M&G The recoverable amount for the M&G CGU has been determined by calculating its value in use. This has been calculated by aggregating the present value of future cash fl ows expected to be derived from the M&G operating segment (based upon management projections).
The discounted cash fl ow valuation has been based on a three-year plan prepared by M&G, and approved by management, and cash fl ow projections for later years. The value in use is particularly sensitive to a number of key assumptions as follows: i The set of economic, market and business assumptions used to derive the three-year plan. The direct and secondary effects of recent developments, eg changes in global equity markets, are considered by management in arriving at the expectations for the fi nancial projections for the plan; ii The assumed growth rate on forecast cash fl ows beyond the terminal year of the plan. A growth rate of 2.5 per cent (2011: 2.5 per cent) has been used to extrapolate beyond the plan period representing management’s best estimate view of the long-term growth rate of the business after considering the future and past growth rates and external sources of data; iii The risk discount rate. Differing discount rates have been applied in accordance with the nature of the individual component businesses. For retail and institutional business, a risk discount rate of 12 per cent (2011: 12 per cent) has been applied to post-tax cash fl ows. The pre-tax risk discount rate was 15 per cent (2011: 15 per cent). Management have determined the risk discount rate by reference to an average implied discount rate for comparable UK listed asset managers calculated by reference to risk-free rates, equity risk premiums of 5 per cent and an average ‘beta’ factor for relative market risk of comparable UK listed asset managers. A similar approach has been applied for the other component businesses of M&G; and iv That asset management contracts continue on similar terms.
Japanese life company The aggregate goodwill impairment of £120 million at 31 December 2012 and 2011 relates to the goodwill held in relation to the Japanese life operation which was impaired in 2005.
Present value of acquired in-force policies for insurance contracts as classifi ed under IFRS 4 (PVIF) 64 64 70
Total of deferred acquisition costs and other intangible assets 4,267 4,234 3,901 * The 2011 and 2010 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy described in note A5.
Deferred acquisition costs PVIF and other intangibles Total Total TotalUK US
Balance at 1 January As previously reported 111 3,880 744 12 322 5,069 4,667 4,097 Effect of change in accounting policy A5 – (785) (50) – – (835) (766) (651)
Exchange differences – (144) (12) – (6) (162) (2) 129 Change in shadow DAC related to movement in unrealised appreciation of Jackson's securities classifi ed as available-for-sale† – (270) – – – (270) (275) (410)
Variable annuity business 3,330 2,960 2,283 Other business 821 855 980 Cumulative shadow DAC (for unrealised gains/losses booked in other comprehensive income) (952) (720) (434)
Deferred acquisition costs related to insurance and investment contracts attributable to shareholders The movement in deferred acquisition costs relating to insurance and investments contracts attributable to shareholders are as follows: 2012 £m 2011* £m 2010* £m
Dilution of holding in PruHealth – – – – (7) –
Comprising: Notes (i) All of the PVIF balances relate to insurance contracts and is accounted for under UK GAAP as permitted by IFRS 4. Investment contracts have been fully amortised. Amortisation is charged to the ‘acquisition costs and other operating expenditure’ line in the income statement over the period of provision of asset management services as those profi ts emerge.
279Notes on the Group fi nancial statements Prudential plc Annual Report 2012 F
At 1 January 178 166 Additions in the year – 12
All the goodwill relates to the UK insurance operations segment. The venture fund investments consolidated by the Group relates to investments by PAC with-profi ts fund managed by M&G. The goodwill shown in the table above relates to these venture fund investments. Goodwill is tested for impairment of these investments by comparing the investment’s carrying value including goodwill with its recoverable amount. The recoverable amount of the investments is determined by calculating their fair value less costs to sell. The fair value is determined by using a discounted cash fl ow valuation. The valuations are based on cash fl ow projections to 2016 prepared by management after considering the historical experience and future growth rates of the business. The key assumption applied in the calculations is the risk discount rate ranging from 10 per cent to 14 per cent derived by reference to risk-free rates and an equity premium risk. In 2012, no goodwill was deemed to be impaired following the impairment testing carried out.
Deferred acquisition costs related to insurance contracts attributable to the PAC with-profi ts fund The movement in deferred acquisition costs relating to insurance contracts attributable to the PAC with-profi ts fund is as follows: At 1 January 6 13 Amortisation charge – (7)
The above costs relate to non-participating business written by the PAC with-profi ts sub-fund. No deferred acquisition costs are established for the participating business.
Distribution rights attributable to with-profi t funds of the Asia insurance operations Distribution rights relate to facilitation fees paid in relation to the bancassurance partnership arrangements in Asia for the bank distribution of Prudential’s insurance products for a fi xed period of time. The distribution rights amounts are amortised over the term of the distribution contracts.
At 1 January Gross amount 96 108 Accumulated amortisation (13) (11)
Comprising amounts in respect of: UK insurance operations D2 (f) 608 589 US insurance operations D3 (f) 6,076 907 Asia insurance operations D4 (f) 175 151
The deferred tax asset at 31 December 2012 and 2011 arises in the following parts of the Group: UK insurance operations: SAIF 1 1 PAC with-profi ts fund (including PAL) 113 78 Other 69 153
The increase in the deferred tax asset primarily relates to additional short-term timing differences on US insurance reserves following the REALIC acquisition partially offset by the utilisation of tax losses across the Group.
The two tables that follow provide a breakdown of the recognised deferred tax assets set out above for both the short-term timing differences and unused tax losses split by business unit. The table also shows the period of estimated recoverability for each respective business unit. For these and each category of deferred tax asset recognised their recoverability against forecast taxable profi ts is not signifi cantly impacted by any current proposed changes to future accounting standards.
Asia 42 1 to 3 years JNL 1,800 With run-off of in-force book UK long-term business 151 1 to 10 years Other 104 1 to 10 years
Other debtors Amounts due from: Total accrued investment income and other debtors 4,159 3,697
Of the £4,159 million (2011: £3,697 million) of accrued investment income and other debtors, £538 million (2011: £162 million) is expected to be settled after one year or more.
Property, plant and equipment comprise Group occupied properties and tangible assets. A reconciliation of the carrying amount of these items from the beginning of the year to the end of the year is as follows: Group occupied property
Additions 4 135 139 5 119 124 Arising on acquisitions of subsidiaries – (1) (1) 69 99 168 Disposals and transfers (2) (12) (14) (7) (8) (15)
Investment properties principally relate to the PAC with-profi ts 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 acquisitions 1,025 393 Resulting from expenditure capitalised 118 45
The total minimum future rentals to be received on non-cancellable sub-leases for the Group’s investment properties held under fi nance leases at 31 December 2012 are £2,439 million (2011: £2,553 million).
Associates accounted for using the equity method A summary of the movements in investments in associates accounted for using the equity method in 2012 and 2011 is set out below: Share of share capital and share premium £m
Balance at 31 December 2010 101 (31) 70 1 71 Capital injection 4 – 4 – 4 Disposals (1) – (1) – (1) Goodwill write off – – – (1) (1) Share of loss for the year after tax – (3) (3) – (3)
There have been no changes recognised in the other comprehensive income of associates that would also be recognised in the other comprehensive income by the Group. The Group’s share of the assets, liabilities, revenues and profi t and loss of associates accounted for using the equity method at 31 December 2012 and 2011 is as follows: Financial position Total assets (excluding goodwill) 162 109 Total liabilities (49) (39)
There are several minor service agreements in place between the associates and the Group. During 2012, the aggregate amount of the transactions was £42 million (2011: £33 million) and the balance due to the Group as at 31 December 2012 was £73.2 million (2011: £74.2 million).
Associates and joint ventures carried at fair value through profi t and loss In addition to the above the Group has associates that are carried at fair value through profi t and loss, as allowed under IAS 28, that comprise investments in open-ended investment companies (OEICs), unit trusts, funds holding collateralised debt obligations, property unit trusts and venture capital investments of the PAC with-profi ts funds where the Group has signifi cant infl uence. These investments are incorporated both in the UK and overseas, and some have year ends which are non-coterminous with that of the Group. In these instances, the investments are recorded at fair value at 31 December 2012 based on valuations or pricing information at that specifi c date. The aggregate fair value of associates carried at fair value through profi t and loss where there are published price quotations is approximately £0.8 billion (2011: £4.8 billion) at 31 December 2012. The aggregate assets of these associates are approximately £2.2 billion (2011: £3.4 billion). Aggregate liabilities, excluding liabilities to unit holders and shareholders for unit trusts and OEICs, are approximately £0.8 billion (2011: £1.1 billion). Fund revenues, with revenue arising in unit trusts and OEICs deemed to constitute the investment return for these vehicles, were approximately £0.1 billion (2011: £0.3 billion) and net profi t in the year, excluding unit trusts and OEICs where all investment returns accrue to unit holders or shareholders respectively, was approximately £0.1 billion (2011: profi t of £0.2 billion).
Investments in joint ventures The Group owns a number of joint ventures. Joint ventures represent activities over which the Group exercises joint control through contractual agreement with one or more parties. The Group’s signifi cant joint ventures, which are accounted for using proportionate consolidation, comprise following interests: Investment % held Principal activity Country
The joint ventures have no signifi cant contingent liabilities or capital commitments to which the Group is exposed nor does the Group have any signifi cant contingent liabilities or capital commitments in relation to its interest in the joint ventures.
Investment properties are classifi ed as held for sale when contracts have been exchanged but the sale has not been completed at the period end. At 31 December 2012 the value of assets held for sale was £98 million (2011: £3 million). Gains on disposal of held for sale assets are recorded in ‘investment return’ within the income statement.
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. Cash and cash equivalents included in the cash fl ow statement comprise the following statement of fi nancial position amounts: Total cash and cash equivalents 6,384 7,257
Issued shares of 5p each fully paid: At 1 January 2011 2,545,594,506 127 1,856 Shares issued under share option schemes 2,444,824 – 17
Transactions by Prudential plc and its subsidiaries in Prudential plc shares The Group buys and sells Prudential plc (‘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. Further information about these transactions is set out below. The cost of own shares of £97 million as at 31 December 2012 (2011: £109 million) is deducted from retained earnings. The Company has established trusts to facilitate the delivery of shares under employee incentive plans and savings-related share option schemes. At 31 December 2012, 8.0 million (2011: 8.1 million) Prudential plc shares with a market value of £69 million (2011: £52 million) were held in such trusts. Of this total, 8.0 million (2011: 8.0 million) shares were held in trusts under employee incentive plans. In 2012, the Company purchased the following number of shares in respect of employee incentive plans.
Cost £m * The maximum number of shares held in 2012 was 8.0 million which was in December 2012.
At 1 January 2011 171,291 10,253 Income and expense included in the income statement 8,748 (1,025) Foreign exchange translation differences 324 (13)
Securities note (ii) 154 154 161 US$300m 6.5% Perpetual Subordinated Capital
Securities note (ii) 185 185 193 US$750m 11.75% Perpetual Subordinated Capital
(iii) The PruCap bank loan was increased from £250 million to £275 million on 20 December 2012. The loan has been made in two tranches: a £160 million loan maturing in June 2014, currently drawn at a cost of 12 month £LIBOR plus 0.6 per cent and a £115 million loan maturing on 20 December 2017 and currently drawn at a cost of 12 month £LIBOR plus 0.79 per cent.
(iv) The Jackson borrowings are unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims of Jackson. (v) Maturity analysis The following table sets out the contractual maturity analysis of the Group’s core structural borrowings: Less than 1 year 115 115 1 to 2 years 160 – 2 to 3 years – 135 3 to 4 years – – 4 to 5 years – – Over 5 years 3,279 3,361
Notes (i) 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.
(v) Maturity analysis The following table sets out the contractual maturity analysis of the Group’s operational borrowings attributable to shareholder-fi nanced operations: Less than 1 year 1,920 3,169 1 to 2 years 6 140 2 to 3 years 309 10 3 to 4 years 9 10 4 to 5 years 1 11 Over 5 years – –
Non-recourse borrowings of consolidated investment funds note(i) 823 747 £100m 8.5% undated subordinated guaranteed bonds of Scottish Amicable Finance plc note (ii) 100 100 Other borrowings (predominantly obligations under fi nance leases) 110 125
(iii) Maturity analysis The following table sets out the contractual maturity analysis of the Group’s borrowings attributable to with-profi ts operations: Less than 1 year 288 297 1 to 2 years 82 75 2 to 3 years 124 30 3 to 4 years 46 110 4 to 5 years 61 31 Over 5 years 432 429
Other provisions The movement in other provisions is shown in the table below: Legal provisions note (i)
Notes (i) Total legal provisions at 31 December 2012 of £20 million related to Jackson. Jackson has been named in civil proceedings, 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. Of the £20 million legal provision as at 31 December 2012, £18 million has been established to cover this potential litigation and is expected to be utilised over the next fi ve years.
(iii) Other provisions comprise staff benefi ts provisions of £286 million, provisions for onerous contracts of £61 million and regulatory and other provisions of £2 million. Staff benefi ts are generally expected to be paid out within the next three years.
The bonus and investment policy for each type of with-profi ts policy is the same irrespective of whether or not the assurance applies and this is expected to continue for the foreseeable future. Hence removal of the assurance for new business has had no impact on policyholder returns.
