term business operations and IFRS
shareholders’ funds of asset management and other operations. The value of in-force business reflects the present value of future shareholder cash flows from long-term in-force business which are not captured as shareholders’ interest on an IFRS basis. Net worth represents the net assets for EEV reporting purposes that reflect the regulatory basis position, sometimes with adjustments to achieve consistency with the IFRS treatment of certain items.
Notes (a) APE new business sales only include one-tenth of single premiums, recorded on policies sold in the period. Gross premiums earned include 100 per cent of such premiums. (b) Other adjustments principally include amounts in respect of the following: – Gross premiums earned includes premiums from existing in-force business as well as new business. The most significant amount is recorded in Asia, where a significant portion of regular premium business is written. Asia in-force premiums form the vast majority of the other adjustment amount; – APE includes new policies written in the period which are classified as investment contracts without discretionary participation features under IFRS 4, arising mainly in Jackson for guaranteed investment contracts and in the UK for certain unit-linked savings and similar contracts. These are excluded from gross premiums earned and recorded as deposits; – APE new business sales are annualised while gross premiums earned are recorded only when revenues are due; and – For the purpose of reporting APE new business sales, we include the Group’s share of amounts sold by the Group’s insurance joint ventures. Under IFRS, joint ventures are equity accounted and so no amounts are included within gross premiums earned.
A number of risk factors affect Prudential’s operating results and financial condition and, accordingly, the trading price of its shares. The risk factors mentioned below should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties. The information given is as of the date of this document, and any forward‑looking statements are made subject to the reservations specified below under ‘Forward‑looking statements’.
Prudential’s businesses are inherently subject to market fluctuations and general economic conditions Uncertainty or negative trends in international economic and investment climates could adversely affect Prudential’s business and profitability. Prudential operates against a challenging background of periods of significant volatility in global capital and equity markets and interest rates (which in some jurisdictions have become negative), together with widespread economic uncertainty. For example, government interest rates remain at or near historic lows in the US, the UK and some Asian countries in which Prudential operates. These factors could have a material adverse effect on Prudential’s business and profitability.
— Increased illiquidity also adds to uncertainty over the accessibility of financial resources and may reduce capital resources as valuations decline. For example, this could occur where external capital is unavailable at sustainable cost, increased liquid assets are required to be held as collateral under derivative transactions or redemption restrictions are placed on Prudential’s investments in illiquid funds. In addition, significant redemption requests could also be made on Prudential’s issued funds and while this may not have a direct impact on the Group’s liquidity, it could result in reputational damage to Prudential.
More generally, upheavals in the financial markets may affect general levels of economic activity, employment and customer behaviour. As a result, insurers may experience an elevated incidence of claims, lapses, or surrenders of policies, and some policyholders may choose to defer or stop paying insurance premiums. The demand for insurance products may also be adversely affected. In addition, there may be a higher incidence of counterparty failures. If sustained, this environment is likely to have a negative impact on the insurance sector over time and may consequently have a negative impact on Prudential’s business and its balance sheet and profitability. For example, this could occur if the recoverable value of intangible assets for bancassurance agreements and deferred acquisition costs are reduced. New challenges related to market fluctuations and general economic conditions may continue to emerge.
Jackson hedges the guarantees on its variable annuity book on an economic basis (with consideration of the local regulatory position) and, thus, accepts variability in its accounting results in the short term in order to achieve the appropriate result on these bases. In particular, for Prudential’s Group IFRS reporting, the measurement of the Jackson variable annuity guarantees is typically less sensitive to market movements than for the corresponding hedging derivatives, which are held at market value. However, depending on the level of hedging conducted regarding a particular risk type, certain market movements can drive volatility in the economic or local regulatory results that may be less significant under IFRS reporting.
Prudential is subject to the risk of exchange rate fluctuations owing to the geographical diversity of its businesses Due to the geographical diversity of Prudential’s businesses, Prudential is subject to the risk of exchange rate fluctuations. Prudential’s operations in the US and Asia, which represent a significant proportion of operating profit based on longer‑term investment returns and shareholders’ funds, generally write policies and invest in assets denominated in local currencies. Although this practice limits the effect of exchange rate fluctuations on local operating results, it can lead to significant fluctuations in Prudential’s consolidated financial statements upon the translation of results into pounds sterling. This exposure is not currently separately managed. The currency exposure relating to the translation of reported earnings could impact on financial reporting ratios such as dividend cover, which is calculated as operating profit after tax on an IFRS basis, divided by the dividends relating to the reporting year. The impact of gains or losses on currency translations is recorded as a component of shareholders’ funds within other comprehensive income. Consequently, this could impact on Prudential’s gearing ratios (defined as debt over debt plus shareholders’ funds). The Group’s surplus capital position for regulatory reporting purposes may also be affected by fluctuations in exchange rates with possible consequences for the degree of flexibility the Prudential has in managing its business.
Risk factors Continued capital controls), regulation or regulatory interpretation applying to companies in the financial services and insurance industries in any of the markets in which Prudential operates, and decisions taken by regulators in connection with their supervision of members of the Group, which in some circumstances may be applied retrospectively, may adversely affect Prudential’s product range, distribution channels, competitiveness, profitability, capital requirements and, consequently, reported results and financing requirements. Also, regulators in jurisdictions in which Prudential operates may impose requirements affecting the allocation of capital and liquidity between different business units in the Group, whether on a geographic, legal entity, product line or other basis. Regulators may change the level of capital required to be held by individual businesses or could introduce possible changes in the regulatory framework for pension arrangements and policies, the regulation of selling practices and solvency requirements. In addition, there could be changes to the maximum level of non‑ domestic ownership by foreign companies in certain jurisdictions. Furthermore, as a result of interventions by governments in response to recent financial and global economic conditions, it is widely expected that there will continue to be a substantial increase in government regulation and supervision of the financial services industry, including the possibility of higher capital requirements, restrictions on certain types of transactions and enhanced supervisory powers.
The European Union’s Solvency II Directive came into effect on 1 January 2016. This measure of regulatory capital is more volatile than under the previous Solvency I regime and regulatory policy may evolve under the new regime. The European Commission has in late 2016 begun a review of some aspects of the Solvency II legislation, which is expected to continue until 2021 and covers, among other things, a review of the Long Term Guarantee measures. Prudential applied for, and has been granted approval by the UK Prudential Regulation Authority to use the following measures when calculating its Solvency II capital requirements: the use of an internal model, the ‘matching adjustment’ for UK annuities, the ‘volatility adjustment’ for selected US Dollar‑ denominated business, and UK transitional measures. Prudential also has permission to use ‘deduction and aggregation’ as the method by which the contribution of the
Group’s US insurance entities to the Group’s solvency is calculated, which in effect recognises surplus in US insurance entities in excess of 250 per cent of local US Risk Based Capital requirements. There is a risk that in the future changes are required to be made to the approved internal model and these related applications which could have a material impact on the Group Solvency II capital position. Where internal model changes are subject to regulatory approval, there is a risk that the approval is delayed or not given. In such circumstances, changes in our risk profile would not be able to be appropriately reflected in our internal model, which could have a material impact on the Group’s Solvency II capital position. The UK’s vote to leave the EU could result in significant changes to the regulatory regime under which the Group operates.
Currently there are also a number of other global regulatory developments which could impact the way in which Prudential is supervised in its many jurisdictions. These include the Dodd‑Frank Wall Street Reform and Consumer Protection Act (Dodd‑Frank Act) in the US, the work of the Financial Stability Board (FSB) on Global Systemically Important Insurers (G‑SIIs) and the Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame) being developed by the International Association of Insurance Supervisors (IAIS). In addition, regulators in a number of jurisdictions in which the Group operates are further developing local capital regimes; this includes potential future developments in Solvency II in the UK (as referred to above), National Association of Insurance Commissioners’ reforms in the US, and amendments to certain local statutory regimes in some territories in Asia. These changes and their potential impact on the Group remain uncertain.
www.prudential.co.uk� Annual�Report�2016 Prudential plc 395 07 A dditional inform ation of a failure of a market participant. As a major participant in the majority of its chosen markets, circumstances could arise where Prudential, along with other companies, may be required to make such contributions.