SAIF with-profi ts policies contain minimum levels of guaranteed benefi t to policyholders. In addition, as mentioned earlier in this note, certain pensions products have guaranteed annuity rates at retirement. Should the assets of SAIF be inadequate to meet the guaranteed benefi t obligations of the policyholders of SAIF, the PAC long-term fund would be liable to cover any such defi ciency in the fi rst instance. The directors believe that the probability of either the PAC long-term fund or the Group’s shareholders’ funds having to contribute to SAIF is remote.
In 2011, Jackson initiated a project to compare its entire policy master fi le to vendors’ databases of known deaths and accrued a £16 million provision for potential claims at 31 December 2011. In 2012, Jackson recognised a charge of £18 million, net of policy reserves released upon death, as a result of the project. At 31 December 2012, based on its current analysis, Jackson has accrued £17 million for estimated remaining claims that have not yet been positively identifi ed.
Guarantee funds in both the UK and the US provide for payments to be made to policyholders on behalf of insolvent life insurance companies. These guarantee funds are fi nanced by payments assessed on solvent insurance companies based on location, volume and types of business. The Group estimated its reserve for future guarantee fund assessments for Jackson, included within other liabilities, to be £31 million at 31 December 2012 (2011: £17 million). Similar assessments for the UK businesses were not signifi cant. The directors believe that the reserve is adequate for all anticipated payments for known insolvencies.
I1: Acquisition of subsidiaries a Acquisition of Reassure America Life Insurance Company (REALIC) On 4 September 2012, the Group through its indirect wholly-owned subsidiary, Jackson National Life Insurance Company (JNLI) completed the acquisition of 100 per cent issued share capital of SRLC America Holding Corp. (SRLC), and its primary operating subsidiary, Reassure America Life Insurance Company (REALIC). The purchase consideration which remains subject to fi nal agreement under the terms of the transaction with Swiss Re, is £370 million (US$587 million). The acquisition increases the scale of the Group’s life business in the US, helping Jackson to diversify earnings by increasing the amount of income from underwriting activities thereby enhancing the quality of earnings in a capital effi cient manner. Immediately prior to the acquisition, SRLC entered into a reinsurance arrangement with Swiss Re, the former ultimate parent company facilitating Swiss Re to retain a portion of the REALIC business. As collateral for this reinsurance arrangement, REALIC holds £2.1 billion of policy loans, bonds and short-term investments, which are offset by a funds withheld liability.
REALIC was a US-based insurance company whose business model was to acquire, through purchase or reinsurance, closed blocks of insurance business, primarily life assurance risks. REALIC did not write new business.
In addition to the purchase consideration, the Group incurred £9 million of acquisition related costs that have been recognised as an expense during the year, in the consolidated income statement.
Identifi able assets Intangible assets attributable to shareholders: Acquired value of in-force business 5
Other non-investment and non-cash assets: Reinsurers' share of insurance contract liabilities 5,444 Deferred tax 390 Current tax recoverable 44 Accrued investment income 58 Other debtors 38
Included within the identifi able assets as shown above are loans and other debtors acquired with fair values of £2,204 million and £38 million, respectively. These values represent the gross contractual amounts all of which are expected to be collected. The majority of the loans of £2,204 million were held to back liabilities for funds withheld under reinsurance arrangements as described above.
The consolidated statement of cash fl ows contains a £224 million net cash outfl ow in respect of this acquisition representing cash consideration of £371 million (based on the preliminary purchase price of £417 million with a deferred consideration of £46 million) less cash and cash equivalents acquired of £147 million.
Operating profi t based on longer-term investment returns 67 Short-term fl uctuations in investment returns 13 Amortisation of acquisition accounting on the purchase of REALICnote (ii) (19) Profi t before tax 61 123
297Notes on the Group fi nancial statements Prudential plc Annual Report 2012 F
th er n o tes c PAC with-profi ts funds acquisitions 2012: The PAC with-profi ts fund, via its venture fund holdings and as part of its investment portfolio, has made an acquisition of a joint venture, see note H8. There were no acquisitions of subsidiaries made during the year.
As these transactions are within the with-profi ts fund, they have no impact on shareholders’ profi t or equity for the year ended 31 December 2011. The impact on the Group’s consolidated revenue, including investment returns, is not material. Had the acquisitions been effected at 1 January 2011, the revenue and profi t of the Group for the year ended 31 December 2011 would not have been materially different.
Net assets acquired: Property, plant and equipment 190 Other non-investment and non-cash assets 16 Cash and cash equivalents 14 Borrowings attributable to with-profi ts funds (114) Derivative liabilities (2) Other non-insurance liabilities (49)
PPM South Africa On 22 February 2012, M&G completed transactions to (i) exchange bonus share rights for equity holdings with the employees of PPM South Africa and (ii) the sale of a 10 per cent holding in the majority of the business to Thesele Group, a minority shareholder, for cash. Following these transactions M&G’s majority holding in the business reduced from 75 per cent to 49.99 per cent. Under IFRS requirements, the divestment is accounted for as the disposal of the 75 per cent holding and an acquisition of a 49.99 per cent holding at fair value resulting in a reclassifi cation of PPM South Africa from a subsidiary to an associate. As a consequence of the IFRS application, the transactions gave rise to a gain on dilution of £42 million. This amount is shown separately and in the Group’s 2012 supplementary analysis of profi t excluded from the Group’s IFRS operating profi t based on longer-term investment returns. The net cash outfl ow arising from this change to the Group’s holdings, as shown in the consolidated statement of cash fl ows, of £23 million, comprised the net effect of cash and cash equivalents no longer consolidated and the cash proceeds received.
I3: Staff and pension plans a Staff and employment costs The average number of staff employed by the Group during the year was: Business operations: Asia operations 18,584 17,001 US operations 4,000 3,785 UK operations 5,035 4,628
The costs of employment were: Business operations: Wages and salaries 1,204 1,101 1,052 Social security costs 85 75 69 Other pension costs: Defi ned benefi t schemes*: Defi ned benefi t schemes – PSPS† 17 22 27 Defi ned benefi t schemes – Other schemes* 21 (34) 31 Defi ned contribution schemes: Defi ned contribution schemes – Domestic 12 12 11 Defi ned contribution schemes – Overseas 35 29 26 Pension actuarial and other (gains) losses charged to income statement* (145) (37) 26 * The derivation of these amounts is shown in note (b)(i)4(i).
Economic surplus (defi cit) (including investment in Prudential insurance policies)note 4(i) 164 (36) 128 (64)
Consolidation adjustment against policyholder liabilities for investment in Prudential insurance policies – (169) (169) (165)
* At 31 December 2012, the PSPS pension asset of £164 million and the other schemes’ pension liabilities of £205 million were included within ‘Other debtors’ and ‘Provisions’ respectively on the consolidated statement of fi nancial position. The comparative liabilities of £229 million as at 31 December 2011 were included within ‘Provisions’.
299Notes on the Group fi nancial statements Prudential plc Annual Report 2012 F
The Group’s businesses operate a number of pension schemes. The specifi c features of these plans vary in accordance with the regulations of the country in which the employees are located, although they are, in general, funded by the Group and based either on a cash balance formula or on years of service and salary earned in the last year or years of employment. The largest defi ned benefi t scheme is the principal UK scheme, namely the Prudential Staff Pension Scheme (PSPS), which PSPS accounts for 86 per cent (2011: 86 per cent) of the underlying scheme liabilities of the Group defi ned benefi t schemes.
The last completed actuarial valuation of PSPS was as at 5 April 2011 by CG Singer, Fellow of the Institute of Actuaries, of Towers Watson Limited. This valuation was fi nalised in the fi rst half of 2012 and demonstrated the scheme to be 111 per cent funded by reference to the Scheme Solvency Target that forms the basis of the scheme’s funding objective. As a result of this valuation, future contributions into the scheme have been reduced to the minimum level of contributions required under the scheme rules effective from July 2012.
Allowance for future improvements to post retirement mortality For males (females) 100% (75%) of Medium Cohort subject to a minimum rate of improvement of 2.00% (1.25%) up to the age of 90, decreasing linearly to zero by age of 120 with a long-term rate of 1.75% pa (1.5% pa) but adjusted as follows: AAAAAAAAAAAAAAAAA period improvements are blended between ages 60 to 80 to the long-term improvement rate over a 15 year period (compared with a 20 year period in the core CMI model) and; AAAAAAAAAAAAAAAAA cohort improvements are assumed to dissipate over a 30 year period, or by age 90 if earlier (compared with a 40 year period, or by age 100 if earlier, in the core CMI model).
The last completed actuarial valuation of the Scottish Amicable Pension Scheme (SAPS) was as at 31 March 2011 by Jonathan Seed, Fellow of the Institute and Faculty of Actuaries, of Xafi nity Consulting. This valuation was fi nalised in the second half of 2012 and demonstrated the scheme to be 85 per cent funded. Based on this valuation, it was agreed with the Trustees that the existing level of defi cit funding of £13.1 million per annum continues to be paid into the scheme over the next six years, to eliminate the actuarial defi cit.
The last completed actuarial valuation of the M&G pension scheme was as at 31 December 2011 by Paul Belok, Fellow of the Institute and Faculty of Actuaries, of AON Hewitt Limited. This valuation was fi nalised in the second half of 2012 and demonstrated the scheme to be 83 per cent funded. Based on this valuation, defi cit funding amounts designed to eliminate the actuarial defi cit over a three year period are being made from January 2013 of £18.6 million per annum for the fi rst two years and £9.3 million in the third year. This compares to the £10.5 million of defi cit funding paid by the Group in 2012.
The underlying IAS 19 surplus for PSPS at 31 December 2012 was £1,174 million. The fi nalisation of the 5 April 2011 triennial valuation was accompanied by an agreement with the Trustees that additional defi cit type funding would no longer be necessary and furthermore, the level of contributions for ongoing service of current employees was reduced to the minimum level required by the scheme rules. As a consequence, a portion of the surplus, being £164 million, is now recognised as recoverable. The £164 million represents the present value of the economic benefi ts available from the reductions to future ongoing contributions to the scheme. Accordingly, a net surplus of £164 million gross of deferred tax was recognised at 31 December 2012. Of this amount, £115 million was allocated to the PAC with-profi ts fund and £49 million was allocated to the shareholders’ fund.
The IAS 19 surplus of the M&G pension scheme on an economic basis at 31 December 2012 was £38 million (31 December 2011: surplus of £10 million) and is wholly attributable to shareholders. The underlying position on an economic basis refl ects the assets (including investments in Prudential insurance policies that are offset against liabilities to policyholders on the Group consolidation) and the liabilities of the schemes. As at 31 December 2012, the M&G pension scheme has invested £169 million in Prudential insurance policies (31 December 2011: £165 million). After excluding these investments that are offset against liabilities to policyholders, the IAS 19 basis position of the M&G pension scheme is a defi cit of £131 million (31 December 2011: defi cit of £155 million).
The actuarial assumptions used in determining benefi t obligations and the net periodic benefi t costs for the years ended 31 December were as follows: Discount rate* 4.4 4.7 Rate of increase in salaries 2.7 2.9 Rate of infl ation†
† The rate of infl ation refl ects the long-term assumption for the UK RPI or CPI depending on the tranche of the schemes. ‡ The rates of 2.5 per cent are those for PSPS. Assumed rates of increase of pensions in payments for infl ation for all other schemes are 2.7 per cent in 2012
The calculations are based on current actuarially calculated mortality estimates with a specifi c allowance made for future improvements in mortality. The specifi c allowance for 2012 and 2011 is in line with a custom calibration of the 2009 mortality model from the Continuous Mortality Investigation Bureau of the Institute and Faculty of Actuaries (CMI). The tables used for PSPS immediate annuities in payment at 31 December 2012 and 2011 were: Male: 108.6 per cent PNMA00 with improvements in line with a custom calibration of the CMI’s 2009 mortality model, with a long-term mortality improvement rate of 1.75 per cent per annum; and
The assumed life expectancies on retirement at age 60, based on the mortality table used was: 2012 years 2011 years
Retiring today 28.0 29.1 27.8 29.0 Retiring in 20 years’ time 30.6 31.2 30.5 31.1
The mean term of the current PSPS liabilities is around 17 years. Using external actuarial advice provided by the scheme actuaries being Towers Watson for the valuation of PSPS, Xafi nity
Separately, the economic fi nancial position also includes the effect of the application of IFRIC 14, ‘IAS 19 – The Limit on a Defi ned Benefi t Asset, Minimum Funding Requirements and their Interaction’. For PSPS, where there are constraints in the trust deed to prevent the company access, the surplus is not recognised and a liability to additional funding is established, where relevant (as previously described).