Regulators’ interest may also include the approach that product providers use to select third‑party distributors and to monitor the appropriateness of sales made by them. In some cases, product providers can be held responsible for the deficiencies of third‑party distributors.
Litigation, disputes and regulatory investigations may adversely affect Prudential’s profitability and financial condition Prudential is, and may be in the future, subject to legal actions, disputes and regulatory investigations in various contexts, including in the ordinary course of its insurance, investment management and other business operations. These legal actions, disputes and investigations may relate to aspects of Prudential’s businesses and operations that are specific to Prudential, or that are common to companies that operate in Prudential’s markets. Legal actions and disputes may arise under contracts, regulations (including tax) or from a course of conduct taken by Prudential, and may be class actions. Although Prudential believes that it has adequately provided in all material aspects for the costs of litigation and regulatory matters, no assurance can be provided that such provisions are sufficient. Given the large or indeterminate amounts of damages sometimes sought, other sanctions that might be applicable and the inherent unpredictability of litigation and disputes, it is possible that an adverse outcome could, from time to time, have an adverse effect on Prudential’s reputation, results of operations or cash flows.
Prudential’s businesses are conducted in highly competitive environments with developing demographic trends and continued profitability depends upon management’s ability to respond to these pressures and trends The markets for financial services in the UK, US and Asia are highly competitive, with several factors affecting Prudential’s ability to sell its products and continued profitability, including price and yields offered, financial strength and ratings, range of product lines and product quality, brand strength and name recognition, investment management performance, historical bonus levels, developing demographic trends and customer appetite for certain savings products. In some of its markets, Prudential faces competitors that are larger, have greater financial resources or a greater market share, offer a broader range of products or have higher bonus rates. Further, heightened competition for talented and skilled employees and agents with local experience, particularly in Asia, may limit Prudential’s potential to grow its business as quickly as planned.
Jackson’s competitors in the US include major stock and mutual insurance
Although Prudential’s IT, compliance and other operational systems, models and processes incorporate controls designed to manage and mitigate the operational and model risks associated with its activities, there can be no assurance that such controls will always be effective. Due to human error among other reasons, operational and model risk incidents do happen periodically and no system or process can entirely prevent them although there have not been any material events to date. Prudential’s legacy and other IT systems and processes, as with operational systems and processes generally, may be susceptible to failure or breaches.
Prudential needs to make assumptions about a number of factors in determining the pricing of its products, for setting reserves, and for reporting its capital levels and the results of its long‑term business operations. For example, the assumption that Prudential makes about future expected levels of mortality is particularly relevant for its UK annuity business, where payments are guaranteed for at least as long as the policyholder is alive. Prudential conducts rigorous research into longevity risk, using industry data as well as its own substantial annuitant experience. As part of its pension annuity pricing and reserving policy, Prudential’s UK business assumes that current rates of mortality continuously improve over time at levels based on adjusted data and informed by models from the Continuous Mortality Investigation (CMI) as published by the Institute and Faculty of Actuaries. Assumptions about future expected levels of mortality are also of relevance to the Guaranteed Minimum Withdrawal Benefit (GMWB) of Jackson’s variable annuity business. If mortality improvement rates significantly exceed the improvement assumed, Prudential’s results of operations could be adversely affected.