All schemes Underlying position (without the eff ect of IFRIC 14) Surplus 1,543 (166) (311) 72 1,138 Less: amount attributable to PAC with-profi ts fund (1,083) 105 222 (31) (787)
Shareholders' share: Gross of tax surplus 460 (61) (89) 41 351 Related tax (117) 25 20 (9) (81)
Eff ect of IFRIC 14 Derecognition of surplus and set up of additional funding
With the eff ect of IFRIC 14 (Defi cit) surplus (64) (30) 150 72 128 Less: amount attributable to PAC with-profi ts fund 41 12 (100) (31) (78)
303Notes on the Group fi nancial statements Prudential plc Annual Report 2012 F
Underlying investments and liabilities of the schemes On the ‘economic basis’, after including the underlying assets represented by the investments in Prudential insurance policies as scheme assets, the plan’s net assets at 31 December comprise the following investments and liabilities: PSPS £m
Equities 43 321 364 5 210 273 483 7 Bonds 5,440 418 5,858 81 5,547 407 5,954 83 Properties 290 40 330 5 297 20 317 4 Other assetsnote (i) 627 18 645 9 378 31 409 6
PSPS Other schemes Total Adjust for investments in Prudential insurance policies
Net defi cit, beginning of year (19) 731 (776) (64) (165) (229) Current service cost (11) (11) (11)
Benefi t payments (17) 17 – Contributions 36 36 72 72 Actuarial and other gains and losses 164 12 (26) 150 (5) 145 Transfer out of investment in Prudential
Net surplus (defi cit), end of year 164 797 (833) 128 (169) (41)
Net defi cit, beginning of year (47) 653 (826) (220) (227) (447) Current service cost (13) (13) (13) Negative past service cost (RPI to CPI
infl ation measure change) 66 66 66 Other fi nance income 41 (45) (4) (15) (19) Cash costs and unwind of discount on opening provision for defi cit funding for PSPS (22) (22) (22)
305Notes on the Group fi nancial statements Prudential plc Annual Report 2012 F
The IAS 19 basis pensions defi cit can be summarised as follows: Plan assets (IAS 19 basis before effect of IFRIC 14): Equities 202 5 336 5 610 11 917 18 875 17 Bonds 5,728 84 5,826 85 4,095 72 3,587 69 2,619 52 Properties 330 5 317 4 206 4 278 5 290 6 Other assets 645 6 407 6 748 13 442 8 1,273 25
Fair value of plan assets, end of year* 6,905 100 6,886 100 5,659 100 5,224 100 5,057 100
Present value of benefi t obligation (6,059) (5,620) (5,438) (4,951) (4,493)
Funded status (wholly or partly funded) 846 1,266 221 273 564
Adjustment in respect of investment of PSPS in Prudential policies 123 112 118 101 103
* The IAS 19 basis plan assets at 31 December 2012 of £6,905 million is diff erent from the economic basis plan assets of £7,197 million as show in section 4(i) above due to the exclusion of investment in Prudential insurance policies of £292 million comprising £123 million for PSPS and £169 million for the M&G scheme.
The expected rates of return have been determined by reference to long-term expectations, the carrying value of the assets and equity and other market conditions at the statement of fi nancial position date.
(iii) Credit (charge) to the income statement The components of the credit (charge) for the net periodic pension cost (comprising amounts attributable to the PAC with-profi ts fund and shareholder-backed operations) are as follows: Pension cost Current service cost (32) (35) Past service cost:note (a)
Total (charge) credit without the effect of IFRIC 14 (166) 256 Effect of the application of IFRIC 14 136 (229)
Net periodic pension cost (included within acquisition and other operating expenditure in the income statement) 107 49
Total employer contributions expected to be paid into the Group defi ned benefi t schemes for the year ending 31 December 2012 amounts to £56 million (2011: £94 million).
Impact of sensitivity on scheme liabilities on IAS 19 basis 2012 2011
Rate of infl ation RPI: 2.7% RPI: 2.9% RPI: Decrease by 0.2% Decrease in scheme liabilities by: CPI: 2.0% CPI: 1.9% CPI: Decrease by 0.2% with consequent reduction in salary increases Other schemes 4.3% 4.1%
The sensitivity of the underlying pension scheme liabilities to changes in discount, infl ation and mortality rates as shown above does not directly equate to the impact on the profi t 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 fi nancial position of the PSPS and Scottish Amicable schemes to the PAC with-profi ts fund as described above.
The sensitivity to the changes in the key variables as shown in the table above has no signifi cant impact on the pension costs included in the Group’s operating results. This is due to the pension costs charged in each of the periods presented being derived largely from market conditions at the beginning of the period. After applying IFRIC 14 and to the extent attributable to shareholders, any residual impact from the changes to these variables is refl ected as actuarial gains and losses on defi ned benefi t pension schemes within the supplementary analysis of profi ts.
At 31 December 2012, it is estimated that the assets of the scheme are broadly suffi cient to cover the liabilities of PSPS on a ‘buy-out’ basis including an allowance for expenses. The ‘buyout’ basis refers to a basis that might apply in the circumstance of a transfer to another appropriate fi nancial institution. In making this assessment, it has been assumed that a more conservative investment strategy applies together with a more prudent allowance for future mortality improvements and no allowance for discretionary pension increases.
(ii) Business Unit Performance Plan The Business Unit Performance Plan (BUPP) is an incentive plan created to provide a common framework under which awards would be made to senior employees in the UK, Jackson and Asia, including the chief executive offi cers. Awards under this plan were based on growth in shareholder capital value on the European Embedded Value basis with performance measured over three years. All awards made are settled in shares after vesting. Participants are entitled to receive the value of reinvested dividends over the performance period for those shares that vest. The growth parameters for the awards are relevant to each region, and vesting of the awards between each performance point is on a straight-line sliding-scale basis. Beginning in 2010, newly issued shares will be used in settling the awards that vest and are released. The BUPP awards for the UK business unit are based on the same relative TSR measure applied to GPSP awards. As a result, awards made under the UK BUPP refl ect those TSR conditions applied to GPSP awards.
(iii) Savings-related options The Group maintains four share option schemes satisfi ed by the issue of new shares: UK-based executive directors and eligible employees are eligible to participate in the Prudential HM Revenue & Customs (HMRC) approved UK savings-related share option scheme. Asia-based executive directors and eligible employees can participate in the equivalent International savings-related share option scheme. Dublin-based employees are eligible to participate in the Prudential International Assurance sharesave plan and Hong Kong-based agents can participate in the non-employee savings-related share option scheme.
The options are normally exercisable during the six month period following either the third or fi fth anniversary of the start of the relevant savings contract. No options may be granted under the schemes if the grant would cause the number of shares which have been issued, or which remain issuable pursuant to options granted in the preceding 10 years under the scheme and other share option schemes operated by the Company, or which have been issued under any other share incentive scheme of the Company, to exceed 10 per cent of the Company’s ordinary share capital at the proposed date of grant.
309Notes on the Group fi nancial statements Prudential plc Annual Report 2012 F
(v) Performance-related share awards Jackson operates a performance-related share award which, subject to the prior approval of the Jackson Remuneration Committee, may grant share awards to eligible Jackson employees 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 Depository Receipts which are tradable on the New York Stock Exchange.
(vi) Long-term Incentive Plan The Prudential Corporation Asia Long-Term Incentive Plan (PCA LTIP) is an incentive plan created in 2008 for senior employees and chief executive offi cers. Awards under this plan will vest after three years subject to the employee being in employment at the time of vesting without any performance conditions. Awards are discretionary and on a year-by-year basis determined by Prudential’s full year fi nancial results and the employee’s contribution to the business. All awards will be in Prudential shares except for countries where share awards are not feasible due to securities and/or tax reasons, where awards will be replaced by the cash value of the shares that would otherwise have been transferred.
(viii) Other Share awards In addition, there are other share awards, including the Prudential Corporation Asia Deferred Bonus Plan (PCA DBP), Prudential Capital Deferred Bonus Plan (PruCap DBP) and other arrangements. There are no performance conditions attaching to these deferred bonus plans, and awards vest in full subject to the individual being employed by Prudential at the end of the vesting period. The other arrangements relate to various awards that have been made without performance conditions to individual employees, typically in order to secure their appointment or ensure retention.
b Outstanding options and awards The following table shows movement in options outstanding under the Group’s share-based compensation plans at 31 December 2012 and 2011: Options outstanding under SAYE schemes
Beginning of year: 13.3 3.55 12.8 3.4 Granted 2.4 6.29 2.1 4.66 Exercised (5.7) 2.99 (0.6) 3.98 Forfeited (0.2) 4.29 (0.2) 3.17 Cancelled (0.2) 4.32 (0.4) 3.56 Lapsed (0.2) 4.39 (0.4) 3.94
The weighted average share price of Prudential plc for the year ended 31 December 2012 was £7.69 compared to £6.86 for the year ended 31 December 2011.
The following table provides a summary of the range of exercise prices for Prudential plc options outstanding at 31 December 2012.
Between £2 and £3 2.8 2.0 2.88 0.1 2.88 Between £4 and £5 4.1 2.3 4.61 0.1 4.24 Between £5 and £6 0.1 0.6 5.60 – 5.67 Between £6 and £7 2.4 3.6 6.29 – –
The following table provides a summary of the range of exercise prices for Prudential plc options outstanding at 31 December 2011.
311Notes on the Group fi nancial statements Prudential plc Annual Report 2012 F
Risk-free interest rates are UK gilt rates with projections for three-year and fi ve-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 GPSP, volatility and correlation between Prudential and an index constructed from a simple average of the TSR growth of 10 companies is required. For grants in 2012, an average index volatility and correlation of 32 per cent and 76 per cent respectively, were used. For the GPSP, 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 fi nancial statements related to share-based compensation is as follows: Share-based compensation expense 58 48 Amount accounted for as equity-settled 42 44 Carrying value at 31 December of liabilities arising from share-based payment transactions 24 15 Intrinsic value of above liabilities for which rights had vested at 31 December 16 6
Total key management remuneration can be broken down in the following table: Salaries and short-term benefi ts 13,793,000 12,192,000 Post-employment benefi ts 1,206,000 1,189,000 Share-based payments 11,787,000 9,734,000
In addition, there were fees incurred of £0.1 million (2011: £0.1 million) for the audit of pension schemes. The above audit fees for 2012 and 2011, refl ect the new disclosure requirements of SI2011/2198 – The Companies (Disclosure of Auditor Remuneration and Liability Limitation Agreements) (Amendment) Regulations 2011. The Audit Committee regularly monitors the non-audit services provided to the Group by its auditor and has developed a formal
Executive offi cers 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.
Apart from these transactions with directors, no director had interests in shares, transactions or arrangements that require disclosure, other than those given in the directors’ remuneration report. Key management remuneration is disclosed in note I5.
Details of all Prudential subsidiaries, joint ventures and associates will be annexed to the next Annual Returns of Prudential plc fi led with the UK Registrar of Companies.
I9: Commitments i Operating leases The Group leases various offi ces to conduct its business. Leases in which a signifi cant portion of the risks and rewards of ownership are retained by the lessor are classifi ed 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.
Future minimum lease payments for non-cancellable operating leases fall due during the following periods: Not later than 1 year 74 66 Later than 1 year and not later than 5 years 199 173 Later than 5 years 116 72
The total minimum future sublease rentals to be received on non-cancellable operating leases for land and buildings for the year ended 31 December 2012 were £18 million (2011: £18 million).
Minimum lease rental payments for the year ended 31 December 2012 of £73 million (2011: £74 million) are included in the consolidated income statement.
Structural borrowings of shareholder-fi nanced operations comprise of core debt of the parent company, the PruCap bank loan and Jackson surplus notes. Core debt excludes borrowings to support short-term fi xed income securities programmes, non-recourse borrowings of investment subsidiaries of shareholder-fi nanced operations and other borrowings of shareholder-fi nanced operations. Cash fl ows in respect of these borrowings are included within cash fl ows from operating activities. Structural borrowings of with-profi ts 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-profi ts fund. Cash fl ows in respect of other borrowings of with-profi ts funds, which principally relate to consolidated investment funds, are included within cash fl ows from operating activities.
Derivative assets 8 3 3 Cash at bank and in hand 193 152
Amounts owed to subsidiary undertakings (1,705) (1,049) Tax payable (103) (198) Sundry creditors (19) (19) Accruals and deferred income (46) (46)
Total net assets (excluding pension) 6,498 7,318 Pension asset (net of related deferred tax) 9 38 39
The fi nancial statements of the parent company on pages 315 to 323 were approved by the Board of directors on 12 March 2013 and signed on its behalf.
Notes on the parent company fi nancial statements 1 Nature of operations
Prudential plc (the Company) is a parent holding company. The Company together with its subsidiaries (collectively, the Group) is an international fi nancial services group with its principal operations in Asia, the US and the UK. In Asia, the Group has operations in Hong Kong, Malaysia, Singapore, Indonesia and other Asian countries. In the US, the Group’s principal subsidiary is Jackson National Life Insurance Company. In the UK, the Group operates through its subsidiaries, primarily The Prudential Assurance Company Limited, Prudential Annuities Limited, Prudential Retirement Income Limited and M&G Investment Management Limited. The Company is responsible for the fi nancing of each of its subsidiaries.
The fi nancial statements are prepared in accordance with applicable accounting standards under UK Generally Accepted Accounting Practice (UK GAAP), including Financial Reporting Standards (FRS) and Statements of Standard Accounting Practice (SSAP).
The Company adopted the ‘Amendment to FRS 29 (IFRS 7) – Financial Instruments: Disclosures – Transfers of Financial Assets’ in 2012. The adoption of this amendment did not have an impact on the fi nancial statements of the Company.
Derivatives Derivative fi nancial instruments are held to manage interest rate and currency profi les. Derivative fi nancial instruments are carried at fair value with changes in fair value included in the profi t and loss account.
Under FRS 26, ‘Financial Instruments: Recognition and Measurement’, hedge accounting is permissible only if certain criteria are met regarding the establishment of documentation and continued measurement of hedge effectiveness. For derivative fi nancial instruments designated as fair value hedges, the movements in the fair value are recorded in the profi t and loss account with the accompanying change in fair value of the hedged item attributable to the hedged risk.
Foreign currency translation Foreign currency borrowings that have been used to fi nance or provide a hedge against Group equity investments in overseas subsidiaries are translated at year end exchange rates. The impact of these currency translations is recorded within the profi t and loss account for the year.
Other assets and liabilities denominated in foreign currencies are also converted at year end exchange rates with the related foreign currency exchange gains or losses refl ected in the profi t and loss account for the year.
The Group’s UK subsidiaries each fi le separate tax returns. In accordance with UK tax legislation, where one domestic UK company is a 75 per cent owned subsidiary of another UK company or both are 75 per cent owned subsidiaries of a common parent, the companies are considered to be within the same UK tax group. For companies within the same tax group, trading profi ts and losses arising in the same accounting period may be offset for the purposes of determining current and deferred taxes.
A pension surplus or defi cit is recorded as the difference between the present value of the scheme liabilities and the fair value of the scheme assets. The Company’s share of pension surplus is recognised to the extent that the Company is able to recover a surplus either through reduced contributions in the future or through refunds from the scheme.
Under FRS 20, ‘Share-based payment’, where the Company, as the parent company, has the obligation to settle the options or awards of its equity instruments to employees of its subsidiary undertakings, and such share-based payments are accounted for as equity-settled in the Group fi nancial 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.
Profi t aft er tax (Loss) profi t for the fi nancial year of the Company in accordance with UK GAAP (216) 3,720 IFRS adjustment* 71 (5)
Share in the IFRS result of the Group, net of distributions to the Company† 2,342 (2,300)
At 1 January 10,902 1,200 Transfer of investment in subsidiary undertaking (3,889) – Investment in subsidiary undertaking 4,930 – Other movements (14) – Foreign exchange movement – (36)
P aren t co m p an y 6 Deferred tax asset
Core structural borrowingsnotes (i) and (v) 3,126 3,201 – – 3,126 3,201 Other borrowings: Commercial paper note (ii) – – 1,535 2,706 1,535 2,706 Floating Rate Notes 2013note (iii) – – 200 200 200 200 Medium-Term Notes 2013notes (ii) and (v) – – 250 250 250 250 Medium-Term Notes 2015note (ii) – – 299 – 299 –
Borrowings are repayable as follows: Within 1 year or on demand – – 1,985 2,906 1,985 2,906 Between 1 and 5 years – – 299 250 299 250 After 5 years 3,126 3,201 – – 3,126 3,201
Recorded in the balance sheet as: Subordinated liabilitiesnote (iv) 2,577 2,652 Debenture loans 549 549
Notes (i) Further details on the core structural borrowings of the Company of £3,126 million (2011: £3,201 million) are provided in note H13 ‘Borrowings’ of the
(iv) The interests of the holders of the subordinated liabilities are subordinate to the entitlements of other creditors of the Company. (v) In January 2013, the Company issued core structural borrowings of US$700 million 5.25 per cent Tier 1 perpetual subordinated capital securities.
Notes on the parent company fi nancial statements continued 8 Derivative fi nancial instruments
Cross-currency swap 3 – 3 – Infl ation-linked swap – 190 – 207
Using external actuarial advice provided by the professionally qualifi ed actuaries, Towers Watson, for the valuation of the Scheme, the most recent full valuations have been updated to 31 December 2012 applying the principles prescribed by FRS 17. The long-term expected rates of return have been determined after applying due consideration to the requirements of paragraph 54 of FRS 17, in particular, taking account of the values of the assets, and are set out below: Prospectively
Equities 43 0.7 210 3.3 548 10.3 830 16.8 823 17.1 Bonds 5,440 81.2 5,547 86.2 3,864 72.2 3,406 68.8 2,430 50.6 Properties 290 4.5 297 4.6 199 3.7 272 5.5 283 5.9 Other assets 627 13.6 378 5.9 740 13.8 441 8.9 1,267 26.4
Total value of assets 6,400 100.0 6,432 100.0 5,351 100.0 4,949 100.0 4,803 100.0 Present value of Scheme
Surplus in the Scheme recognised by the Company 49 52 56 52 50
Amounts refl ected in the balance sheet of the Company, net of deferred tax 38 39 41 37 36
Underlying Scheme liabilities and assets The change in the present value of the underlying Scheme liabilities and the change in the fair value of the underlying Scheme assets are as follows: Present value of Scheme liabilities, at 1 January 4,844 4,866 Current service cost 21 22 Past service cost* 106 (216) Interest cost 227 254 Employee contributions 1 1 Actuarial losses 252 131 Benefi t payments (225) (214)
† The contributions include defi cit funding, ongoing service contributions and expenses.
Pension (charge) credit and actuarial (losses) gains of the Scheme and attributable to the Company The pension (charge) credit of the Scheme and the charge recognised in the Company’s profi t and loss account are as follows: Pension (charge) credit: 2012 £m 2011 £m
Finance (expense) income: Interest on Scheme liabilities (227) (254) Expected return on Scheme assets 201 267
Changes in assumptions underlying the present value of Scheme liabilities (233) (426) (370) (374) 200
Total actuarial (losses) gains (6% (2011: 17%) (2010: 2%) (2009: 5%) (2008: 2%) of the present value of Scheme liabilities) (297) 842 (94) (230) 68
The total actual return on Scheme assets was a gain of £156 million (2011: £1,240 million). The experience gains on Scheme liabilities in 2011 of £295 million related mainly to the ‘true-up’ refl ecting improvements in data consequent upon the 2011 triennial valuation of the Scheme. Similarly, the experience gains of £127 million in 2008 were related mainly to the improvements in the data consequent to the 2008 triennial valuation.
P aren t co m p an y 10 Share capital and share premium
11 Profi t of the Company and reconciliation of the movement in shareholders’ funds
The loss after tax of the Company for the year was £216 million (2011: profi t of £3,720 million). After dividends of £655 million (2011: £642 million), actuarial gains net of tax in respect of the pension scheme of £27 million (2011: losses of £12 million) and share-based payment credits of £6 million (2011: £7 million), retained profi t at 31 December 2012 amounted to £4,519 million (2011: £5,357 million). Retained profi t includes £2,734 million relating to gains made by an intermediate holding company following the transfer at fair value of certain of its subsidiaries to other parts of the Group as part of an internal restructuring exercise in 2011. Because the gains relate to intragroup transactions, the amount of £2,734 million is not able to be regarded as part of the distributable reserves of the parent company. Under English company law, Prudential may pay dividends only if suffi cient distributable reserves of the Company are available for the purpose and if the amount of its net assets is greater than the aggregate of its called up share capital and undistributable reserves (such as for example the share premium account) and the payment of the dividend does not reduce the amount of its net assets to less than that aggregate. At 31 December 2012, the UK GAAP retained earnings of the holding company from which distributable reserves may be derived were £4,519 million.
Net (decrease) increase in shareholders' funds (821) 3,090 Shareholders' funds at beginning of year 7,357 4,267
In January 2013, the Company issued US$700 million 5.25 per cent Tier 1 perpetual subordinated capital securities. The proceeds, net of costs, were US$689 million. Also in January 2013, the Company repaid £250 million Medium-Term Notes 2013 on maturity.
AAAAAAAAAAAAAAAA Prepare the fi nancial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent company will continue in business.
AAAAAAAAAAAAAAAAA The directors’ 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.
We have audited the fi nancial statements of Prudential plc for the year ended 31 December 2012 set out on pages 147 to 323. The fi nancial reporting framework that has been applied in the preparation of the Group fi nancial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the EU. The fi nancial reporting framework that has been applied in the preparation of the parent company fi nancial statements is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice).
Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 324, the directors are responsible for the preparation of the fi nancial statements and for being satisfi ed that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the fi nancial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.
AAAAAAAAAAAAAAAAAAA The fi nancial statements have been prepared in accordance with the requirements of the Companies Act 2006; and, as regards the Group fi nancial statements, Article 4 of the IAS Regulation.
Opinion on other matters prescribed by the Companies Act 2006 In our opinion: AAAAAAAAAAAAAAAAAA The part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: AAAAAAAAAAAAAAAAAA Adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
AAAAAAAAAAAAAAAAAA We have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review: AAAAAAAAAAAAAAAAAA The directors’ statement, set out on page 110, in relation to going concern; AAAAAAAAAAAAAAAAAA The part of the Corporate Governance Statement set out in the Governance report relating to the Company’s compliance with the nine provisions of the UK Corporate Governance Code specifi ed for our review; and
AAAAAAAAAAAAAAAAAA Certain elements of the report to shareholders by the Board on directors’ remuneration.
Rees Aronson Senior Statutory Auditor for and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants London
Asia operations New business 2 1,266 1,076 Business in force 3 694 688
US operations New business 2 873 815 Business in force 3 737 616
UK operations New business 2 313 260 Business in force 3 553 593
Other income and expenditure Investment return and other income 13 22 Interest payable on core structural borrowings (280) (286) Corporate expenditure (231) (219) Unwind of expected asset management marginnote (ii) (56) (53)
RPI to CPI infl ation measure change on defi ned benefi t pension schemesnote (iii) – 45 Solvency II implementation costsnote (iv) (50) (56) Restructuring costsnote (iv) (22) (19)
Analysed as profi ts (losses) from: New business 2 2,452 2,151 Business in force 3 1,984 1,897
Long-term business 4,436 4,048 Asset management 485 461 Other results (600) (531)
(ii) The value of future profi ts or losses from asset management and service companies that support the Group’s covered insurance businesses are included in the profi ts for new business and the in-force value of the Group’s long-term business. The results of the Group’s asset management operations include the profi ts from the management of internal and external funds. For EEV basis reporting, Group shareholders’ other income is adjusted to deduct the unwind of the expected margin for the year arising from the management of the assets of the covered business (as defi ned in note 1(a)) by the Group’s asset management businesses. The deduction is on a basis consistent with that used for projecting the results for covered insurance business. Group operating profi t accordingly includes the variance between actual and expected profi t in respect of management of the covered business assets.
(iii) During 2011, the Group altered its infl ation measure basis for future statutory increases to pension payments for certain tranches of its UK defi ned benefi t pension schemes. This refl ected the UK Government’s decision to replace the basis of indexation from RPI with CPI. This resulted in a credit to operating profi t for 2011 on an IFRS basis of £42 million and an additional £3 million recognised on the EEV basis.
(v) The comparative results have been prepared using previously reported average exchange rates for the year.
Operating profi t based on longer-term investment returns 4,321 3,978 Short-term fl uctuations in investment returns 6 538 (907) Mark to market value movements on core borrowings 10 (380) (14) Shareholders’ share of actuarial and other gains and losses on defi ned benefi t pension schemes 7 62 23 Effect of changes in economic assumptions 8 (16) (158) Gain on dilution of Group’s holdings 4 42 – Gain on acquisition of REALIC 5 453 –
Profi t before tax attributable to shareholders (including actual investment returns) 5,020 2,922 Tax attributable to shareholders’ profi t 12 (1,207) (776)
Based on operating profi t including longer-term investment returns, after related tax and non-controlling interests of £3,176 million (2011: £2,930 million) 13 125.0p 115.7p
Dividends relating to reporting year: Dividends declared and paid in reporting year: Current year interim dividend 8.40p 7.95p Final dividend for prior year 17.24p 17.24p
Profi t for the year attributable to equity shareholders 3,813 2,142 Items taken directly to equity: Exchange movements on foreign operations and net investment hedges: Exchange movements arising during the year (467) (90) Related tax (2) (68)
Net increase in shareholders’ equity 11 2,806 1,430 Shareholders’ equity at beginning of year (excluding non-controlling interests) 11 19,637 18,207
Shareholders’ equity at end of year (excluding non-controlling interests) 11 22,443 19,637
Asia operations: Net assets of operations 9,462 207 9,669 8,510 211 8,721 Acquired goodwill 239 61 300 235 61 296
UK insurance operations: M&G: Net assets of operations – 392 392 – 229 229 Acquired goodwill – 1,153 1,153 – 1,153 1,153
Shareholders’ equity at end of year (excluding non-controlling interests) 22,505 (62) 22,443 19,885 (248) 19,637
Based on EEV basis shareholders’ equity of £22,443 million (2011: £19,637 million) 878p 771p Number of issued shares at year end (millions) 2,557 2,548 Return on embedded value* 16% 16%
Policyholder liabilities (net of reinsurers’ share) and unallocated surplus of with-profi ts funds (264,504) (234,643) Less shareholders’ accrued interest in the long-term business 12,084 11,073
Total IFRS basis shareholders’ equity 11 10,359 8,564 Additional EEV basis retained profi t 11 12,084 11,073
Total EEV basis shareholders’ equity (excluding non-controlling interests) 11 22,443 19,637 * Including liabilities in respect of insurance products classifi ed as investment contracts under IFRS 4. † For IFRS reporting purposes, the Group has adopted updated US GAAP requirements for deferred acquisition costs as an improvement to its accounting policy under IFRS 4 for those operations of the Group which measure insurance assets and liabilities substantially by reference to US GAAP principles. Accordingly, the IFRS elements and additional EEV basis shareholders’ interest for the comparative results for 2011 have been adjusted from those previously published for the retrospective application of the change as if the new accounting policy had always applied. This has resulted in a reallocation of £553 million for 2011 from IFRS basis shareholders’ reserves to shareholders’ accrued interest in the long-term business, with no overall eff ect on the EEV basis results.
Notes on the EEV basis results 1 Basis of preparation, methodology and accounting presentation
The directors are responsible for the preparation of the supplementary information in accordance with the EEV Principles. Except for the consequential effects of the change in accounting policy for deferred acquisition costs for IFRS reporting, as described in the footnotes to the summary statement of fi nancial position, the 2011 results have been derived from the EEV basis results supplement to the Company’s statutory accounts for 2011.