A further factor is the assumption that Prudential makes about future expected levels of the rates of early termination of products by its customers (known as persistency). This is particularly relevant to its lines of business other than its UK annuity business, especially Jackson’s portfolio of variable annuities. Prudential’s persistency assumptions reflect a combination of recent past experience for each relevant line of business and expert judgement, especially where a lack of relevant and credible experience data exists. Any expected change in future persistency is also reflected in the assumption. If actual levels of future persistency are significantly different than assumed, the Group’s results of operations could be adversely affected. Furthermore, Jackson’s variable annuity products are sensitive to other types of policyholder behaviour, such as the take‑up of its GMWB product features.
Prudential operates in a number of markets through joint ventures and other arrangements with third parties, involving certain risks that Prudential does not face with respect to its consolidated subsidiaries Prudential operates, and in certain markets is required by local regulation to operate, through joint ventures and other similar arrangements. For such Group operations, management control is exercised in conjunction with the other participants. The level of control exercisable by the Group depends on the terms of the contractual agreements, in particular, the allocation of control among, and continued cooperation between, the participants.
Back book of business The insurance policies sold in past periods that are still in force and hence are still recorded on the insurer’s balance sheet.
Closed-book life insurance business A ‘closed book’ is essentially a group of insurance policies that are no longer sold, but are still featured on the books of a life insurer as a premium-paying policy. The insurance company has ‘closed the books’ on new sales of these products which will remain in run-off until the policies expire and all claims are settled.
Discretionary participation features or DPF A contractual right to receive, as a supplement to guaranteed benefits, additional benefits: — That are likely to be a significant portion of the total contractual benefits; — Whose amount or timing is contractually at the discretion of the issuer; and
Dividend cover Dividend cover is calculated as operating profit after tax on an IFRS basis, divided by the current period interim dividend plus the proposed second interim dividend.
European Embedded Value or EEV Financial results that are prepared on a supplementary basis to the Group’s consolidated IFRS results and which are prepared in accordance with a set of principles issued by the Chief Financial Officers Forum of European Insurance Companies in May 2004 and expanded by the Additional Guidance of EEV Disclosures published in October 2005. The principles are designed to capture the value of the new business sold in the period and of the business in force.
Fixed annuities Fixed annuity contracts written in the US which allow for tax-deferred accumulation of funds, are used for asset accumulation in retirement planning and for providing income in retirement and offer flexible pay-out options. The contract holder pays the insurer a premium, which is credited to the contract holders’ account. Periodically,
Internal rate of return (IRR) The IRR is equivalent to the discount rate at which the present EEV value of the post-tax cash flows expected to be earned over the lifetime of the business written in shareholder-backed life funds is equal to the total invested capital to support the writing of the business. The capital included in the calculation of the IRR is equal to the amount required to pay acquisition costs and set up reserves less premiums received, plus encumbered capital. The impact of the time value of options and guarantees is included in the calculation.
Internal vesting Internal vestings are proceeds from a Prudential policy which the policyholder has decided to reinvest in a Prudential annuity product.
Net premiums Life insurance premiums, net of reinsurance ceded to third-party reinsurers.
Open-ended investment company (OEIC) A collective investment fund structured as a limited company in which investors can buy and sell shares.
Unit-linked products or unit-linked contracts See ‘investment-linked products or contracts’ above.
Variable annuity (VA) (US) An annuity whose value is determined by the performance of underlying investment options that frequently includes securities. A variable annuity’s value is not guaranteed and will fluctuate, depending on the value of its underlying investments. The holder of a variable annuity assumes the investment risk and the funds backing a variable annuity are held in the insurance company’s separate account. VAs are similar to unit-linked annuities in the UK.
Annual General Meeting The 2017 Annual General Meeting (AGM) will be held in the Churchill Auditorium at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE on 18 May 2017 at 11.00am.
Company constitution Prudential is governed by the Companies Act 2006, other applicable legislation and regulations, and provisions in its Articles. Any change to the Articles must be approved by special resolution of the shareholders. There were no changes to the constitutional documents during 2016. The Memorandum and Articles are available on the Company’s website.