The embedded value is the present value of the shareholders’ interest in the earnings distributable from assets allocated to covered business after suffi cient allowance has been made for the aggregate risks in that business. The shareholders’ interest in the Group’s long-term business comprises: AAAAAAAAAAAAAAAAA Present value of future shareholder cash fl ows from in-force covered business (value of in-force business), less deductions for: – the cost of locked-in required capital; – the time value of cost of options and guarantees; AAAAAAAAAAAAAAAAA Locked-in required capital; and AAAAAAAAAAAAAAAAA Shareholders’ net worth in excess of required capital (free surplus).
Expected returns on equity and property asset classes and corporate bonds are derived by adding a risk premium, based on the Group’s long-term view, to the risk-free rate.
The total profi t that emerges over the lifetime of an individual contract as calculated using the embedded value basis is the same as that calculated under the IFRS basis. Since the embedded value basis refl ects discounted future cash fl ows, under this methodology the profi t emergence is advanced, thus more closely aligning the timing of the recognition of profi ts with the efforts and risks of current management actions, particularly with regard to business sold during the year.
With the exception of debt securities held by Jackson, investment gains and losses during the year (to the extent that changes in capital values do not directly match changes in liabilities) are included directly in the profi t for the year and shareholders’ equity as they arise.
The results for any covered business conceptually refl ect the aggregate of the IFRS results and the movements on the additional shareholders’ interest recognised on the EEV basis. Thus the start point for the calculation of the EEV results for Jackson, as for other businesses, refl ects the market value movements recognised on the IFRS basis.
However, in determining the movements on the additional shareholders’ interest, the basis for calculating the Jackson EEV result acknowledges that, for debt securities backing liabilities, the aggregate EEV results refl ect 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.
A charge is deducted from the embedded value for the cost of capital supporting the Group’s long-term business. This capital is referred to as required capital. The cost is the difference between the nominal value of the capital and the discounted value of the projected releases of this capital allowing for investment earnings (net of tax) on the capital.
Nature of fi nancial 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 the PAC Hong Kong branch, Singapore and Malaysia. Participating products have both guaranteed and non-guaranteed elements.
US operations (Jackson) The principal fi nancial options and guarantees in Jackson are associated with the fi xed annuity and variable annuity (VA) lines of business.
Fixed annuities provide that, at Jackson’s discretion, it may reset the interest rate credited to policyholders’ accounts, subject to a guaranteed minimum. The guaranteed minimum return varies from 1.0 per cent to 5.5 per cent for 2012 and 2011, depending on the particular product, jurisdiction where issued, and date of issue. For 2012, 86 per cent (2011: 85 per cent) of the account values on fi xed annuities are for policies with guarantees of 3 per cent or less. The average guarantee rate is 2.8 per cent for 2012 and 2011.
Jackson issues VA contracts where it contractually guarantees to the contract holder either: a) return of no less than total deposits made to the contract adjusted for any partial withdrawals; b) total deposits made to the contract adjusted for any partial withdrawals plus a minimum return; or c) the highest contract value on a specifi ed anniversary date adjusted for any withdrawals following the specifi ed contract anniversary. These guarantees include benefi ts that are payable at specifi ed dates during the accumulation period (Guaranteed Minimum Withdrawal Benefi t (GMWB)), as death benefi ts (Guaranteed Minimum Death Benefi ts (GMDB)) or as income benefi ts (Guaranteed Minimum Income Benefi ts (GMIB)). These guarantees generally protect the policyholder’s value in the event of poor equity market performance. Jackson hedges the GMDB and GMWB guarantees through the use of equity options and futures contracts, and fully reinsures the GMIB guarantees.
Jackson also issues fi xed index annuities that enable policyholders to obtain a portion of an equity-linked return while providing a guaranteed minimum return. The guaranteed minimum returns would be of a similar nature to those described above for fi xed annuities.
With-profi ts products provide returns to policyholders through bonuses that are smoothed. There are two types of bonuses – annual and fi nal. Annual bonuses are declared once a year and, once credited, are guaranteed in accordance with the terms of the particular product. Unlike annual bonuses, fi nal bonuses are guaranteed only until the next bonus declaration. The with-profi ts fund also held a provision on the Pillar I Peak 2 basis of £47 million at 31 December 2012 (31 December 2011: £90 million) to honour guarantees on a small number of guaranteed annuity option products.
The only material guaranteed surrender values relate to investments in the PruFund range of with-profi ts funds. For these products the policyholder can choose to pay an additional management charge. In return, at the selected guarantee date, the fund will be increased if necessary to a guaranteed minimum value (based on the initial investment adjusted for any prior withdrawals). The with-profi ts fund held a reserve of £52 million at 31 December 2012 (31 December 2011: £59 million) in respect of this guarantee.
Time value The value of fi nancial options and guarantees comprises two parts. One is given by a deterministic valuation on best estimate assumptions (the intrinsic value). The other part arises from the variability of economic outcomes in the future (the time value).
The economic assumptions used for the stochastic calculations are consistent with those used for the deterministic calculations. Assumptions specifi c to the stochastic calculations refl ect 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 17(iv), (v) and (vi).
In deriving the time value of fi nancial options and guarantees, management actions in response to emerging investment and fund solvency conditions have been modelled. Management actions encompass, but are not confi ned to investment allocation decisions, levels of reversionary and terminal bonuses and credited rates. Bonus rates are projected from current levels and varied in accordance with assumed management actions applying in the emerging investment and fund solvency conditions.
In all instances, the modelled actions are in accordance with approved local practice and therefore refl ect the options actually available to management. For the PAC with-profi ts fund, the actions assumed are consistent with those set out in the Principles and Practices of Financial Management which explains how regular and fi nal bonus rates within the discretionary framework are determined, subject to the general legislative requirements applicable.
AAAAAAAAAAAAAAAAA UK insurance operations: the capital requirements are set at the higher of Pillar I and Pillar II requirements for shareholder-backed business of UK insurance operations as a whole.
Under the EEV Principles, discount rates used to determine the present value of future cash fl ows are set equal to risk-free rates plus a risk margin. The risk margin should refl ect any non-diversifi able risk associated with the emergence of distributable earnings that is not allowed for elsewhere in the valuation. Prudential has selected a granular approach to better refl ect differences in market risk inherent in each product group. The risk discount rate so derived does not refl ect an overall Group market beta but instead refl ects the expected volatility associated with the cash fl ows for each product category in the embedded value model.
Since fi nancial options and guarantees are explicitly valued under the EEV methodology, discount rates under EEV are set excluding the effect of these product features.
The beta of a portfolio or product measures its relative market risk. The risk discount rates refl ect the market risk inherent in each product group and hence the volatility of product cash fl ows. These are determined by considering how the profi ts from each product are affected by changes in expected returns on various asset classes. By converting this into a relative rate of return it is possible to derive a product specifi c beta.
Product level betas refl ect the most recent product mix to produce appropriate betas and risk discount rates for each major product grouping.
The Group’s methodology is to allow appropriately for credit risk. The allowance for total credit risk is to cover: AAAAAAAAAAAAAAAAA Expected long-term defaults; AAAAAAAAAAAAAAAAA Credit risk premium (to refl ect the volatility in downgrade and default levels); and AAAAAAAAAAAAAAAAA Short-term downgrades and defaults.
These allowances are initially refl ected in determining best estimate returns and through the market risk allowance described above. However, for those businesses which are largely backed by holdings of debt securities these allowances in the projected returns and market risk allowances may not be suffi cient and an additional allowance may be appropriate.
Asia operations For Asia operations, the allowance for credit risk incorporated in the projected rates of return and the market risk allowance are suffi cient. Accordingly, no additional allowance for credit risk is required.
The risk discount rate incorporates an additional allowance for credit risk premium and short-term downgrades and defaults. In determining this allowance a number of factors have been considered. These factors, in particular, include: AAAAAAAAAAAAAAAAA How much of the credit spread on debt securities represents an increased credit risk not refl ected in the RMR long-term default assumptions, and how much is liquidity premium (which is the premium required by investors to compensate for the risk of longer-term investments which cannot be easily converted into cash, and converted at the fair market value). In assessing this effect, consideration has been given to a number of approaches to estimating the liquidity premium by considering recent statistical data; and
AAAAAAAAAAAAAAAAA Policyholder benefi ts for Jackson fi xed annuity business are not fi xed. It is possible in adverse economic scenarios to pass on a component of credit losses to policyholders (subject to guarantee features) through lower investment return rates credited to policyholders. Consequently, it is only necessary to allow for the balance of the credit risk in the risk discount rate.
In the annuity MCEV calculations, the future cash fl ows are discounted using the swap yield curve plus an allowance for liquidity premium based on Prudential’s assessment of the expected return on the assets backing the annuity liabilities after allowing for expected long-term defaults, a credit risk premium, an allowance for a 1 notch downgrade of the portfolio subject to credit risk and an allowance for short-term defaults. For the purposes of presentation in the EEV results, the results on this basis are reconfi gured. Under this approach the projected earned rate of return on the debt securities held is determined after allowing for expected long-term defaults and, where necessary, an additional allowance for an element of short-term downgrades and defaults to bring the allowance in the earned rate up to best estimate levels. The allowances for credit risk premium, 1 notch downgrade and the remaining element of short-term downgrade and default allowances are incorporated into the risk margin included in the discount rate, as shown in note 17(iii).
(2) With-profi ts fund non-profi t annuity business For UK non-profi t annuity business including that written by Prudential Annuities Limited (PAL) the basis for determining the aggregate allowance for credit risk is consistent with that applied for UK shareholder-backed annuity business (as described above). The allowance for credit risk in PAL is taken into account in determining the projected cash fl ows to the with-profi ts fund, which are in turn discounted at the risk discount rate applicable to all of the projected cash fl ows of the fund.
(3) With-profi ts fund holdings of debt securities The UK with-profi ts fund holds debt securities as part of its investment portfolio backing policyholder liabilities and unallocated surplus. The assumed earned rate for with-profi t holdings of corporate bonds is defi ned as the risk-free rate plus an assessment of the long-term spread over gilts, net of expected long-term defaults. This approach is similar to that applied for equities and properties for which the projected earned rate is defi ned as the risk-free rate plus a long-term risk premium.
Allowance for non-diversifi able non-market risks The majority of non-market and non-credit risks are considered to be diversifi able. Finance theory cannot be used to determine the appropriate component of beta for non-diversifi able 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.
Notes on the EEV basis results continued 1 Basis of preparation, methodology and accounting presentation continued
In addition, for 2012 the gain recognised on the acquisition of REALIC and the gain on dilution of the Group holdings in PPM South Africa have been shown separately from operating profi ts based on longer-term investment returns.
For the purpose of determining the long-term returns for debt securities of US operations for fi xed annuity and other general account business, a risk margin charge is included which refl ects 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 refl ects the aggregation of end of year risk-free rates and equity risk premium. For US variable annuity separate account business, operating profi t includes the unwind of discount on the opening value of in-force adjusted to refl ect end of year projected rates of return with the excess or defi cit of the actual return recognised within non-operating profi t, together with the related hedging activity.
(iii) Eff ect of changes in operating assumptions Operating profi t includes the effect of changes to operating assumptions on the value of in-force at the end of the period. For presentational purposes, the effect of change is delineated to show the effect on the opening value of in-force with the experience variance being determined by reference to the end of period assumptions.
(iv) 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, required capital and surplus assets at the start of the period as adjusted for the effect of changes in economic and operating assumptions refl ected in the current period.
(v) Operating experience variances Operating profi ts include the effect of experience variances on non-economic assumptions, which are calculated with reference to the embedded value assumptions at the end of the reporting year, such as persistency, mortality and morbidity, expenses and other factors. Further details of these assumptions are shown in notes 17(vii), (viii) and (ix).
Actuarial and other gains and losses of defi ned benefi t pension schemes
For the Group’s defi ned benefi t pension schemes the EEV results refl ect the IAS 19 position booked for IFRS reporting. Consistent with this approach, to the extent of recognition of any surplus, the actuarial and other gains and losses include: AAAAAAAAAAAAAAAAA The difference between actual and expected return on the scheme assets; AAAAAAAAAAAAAAAAA Experience gains and losses on scheme liabilities; AAAAAAAAAAAAAAAAA The impact of altered economic and other assumptions on the discounted value of scheme liabilities; and AAAAAAAAAAAAAAAAA For pension schemes where the IAS 19 position refl ects a defi cit funding obligation, actuarial and other gains and losses includes the movement in estimates of defi cit funding requirements.
In addition, this item includes the effect of partial recognition of the Prudential Staff Pension Scheme surplus that arose in 2012. This partial recognition refl ects the impact of the 5 April 2011 triennial valuation that was completed in 2012. Under that valuation there was suffi cient actuarial surplus to permit a reduction in employer contributions to the minimum level under the trust deed rules, thereby allowing recoverability of part of the surplus in future years.
(x) Foreign exchange rates Foreign currency results have been translated as discussed in note 1(b)(vi), for which the principal exchange rates are as follows: Local currency: £ Closing rate at
Asia operations 1,568 1,740 1,897 10,544 1,266 67 12.0 US operations 14,504 12 1,462 14,600 873 60 6.0 UK insurance operations 6,286 207 836 7,311 313 37 4.3
Asia operations 1,456 1,514 1,660 8,910 1,076 65 12.1 US operations 12,562 19 1,275 12,720 815 64 6.4 UK insurance operations 4,871 259 746 6,111 260 35 4.3
Asia operations: China 26 27 Hong Kong 210 218 India 19 20 Indonesia 476 314 Korea 26 43 Taiwan 48 28 Other 461 426
V b asis su p p lem en tary in fo rm atio n 3 Operating profi t from business in force
Unwind of discount and other expected returnsnote (a) 599 613 Effect of changes in operating assumptions: Mortality and morbiditynote (b) 94 126 Persistency and withdrawalsnote (c) (34) (140)
Notes (a) The decrease in unwind of discount and other expected returns of £(14) million from £613 million in 2011 to £599 million in 2012 mainly refl ects the £(43) million eff ect of lower risk discount rates driven by the reduction in interest rates, partly off set by the £29 million eff ect of the growth in the opening in-force value (adjusted for assumption changes), on which the discount rates are applied.
(b) The credit of £94 million in 2012 for mortality and morbidity assumption changes primarily refl ects mortality improvements in Hong Kong and Singapore and revised assumptions for critical illness business in Singapore in line with recent experience. In 2011, the £126 million refl ected £69 million arising in Malaysia, £33 million in Indonesia and a net £24 million for other operations.
(e) The favourable eff ect of mortality and morbidity experience in 2012 of £57 million (2011: £58 million) refl ects continued better than expected experience, principally arising in Hong Kong, Indonesia, Malaysia and Singapore.
(g) The negative expense experience variance of £(30) million in 2012 (2011: £(31) million) principally refl ects expense overruns for operations which are currently sub-scale (China, Malaysia Takaful and Taiwan) and in India where the business model is being adapted in response to the regulatory changes introduced in recent years.
(h) The charge of £(2) million in 2012 for other items refl ects the broadly off setting eff ects of the realised gain on the sale of the Group’s 7.74 per cent stake in China Life of Taiwan and charges for other non-recurrent items.
35 14 Experience variances and other items: Spread experience variancenote (f) 205 152 Amortisation of interest-related realised gains and lossesnote (g) 91 84 Other (6) 17
(b) The eff ect of changes in persistency assumptions of £45 million in 2012 primarily relate to VA business. (c) The eff ect of the change of assumption for VA fees represents the capitalised value of the change in the projected level of policyholder advisory fees, which vary according to the current size and mix of VA funds. (d) The credit of £33 million in 2012 for the eff ect of updated mortality assumptions principally relates to life business, representing a credit of £86 million for the modelling of projected mortality improvement, partially off set by a charge of £(53) million for other regular mortality updates to refl ect recent experience.
Guaranteed Minimum Withdrawal Benefi t utilisation and £(12) million for other items. (f) The spread assumption for Jackson is determined on a longer-term basis, net of provision for defaults. The spread experience variance in 2012 of £205 million (2011: £152 million) includes the positive eff ect of transactions undertaken to more closely match the overall asset and liability duration. (g) The amortisation of interest-related gains and losses refl ects the fact that when bonds that are neither impaired nor deteriorating are sold and reinvested there will be a consequent change in the investment yield. The realised gain or loss is amortised into the result over the period when the bonds would have otherwise matured to better refl ect the long-term returns included in operating profi ts.
V b asis su p p lem en tary in fo rm atio n 4 Changes to Group’s holdings
On 4 September 2012, the Group through its indirect wholly-owned subsidiary, Jackson National Life Insurance Company, completed the acquisition of 100 per cent issued share capital of SRLC America Holding Corp. (SRLC), and its primary operating subsidiary, Reassure America Life Insurance Company (REALIC). The purchase consideration, which remains subject to fi nal agreement under the terms of the transaction with Swiss Re, is £370 million (US$587 million). The Embedded value of REALIC on the date of acquisition, calculated in accordance with the Group’s methodology and assumptions as set out in note 1 was £823 million. The acquisition increases the scale of the Group’s life business in the US, helping Jackson to diversify earnings by increasing the amount of income from underwriting activities thereby enhancing the quality of earnings in a capital effi cient manner. The earnings of REALIC are derived from seasoned, long duration cash fl ows, generated principally from term life, whole life and basic universal life products.
Notes (i) The embedded value of the acquired business has been determined by applying the same methodology as applied for Jackson’s non-variable annuity business. A risk discount rate of 4.3 per cent at the date of acquisition on 4 September 2012 has been used. (ii) The amounts shown above have been translated at the 4 September 2012 exchange rate of US$1.59/£.
(ii) Asia operations For 2012, the positive short-term fl uctuations in investment returns of £395 million in Asia operations were driven by unrealised gains on bonds and higher equity markets, principally arising in Hong Kong of £139 million mainly relating to positive returns on bonds backing participating business, Singapore of £114 million, primarily relating to increasing future expected fee income for unit-linked business and unrealised gains on bonds, Taiwan of £56 million for unrealised gains on bonds and CDOs and India of £30 million.
For 2011, short-term fl uctuations in investment returns of £(155) million were driven by lower equity markets reducing future expected fee income, mainly arising in Singapore of £(105) million and Korea of £(22) million. The 2011 short-term fl uctuations in investment returns also included £(28) million of adverse variance arising in other territories. This principally comprises fl uctuations arising in India of £(53) million refl ecting lower equity market returns, in Vietnam of £(33) million for unrealised losses on bonds and equities and Taiwan of £(30) million for losses on bonds and CDOs, partially offset by a credit in Hong Kong of £96 million primarily relating to positive returns on bonds backing participating business.
Actual less long-term return on equity based investments and other items 28 1
Notes (a) The charge relating to fi xed income securities comprises the following elements: – the excess of actual realised losses over the amortisation of interest related realised gains and losses recorded in the profi t and loss account; – credit loss experience (versus the longer-term assumption); and – the impact of de-risking activities within the portfolio.
(b) This item refl ects the net impact of: – variances in projected future fees arising from the eff ect of market fl uctuations on the growth in separate account asset values in the current reporting period; and – related hedging activity. In 2012, there was a 14.8 per cent rate of return for the variable annuity separate account assets compared with an assumed longer-term rate of return of 5.3 per cent. Consequently, the asset values and therefore projected future fees at 31 December 2012 were higher than assumed. However, net of the impact of related hedging eff ects there is a short-term fl uctuation of £(183) million.
Notes (a) For with-profi ts business the amounts refl ect the excess (defi cit) of the actual investment return on the investments of the PAC with-profi ts fund (covering policyholder liabilities and unallocated surplus) against the assumed long-term rate for the year. For 2012, the credit of £285 million refl ects the actual investment return of 9.8 per cent against the assumed long-term rate of 5.0 per cent for the year.
(b) Short-term fl uctuations in investment returns for shareholder-backed annuity business comprise: (1) gains on surplus assets refl ecting reductions in corporate bond and gilt yields; (2) the diff erence between actual and expected default experience; and (3) the eff ect of mismatching for assets and liabilities of diff erent durations and other short-term fl uctuations in investment returns.
(v) Economic hedge value movements This item represents the costs on short-dated hedge contracts taken out in the fi rst half of 2012 to provide downside protection against severe equity market falls through a period of particular uncertainty with respect to the Eurozone. The hedge contracts were terminated in the second half of 2012.
The effect of changes in economic assumptions for in-force business, net of the related change in the time value of cost of options and guarantees, included within profi t before tax (including actual investment returns) arise as follows: (i) Group summary
Asia operationsnote (ii) (149) 279 US operationsnote (iii) 85 (144) UK insurance operationsnote (iv) 48 (293)
(ii) Asia operations The effect of changes in economic assumptions for Asia operations in 2012 of £(149) million principally arises in Hong Kong of £(320) million, primarily refl ecting the effect on projected cash fl ows of de-risking the asset portfolio and the reduction in fund earned rates on participating business, driven by the very low interest rate environment, and in Vietnam of £(47) million, following the fall in bond yields. There are partial offsets which in total are £218 million, principally arising in Malaysia and Indonesia, mainly refl ecting the positive impact of discounting projected health and protection profi ts at lower rates, driven by the decrease in risk discount rates.
The effect of changes in economic assumptions for 2011 of a credit of £279 million principally arose in Singapore of £160 million, Malaysia of £97 million and Indonesia of £94 million, primarily refl ecting the positive impact of discounting projected health and protection profi ts at lower rates, driven by the decrease in risk-free rates. There is a partial offset arising in Hong Kong of £(57) million, primarily refl ecting the reduction in fund earned rates for participating business.
Fixed annuity and other general account business 20 282 Variable annuity (VA) business (83) (333)
The risk discount rate, as discussed in note 1(b)(iii), represents the aggregate of the risk-free rate and margin for market risk, credit risk and non-diversifi able non-market risk.
(b) For 2012, the £148 million eff ect of the decrease in the additional allowance within the risk discount rate for credit risk refl ects the reduction in credit spreads and represents a 50 basis points decrease for spread business, including the acquired REALIC business (from 200 basis points in 2011 to 150 basis points in 2012), and 10 basis points decrease for VA business (from 40 basis points in 2011 to 30 basis points in 2012), representing the proportion of business invested in the general account (as described in note 1(b)(iii)).
Effect of change in: Expected long-term rates of return, risk discount rates and other changes 140 278 Tax regimenote (b) (46) –
(b) The change in the insurance tax regime was enacted on 17 July 2012. The eff ect of £(46) million refl ects the change in pattern of taxable profi ts for shareholder-backed annuity business arising from the acceleration of tax payments due to the altered timing of relief on regulatory basis provisions.
(c) For with-profi ts and other business the total charge in 2012 of £(46) million refl ects the changes in fund earned rates and risk discount rate (as shown in note 17(iii)), driven by the 20 basis points decrease in the gilt rate.
1,364 512 1,876 Net cash fl ows to parent companynote (vi) (921) (279) (1,200) Exchange movements, timing differences and other itemsnote (vii) (325) (83) (408)
Balance at 1 January 2012 Representing: Asia operations 1,067 211 1,278 US operations 1,220 113 1,333 UK operations 552 258 810
(ii) Free surplus invested in new business is for the eff ects of setting aside required capital and incurring acquisition costs. (iii) For the purposes of this analysis, free surplus for asset management operations and the UK general insurance commission is taken to be IFRS basis shareholders’ equity.
Short-term fl uctuations in investment returns primarily refl ect temporary market movements on the portfolio of investments held by the Group’s shareholder-backed operations.
Mark to market value movements on Jackson assets backing surplus and required capitalnote 14 35 – 35 Othernote (viii) (268) (70) (338)
(viii) Other primarily refl ects the eff ect of repayment of contingent loan funding, as shown in note 14(ii), together with intra-group loans, timing diff erences and other non-cash items.
Prudential Capital 275 – 275 250 – 250 Core structural borrowings – Jackson 153 43 196 160 17 177
Net core structural borrowings of shareholder- * Including central fi nance subsidiaries.
Long-term business: New businessnote 2 1,266 873 313 2,452 – 2,452 Business in forcenote 3 694 737 553 1,984 – 1,984
Shareholders’ share of actuarial and other gains and losses on defi ned benefi t pension schemesnote 7 – – (16) (16) 78 62
Effect of changes in economic assumptionsnote 8 (149) 85 48 (16) – (16) Gain on dilution of Group’s holdingsnote 4 – – – – 42 42 Gain on acquisition of REALICnote 5 – 453 – 453 – 453
Shareholders’ equity at 31 December 2012note (i) 9,462 6,032 6,772 22,266 177 22,443
Representing: Statutory IFRS basis shareholders’ equity 2,290 4,343 3,008 9,641 718 10,359 Additional retained profi t (loss) on an EEV
V b asis su p p lem en tary in fo rm atio n 12 Tax attributable to shareholders’ profi t
The tax charge comprises: Tax charge on operating profi t based on longer-term investment returns: Long-term business: Asia operations 420 402 US operations 513 487 UK insurance operations 168 221
Tax charge (credit) on items not included in operating profi t: Tax charge (credit) on short-term fl uctuations in investment returns 44 (210) Tax charge on shareholders’ share of actuarial and other gains and losses on defi ned benefi t pension schemes 14 6 Tax charge (credit) on effect of changes in economic assumptions 4 (64)
Total tax charge (credit) on items not included in operating profi t 62 (268)
Tax charge on profi t attributable to shareholders (including tax on actual investment returns) 1,207 776 13 Earnings per share (EPS)
Profi t after tax and non-controlling interests 3,176 3,813 2,930 2,142 EPS (pence) 125.0p 150.1p 115.7p 84.6p
14 Reconciliation of net worth and value of in-force for long-term businessnote(i)
Representing: Asia operations Shareholders’ equity at 1 January 2012 1,067 860 1,927 6,583 8,510 New business contributionnote (iv) (292) 97 (195) 1,177 982 Existing business – transfer to net worth 635 (3) 632 (632) – Expected return on existing business 56 – 56 413 469 Changes in operating assumptions and experience variances 80 25 105 (23) 82 Changes in non-operating assumptions and experience
V b asis su p p lem en tary in fo rm atio n 2012 £m
US operations Shareholders’ equity at 1 January 2012 1,220 1,371 2,591 2,491 5,082 New business contributionnote (iv) (281) 271 (10) 578 568 Existing business – transfer to net worth 777 (242) 535 (535) – Expected return on existing business 40 48 88 180 268 Changes in operating assumptions and experience variances 219 19 238 21 259 Changes in non-operating assumptions and experience
Intra-group dividends (including statutory transfers) (252) – (252) – (252) Mark to market value movements on Jackson assets backing surplus and required capital 35 – 35 – 35 Other transfers to net worth 6 – 6 – 6
(iv) Free surplus invested in new business is as follows: Asia operations
Free surplus invested in new business (292) (281) (45) (618) (297) (202) (54) (553)
Note ‘Other items’ represent amounts incorporated into VIF where there is no defi nitive timeframe for when the payments will be made or receipts received. In particular, other items includes the deduction of the value of the shareholders’ interest in the estate, the value of which is derived by increasing fi nal bonus rates so as to exhaust the estate over the lifetime of the in-force with-profi ts business. This is an assumption to give an appropriate valuation. To be conservative this item is excluded from the expected free surplus generation profi le below.