Issued share capital The issued share capital as at 31 December 2016 consisted of 2,581,061,573 (2015: 2,572,454,958) ordinary shares of 5 pence each, all fully paid up and listed on the London Stock Exchange and the Hong Kong Stock Exchange. As at 31 December 2016, there were 48,534 (2015: 56,276) accounts on the register. Further information can be found in note C10 on page 275.
Restrictions on transfer In accordance with English company law, shares may be transferred by an instrument of transfer or through an electronic system (currently CREST) and any transfer is not restricted except that the Directors may, in certain circumstances, refuse to register transfers of shares but only if such refusal does not prevent dealings in the shares from taking place on an open and proper basis. If the Directors make use of that power, they must send the transferee notice of the refusal within two months.
Certain restrictions may be imposed from time to time by applicable laws and regulations (for example, insider trading laws) and pursuant to the Listing Rules of both the FCA and the Hong Kong Stock Exchange, as well as under the rules of some of the Group’s employee share plans.
Authority to issue shares The Directors require authority from shareholders in relation to the issue of shares. Whenever shares are issued, these must be offered to existing shareholders pro rata to their holdings unless the Directors have been given authority by shareholders to issue shares without offering them first to existing shareholders. Prudential seeks authority from its shareholders on an annual basis to issue shares up to a maximum amount, of which a defined number may be issued without pre-emption. Disapplication of statutory pre-emption procedures is also sought for rights issues. The existing authorities to issue shares and to do so without observing pre-emption rights are due to expire at the end of this year’s AGM. Relevant resolutions to authorise share capital issuances will be put to shareholders at the AGM on 18 May 2017.
Authority to purchase own shares The Directors also require authority from shareholders in relation to the purchase of the Company’s own shares. Prudential seeks authority by special resolution on an annual basis for the buyback of its own shares in accordance with the relevant provisions of the Companies Act 2006 and other related guidance. This authority has not been used since it was last granted at the AGM in 2016. This existing authority is due to expire at the end of this year’s AGM and a special resolution to renew the authority will be put to shareholders at the AGM on 18 May 2017.
Record date 31 March 2017 31 March 2017 31 March 2017
Hong Kong branch register Computershare Hong Kong Investor Services Limited, 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong.
ADRs J.P. Morgan Chase Bank N.A, PO Box 64504, St. Paul, MN 55164-0854, USA.
Dividend mandates Shareholders may have their dividends paid directly to their bank or building society account. If you wish to take advantage of this facility, please call Equiniti and request a Cash Dividend Mandate form. Alternatively, shareholders may download the form from www. prudential.co.uk/prudential-plc/ investors/shareholder_services/forms
Cash dividend alternative The Company operates a Dividend Re-investment Plan (DRIP). Shareholders who have elected for the DRIP will automatically receive shares for all future dividends in respect of which a DRIP alternative is offered. The election may be cancelled at any time by the shareholder. Further details of the DRIP and the timetable are available on the Company’s website at www.prudential.co.uk/ investors/shareholder-centre/agminformation /2017
Share dealing services The Company’s registrars, Equiniti, offer a postal dealing facility for buying and selling Prudential plc ordinary shares; please see the Equiniti address or telephone 0371 384 2248. They also offer a telephone and internet dealing service, Shareview, which provides a simple and convenient way of selling Prudential shares. For telephone sales call 0345 603 7037 between 8.00am and 4.30pm, Monday to Friday, and for internet sales log on to www.shareview.co.uk/dealing
ShareGift Shareholders who have only a small number of shares the value of which makes them uneconomic to sell them may wish to consider donating them to ShareGift (Registered Charity 1052686). The relevant share transfer form may be downloaded from our website www.prudential.co.uk/prudential-plc/ investors/shareholder_services/forms or from Equiniti. Further information about ShareGift may be obtained on +44 (0)20 7930 3737 or from www.ShareGift.org
Prudential public limited company Incorporated and registered in England and Wales