Cash fl ows are projected on a deterministic basis and are discounted at the appropriate risk discount rate. The modelled cash fl ows use the same methodology underpinning the Group’s embedded value reporting and so is subject to the same assumptions and sensitivities.
Expected period of conversion of future post-tax distributable earnings and required capital fl ows to free surplus 2012 total as shown above 1-5 years 6 -10 years 11-15 years 16 -20 years 21-40 years 40+ years
Asia operations 8,410 2,987 1,873 1,181 840 1,297 232 US operations 5,439 2,723 1,607 698 301 110 – UK insurance operations 4,742 1,890 1,185 756 456 445 10 2011 £m
Asia operations 7,387 2,582 1,596 1,012 732 1,262 203 US operations 4,267 2,241 1,287 490 173 76 – UK insurance operations 4,628 1,864 1,166 743 453 394 8
Interest rates – 1% increase 33 104 6 143 2 81 5 88 Interest rates – 1% decrease (106) (161) (11) (278) (72) (117) (6) (195) Equity/property yields – 1% rise 48 97 13 158 50 92 11 153 Long-term expected defaults – 5 bps increase – – (10) (10) – – (8) (8)
Interest rates – 1% decrease 85 49 399 533 253 58 400 711 Equity/property yields – 1% rise 328 230 202 760 329 185 205 719 Equity/property market values – 10% fall (159) (69) (309) (537) (159) 16 (326) (469) Statutory minimum capital 108 89 4 201 114 92 4 210 Long-term expected defaults – 5 bps increase – – (112) (112) – – (98) (98)
The sensitivities shown above are for the impact of instantaneous changes on the embedded value of long-term business operations and include the combined effect on the value of in-force business and net assets at the balance sheet dates indicated. If the change in assumption shown in the sensitivities were to occur, then the effect shown above would be recorded within two components of the profi t analysis for the following year. These are for the effect of economic assumption changes and, to the extent that asset value changes are included in the sensitivities, within short-term fl uctuations in investment returns. In addition to the sensitivity effects shown above, the other components of the profi t for the following year would be calculated by reference to the altered assumptions, for example new business contribution and unwind of discount, together with the effect of other changes such as altered corporate bond spreads. In addition for Jackson, the fair value movements on assets backing surplus and required capital which are taken directly to shareholders’ equity would also be affected by changes in interest rates.
AAAAAAAAAAAAAAAAAAA 5 per cent proportionate decrease in base mortality and morbidity rates (ie increased longevity).
Maintenance expenses – 10% decrease 32 13 4 49 26 11 7 44 Lapse rates – 10% decrease 95 26 7 128 92 24 10 126 Mortality and morbidity – 5% decrease 76 5 (11) 70 60 9 (9) 60 Change representing effect on: Embedded value of long-term business operations
Maintenance expenses – 10% decrease 137 50 56 243 117 44 52 213 Lapse rates – 10% decrease 333 225 66 624 342 157 65 564 Mortality and morbidity – 5% decrease 387 178 (273) 292 289 92 (227) 154 Change representing effect on: (c) Eff ect of proposed change in UK corporation tax rate The proposed rate change from 23 per cent to 22 per cent announced in the 2012 Budget on 21 March 2012 has been reduced by a further 1 per cent to 21 per cent in the Autumn Statement on 5 December 2012. The change from 23 per cent to 21 per cent is expected to be effective 1 April 2014 and when substantively enacted it would have the impact of increasing the net of tax value of in-force business of UK insurance operations at 31 December 2012 by around £65 million.
Equity risk premiums in Asia range from 3.25 per cent to 8.8 per cent for 2012 (2011: 3.25 per cent to 8.7 per cent).
Notes (a) The weighted risk discount rates for Asia operations shown above have been determined by weighting each country’s risk discount rates by reference to the EEV basis new business result and the closing value of in-force business. The changes in the risk discount rates for individual Asia territories refl ect the movements in government bond yields, together with the eff ects of movements in the allowance for market risk and changes in product mix.
Variable annuity 6.5 6.7 Non-variable annuity 4.0 4.6 Weighted average total:note (b)
Notes (a) The assumed new business spread margins shown above are the rates at inception. For fi xed annuity business (including the proportion of variable annuity business invested in the general account) in both years the assumed spread margin grades up linearly by 25 basis points to the long-term assumption over fi ve years. In 2012, for fi xed index annuity business the assumed spread margin also grades up linearly by 25 basis points to the long-term assumption over fi ve years. For fi xed index annuity business in 2011 and institutional business in both years the assumption applies from inception (ie no grading).
Risk discount rate: New businessnote (a) 6.9 7.7 In forcenote (b) 7.95 8.6 Pre-tax expected long-term nominal rate of return for shareholder-backed annuity business: New business 4.2 4.85 In forcenote (b) 3.9 4.4 Other business:note (d)
New business 5.2 5.3 In force 5.6 5.65 Equity risk premium 4.0 4.0 Pre-tax expected long-term nominal rates of investment return: UK equities 6.3 6.5 Overseas equities 5.8 to 9.6 5.9 to 9.9 Property 5.1 5.2 Gilts 2.3 2.5 Corporate bonds 3.9 4.0 Expected long-term rate of infl ation 2.9 3.0 Post-tax expected long-term nominal rate of return for the PAC with-profi ts fund: Pension business (where no tax applies) 5.0 5.1 Life business 4.35 4.4
Notes (a) The new business risk discount rate for shareholder-backed annuity business incorporates an allowance for best estimate defaults and additional credit risk provisions, appropriate to the new business assets, over the projected lifetime of this business. These additional provisions comprise of a credit risk premium, which is derived from Moody’s data from 1970 to 2009, an allowance for a 1 notch downgrade of the portfolio subject to credit risk and an allowance for short-term defaults.
For UK shareholder-backed annuity business, diff erent dynamics apply both in terms of the nature of the business and the EEV methodology applied. For this type of business the assets are generally held to maturity to match long duration liabilities. It is therefore appropriate under EEV methodology to include a liquidity premium in the economic basis used. The appropriate EEV risk discount rate is set in order to equate the EEV with a ‘market consistent embedded value’ including liquidity premium. The liquidity premium in the ‘market consistent embedded value’ is derived from the yield on the assets held aft er deducting an appropriate allowance for credit risk. For Prudential Retirement Income Limited, which has approximately 90 per cent of UK shareholder-backed annuity business, the allowance for credit risk for the in-force business at 31 December 2012 is made up of: (1) 15 basis points in respect of long-term expected defaults derived by applying Moody’s data from 1970 to 2009 and the defi nition of the credit rating used is the second highest credit rating published by Moody’s, Standard and Poor’s and Fitch; and
Bond spread over swap rates 150 139 Total credit risk allowance† 35 35
In-force business Bond spread over swap rates 161 201 Total credit risk allowance 65 66 * The new business liquidity premium is based on the weighted average of the point of sale liquidity premia. † Specifi c assets are allocated to the new business for the period with the appropriate allowance for credit risk which was 35 basis points for 2012 and 2011.
The overall allowance for credit risk is prudent by comparison with historic rates of default and would be suffi cient to withstand a wide range of extreme credit events over the expected lifetime of the annuity business.
Details are given below of the key characteristics and calibrations of each model.
AAAAAAAAAAAAAAAAAAA The mean stochastic returns are consistent with the mean deterministic returns for each country. The expected 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 (2011: 0.9 per cent to 2.4 per cent).
Mean returns have been derived as the annualised arithmetic average return across all simulations and durations. For each projection year, standard deviations have been calculated by taking the square root of the annualised variance of the returns over all the simulations. These have been averaged over all durations in the projection. For equity and property, the standard deviations relate to the total return on these assets. The standard deviations applied for both years are as follows: Equities:
(vii) Demographic assumptions Persistency, mortality and morbidity assumptions are based on an analysis of recent experience but also refl ect expected future experience. Where relevant, when calculating the time value of fi nancial options and guarantees, policyholder withdrawal rates vary in line with the emerging investment conditions according to management’s expectations.
(viii) 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 identifi ed 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) and India (where the business model is being adapted in response to the regulatory changes introduced in recent years), expense overruns are permitted provided these are short-lived.
Corporate expenditure comprises: AAAAAAAAAAAAAAAA Expenditure for Group head offi ce, to the extent not allocated to the PAC with-profi ts funds, together with Solvency II
The sensitivity of the embedded value as at 31 December 2012 to the effect of the forthcoming change in the UK corporate tax rates is shown in note 16(c).
V b asis su p p lem en tary in fo rm atio n 18 New business premiums and contributionsnote (i)
UK and Europe insurance operations Direct and partnership annuities 297 328 – – 30 33 297 328 Intermediated annuities 653 241 – – 65 24 653 241 Internal vesting annuities 1,456 1,223 – – 146 122 1,456 1,223
Total individual annuities 2,406 1,792 – – 241 179 2,406 1,792 Corporate pensions 303 184 159 215 189 233 1,045 1,224 Onshore bonds 2,275 1,779 – – 228 178 2,277 1,781 Other products 894 780 48 44 137 122 1,175 978 Wholesale 408 336 – – 41 34 408 336
Total UK and Europe insurance operations 6,286 4,871 207 259 836 746 7,311 6,111
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 profi ts for shareholders. The amounts shown are not, and not intended to be, refl ective of premium income recorded in the IFRS income statement. (ii) New business in China is included at Prudential’s 50 per cent interest in the China life operation. (iii) New business in India is included at Prudential’s 26 per cent interest in the India life operation.
Acquisition of Thanachart Life Assurance Company Limited On 5 November 2012, Prudential plc, through its subsidiary Prudential Life Assurance (Thailand) Public Company Limited (Prudential Thailand) entered into an agreement to acquire 100 per cent of Thanachart Life Assurance Company Limited (Thanachart Life), a wholly-owned life insurance subsidiary of Thanachart Bank Public Company limited (Thanachart Bank). The consideration for Thanachart Life is THB 17.5 billion (£352 million at the year end exchange rate) settled in cash on completion, with a further payment of THB 0.5 billion (£10 million) payable 12 months after completion, subject to a post-completion adjustment to refl ect the net asset value as at the completion date. The transaction is subject to regulatory approval and is expected to close in the fi rst half of 2013. Upon completion of the transaction, Thanachart Life will become a wholly-owned subsidiary of Prudential Thailand.
Opinion on supplementary information In our opinion, the EEV basis supplementary information of the Company for the year ended 31 December 2012 has been properly prepared, in all material respects, in accordance with the EEV Principles using the methodology and assumptions set out on pages 331 to 336 and 356 to 360 respectively.
Rees Aronson for and on behalf of KPMG Audit Plc Chartered Accountants London
We have audited the EEV basis supplementary information (the supplementary information) of Prudential plc (the Company) for the year ended 31 December 2012 set out on pages 326 to 362. The fi nancial reporting framework that has been applied in the preparation of the supplementary information is the European Embedded Value Principles issued in May 2004 by the European CFO Forum as supplemented by the Additional Guidance on European Embedded Value Disclosures issued in October 2005 together ‘the EEV Principles’ using the methodology and assumptions set out on pages 331 to 336 and 356 to 360 respectively. The supplementary information should be read in conjunction with the Group fi nancial statements which are on pages 147 to 314.
d d itio n al u n au d ited fi n an cial in fo rm atio n
operating profi t based on longer -term investment returns by driver 374 b Asia operations – analysis of IFRS operating profi t by territory 375 c Analysis of asset management operating profi t based on longer-term investment return
The following table sets forth Prudential’s selected consolidated fi nancial data for the periods indicated. Certain data is derived from Prudential’s audited consolidated fi nancial 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). This table is only a summary and should be read in conjunction with Prudential’s consolidated fi nancial statements and the related notes included elsewhere in this document.
IFRS basis results Gross premium earned 29,910 25,706 24,568 20,299 18,993 Outward reinsurance premiums (506) (429) (357) (323) (204)
Profi t (loss) before tax attributable to shareholders 2,810 1,828 1,271 562 (448) Tax (charge) credit attributable to shareholders’ returns (613) (409) 40 10 58
Profi t (loss) from continuing operations after tax 2,197 1,419 1,311 572 (390) Discontinued operations (net of tax) – – – (14) –
Based on profi t (loss) for the year attributable to the equity holders of the Company: Basic earnings per share (in pence) 86.5p 55.8p 51.8p 22.3p (16.0)p Diluted earnings per share (in pence) 86.4p 55.7p 51.7p 22.2p (16.0)p
Dividend per share declared and paid in reporting period (in pence) note (6) 25.64p 25.19p 20.17p 19.20p 18.29p * The Group has adopted updated US GAAP requirements for deferred acquisition costs as an improvement to its accounting policy under IFRS 4 for those operations of the Group which measure insurance assets and liabilities substantially by reference to US GAAP principles. Accordingly, the 2008 to 2011 comparative results have been adjusted from those previously published for the retrospective application of the improvement as if the new accounting policy had always applied.
Operating profi t based on longer-term investment returns note (2) 2,533 2,027 1,826 1,428 1,248 Short-term fl uctuations in investment returns
Operating earnings per share (refl ecting operating profi t based on longer-term investment returns after related tax and non-controlling interests and excluding 2010 exceptional tax credit) (in pence) 125.0p 115.7p 106.9p 88.8p 85.1p
Operating earnings per share (refl ecting operating profi t based on longer-term investment returns after related tax and non-controlling interests and including 2010 exceptional tax credit) (in pence) 125.0p 115.7p 113.2p 88.8p 85.1p
As of and for the year ended 31 December* 2012 £m 2011 £m 2010 £m 2009 £m 2008 £m
3 Asia comparative APE new business sales prior to 2011 exclude the Japanese insurance operations, which ceased writing new business from 15 February 2010. 4 Funds under management comprise funds of the Group held in the statement of fi nancial position and external funds that are managed by Prudential asset management operations. 5 The surpluses shown are before allowing for the fi nal dividends for each year, which are paid in the following year. The 2012 surplus is estimated.
A d d itio n al u n au d ited fi n an cial in fo rm atio n
This classifi es the Group’s pre-tax operating earnings from long-term insurance operations into the underlying drivers of those profi ts, using the following categories: i Spread income represents the difference between net investment income (or premium income in the case of the UK annuities new business) and amounts credited to policyholder accounts. It excludes the operating investment return on shareholder net assets, which has been separately disclosed as expected return on shareholder assets ; ii Fee income represents profi ts driven by net investment performance, being asset management fees that vary with the size of the underlying policyholder funds net of investment management expenses ; iii With-profi ts results represents the shareholders’ transfer from the with-profi ts fund in the period ; iv Insurance margin primarily represents profi ts derived from the insurance risks of mortality, morbidity and persistency ; v Margin on revenues primarily represents amounts deducted from premiums to cover acquisition costs and administration expenses ; vi Acquisition costs and administration expenses represent expenses incurred in the period attributable to shareholders. It excludes items such as restructuring costs and Solvency II costs which are not included in the segment profi t for insurance as well as items that are more appropriately included in other source of earnings lines (eg investment expenses are netted against investment income as part of spread income or fee income as appropriate) ; and vii DAC adjustments comprises DAC amortisation for the period, excluding amounts related to short-term fl uctuations, net of costs deferred in respect of new business.
Analysis of pre-tax IFRS operating profi t by source 2012 £m
Total operating profi t based on longer-term investment returns 988 1,003 1,107 (565) 2,533 * Including restructuring and Solvency II implementation costs.
Spread income 88 730 247 – 1,065 Fee income 131 680 59 – 870 With-profi ts result 38 – 293 – 331 Insurance margin 477 232 27 – 736 Margin on revenues 1,199 – 226 – 1,425 Expenses: Expected return on shareholder assets 26 83 91 – 200
Long-term business operating profi t 704 651 683 – 2,038 Asset management operating profi t 80 24 357 – 461 GI commission – – 40 – 40 RPI to CPI infl ation measure change on defi ned benefi t schemes – – – 42 42 Other income and expenditur e† – – – (554) (554)
in an cial statem en ts Additional unaudited fi nancial information Prudential plc Annual Report 2012
Expected return on shareholder assets 43 26 Gain on China Life (Taiwan) shares 51 –
Analysis of Asia IFRS operating profi t drivers AAAAAAAAAAAAAAAAAAA Spread income has increased by £18 million from £88 million in 2011 to £106 million in 2012, an increase of 20 per cent that predominantly refl ects the growth of the Asian non-linked policyholder liabilities.
AAAAAAAAAAAAAAAAAAA Acquisition costs have increased by 18 per cent from £766 million in 2011 to £903 million in 2012, compared to the 14 per cent increase in sales, resulting in a marginal increase in the acquisition cost ratio. The analysis above has been prepared applying shareholder acquisition costs as a proportion of total APE. If with-profi ts sales were excluded from the denominator the acquisition cost ratio would become 63 per cent (2011: 59 per cent) refl ecting changes to product and country mix.
Notes (i) The ratio for acquisition costs is calculated as a percentage of APE. (ii) DAC adjustments have been adjusted for the retrospective application of the accounting policy change described in note A5 of the IFRS fi nancial statements. (iii) The calculation of average liabilities for Jackson is derived from month-end balances throughout the year as opposed to opening and closing balances only.
Liabilities held in the general account for variable annuity living and death guaranteed benefi ts together with other amounts on which no spread income is earned (eg REALIC liabilities) are excluded from the calculation of the average. In addition for REALIC, which is included in the average liability to calculate the administration expense margin, the calculation excludes the liabilities reinsured to (and in essence retained by) Swiss Re immediately prior to the acquisition by Jackson.
The 2010 balances have been amended for consistency albeit impacts are minimal.
Analysis of US operating profi t drivers AAAAAAAAAAAAAAAA Spread income was £702 million in 2012, down £28 million from the £730 million earned in 2011. 2012 benefi ted by £156 million from the effect of transactions entered into during 2011 and 2010 to more closely match the overall asset and liability duration (2011: £113 million). Excluding this effect, the spread margin would have been 186 basis points (2011: 218 basis points). The reported spread margin decreased as a result of downward pressure on yields caused by the low interest rate environment, the effect of which was only partly mitigated by reductions in crediting rates.
AAAAAAAAAAAAAAAA Insurance margin represents operating profi ts from insurance risks, including variable annuity guarantees and other sundry items. Positive net fl ows into variable annuity business with life contingent and other guarantee fees, coupled with the benefi t in the period of repricing actions, have increased the insurance margin from £232 million in 2011 to £399 million in 2012. This includes the benefi ts of four months’ profi ts amounting to £87 million from the life business of REALIC, following its acquisition by Jackson in September 2012.
Analysis of pre-tax operating profi t before and aft er acquisition costs and DAC adjustments
Spread income 266 26,038 102 247 23,520 105 Fee income 61 21,739 28 59 21,476 27 With-profi ts result 272 82,691 33 293 81,281 36 Insurance margin 39 27 Margin on revenues 216 226 Expenses: DAC adjustments (8) (5)
II(b): Asia operations – analysis of IFRS operating profi t by territory 2012 £m 2011* £m
China 19 11 Hong Kong 88 69 India 54 47 Indonesia 260 212 Japan (2) 2 Korea 16 17 Malaysia 120 104 Philippines 15 5 Singapore 206 167 Taiwan bancassurance business 18 2 Thailand 7 4 Vietnam 25 30 Other (5) 1 Non-recurrent items: note (ii)
Total insurance operations note (i) 920 709 Development expenses (7) (5)
Total long-term business operating profi t 913 704 Eastspring Investments 75 80
Notes (i) Analysis of operating profi t between new and in-force business The result for insurance operations comprises amounts in respect of new business and business in-force as follows: 2012 £m 2011* £m
New business strain (51) (70) Business in force 872 741 Non-recurrent items: note (ii)
The IFRS new business strain corresponds to approximately 3 per cent of new business APE premiums for 2012 (2011: approximately 4 per cent of new business APE). The improvement is driven by a shift in overall sales mix to lower strain products and countries.
The strain refl ects the aggregate of the pre-tax regulatory basis strain to net worth aft er IFRS adjustments for deferral of acquisition costs and deferred income where appropriate.
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy described in note A5.
Operating profi t based on longer-term investment returns 320 75 51 39 485
Average funds under management (FUM), excluding PPM South Africa† £205.1 bn £55.0 bn
Margin based on operating income† 36 bps 37 bps Cost/income ratio‡ 59% 64%
Operating profi t based on longer-term investment returns 301 80 56 24 461
Average funds under management (FUM), including 49.99% proportional share of PPM South Africa† £195.1 bn
Average funds under management (FUM), excluding PPM South Africa† £190.9 bn £51.4 bn
(ii) M&G and Eastspring Investments can be further analysed as follows:
bps * Operating income is net of commissions. M&G’s operating income excludes any contribution from M&G’s associate, PPM South Africa. † Margin represents operating income before performance related fees as a proportion of the related funds under management (FUM), excluding PPM South Africa.
Note External funds shown above for 2012 of £121.4 billion (2011: £99.8 billion) comprise £133.5 billion (2011: £111.2 billion) of funds managed by Eastspring Investments and M&G (as shown in note (iii) below) less £12.1 billion (2011: £11.4 billion) that are classifi ed within internal funds .
A d d itio n al u n au d ited fi n an cial in fo rm atio n ii Internal funds under management – analysis by business area
Asia operations US operations UK operations Total £bn £bn £bn £bn £bn £bn £bn £bn
The tables below show how the VIF generated by the in-force long-term business and the associated required capital is modelled as emerging into free surplus over the next 40 years. Although a small amount (less than 2 per cent) of the Group’s embedded value emerges after this date, analysis of cash fl ows emerging in the years shown in the tables is considered most meaningful. The modelled cash fl ows use the same methodology underpinning the Group’s embedded value reporting and so are subject to the same assumptions and sensitivities. In addition to showing the amounts, both discounted and undiscounted, expected to be generated from all in-force business at 31 December 2012, the tables also present the expected future free surplus to be generated from the investment made in new business during 2012 over the same 40 year period.
Total free surplus expected to emerge in the next 40 years 17,241 7,549 10,362 35,152 2,709 1,406 622 4,737 * The analysis excludes amounts incorporated into VIF at 31 December 2012 where there is no defi nitive timeframe for when the payments will be made or receipts received. In particular, it excludes the value of the shareholders’ interest in the estate. It also excludes any free surplus emerging aft er 2052.
Post-tax EEV new business profi t 982 568 241 1,791 Tax 284 305 72 661
The undiscounted expected free surplus generation from all in-force business at 31 December 2012 shown below can be reconciled to the amount that was expected to be generated as at 31 December 2011 as follows: Group £m £m £m £m £m £m Other £m Total £m 2011 expected free surplus generation for years 2012 to 2051 1,777 1,634 1,556 1,512 1,502 1,414 24,667 34,062
Less: amounts expected to be realised in the current year (1,777) – – – – – – (1,777)
Add: expected free surplus to be generated in year 2052* – – – – – – 175 175
New business – 401 260 265 156 236 3,419 4,737 Acquisition of REALIC – 45 35 44 38 41 738 941 Operating movements – (2) 28 32 24 17 Non-operating and other movements† – (83) (21) (24) 9 1 (2,165) (2,184)
2012 expected free surplus generation for years 2013 to 2052 – 1,950 1,816 1,788 1,687 1,671 26,240 35,152
Add: expected free surplus to be generated in year 2052* – – – – – – 135 135
Non-operating and other movements – 12 20 11 17 16 (2,125) (2,067)
£m £m £m £m £m £m Other £m Total £m 2011 expected free surplus generation for years 2012 to 2051 680 485 450 480 484 438 2,996 6,013
† Includes an adjustment of £102 million to the cashfl ows for which there is no defi nitive timeframe for their emergence and therefore which have been removed from the cashfl ows presented at 31 December 2012.
Less: amounts expected to be realised in the current year (423) – – – – – – (423)
Add: expected free surplus to be generated in year 2052* – – – – – – 40 40
At 31 December 2012, the total free surplus expected to be generated over the next fi ve years (years 2013 to 2017 inclusive), using the same assumptions and methodology as underpin our embedded value reporting was £8.9 billion, an increase of £1.3 billion from the £7.6 billion expected over the same period at the end of 2011. This increase primarily refl ects the new business written in 2012, which is expected to generate £1,318 million of free surplus over the next fi ve years. Operating movements contributed positive £99 million. The acquisition of REALIC contributed positive expected cash fl ows of £203 million over the next fi ve years. Non-operating and other items, including foreign exchange movements, reduced expected free surplus generation for the next fi ve years by £326 million. At 31 December 2012, the total free surplus expected to be generated on an undiscounted basis in the next 40 years is £35 billion, up from the £34 billion expected at end of 2011. This is after allowing for adverse market movements in the period, with a £0.8 billion reduction due to foreign exchange and negative market movements in Asia as a result of lower fund earned rates. A signifi cant proportion of these market movements arise in Hong Kong refl ecting both the projected derisking of the asset portfolio for participating business and lower local government bond yields (fall of 90 basis points) and Singapore where government bond yields have fallen by 30 basis points. The overall growth in the undiscounted value of free surplus, notwithstanding these impacts, refl ects both our ability to write new business on attractive economics and to manage the in-force book for value. Actual underlying free surplus generated in 2012 from life business in-force at the end of 2011 was £2.3 billion inclusive of £0.3 billion of changes in operating assumptions and experience variances. This compares with the expected 2012 realisation at the end of 2011 of £1.8 million. This can be analysed further as follows: Asia £m
Transfer to free surplus in 2012 635 777 511 1,923 Expected return on free assets 56 40 – 96 Changes in operating assumptions and experience variances 80 219 (4) 295
Total discounted free surplus expected to emerge in the next 40 years 8,178 5,439 4,732 18,349 1,210 1,000 274 2,484
The above amounts can be reconciled to the Group’s fi nancial statements as follows: Total £m
Discounted expected generation from all in-force business for years 2013 to 2052 18,349 Discounted expected generation from all in-force business for years after 2052 242
Discounted expected generation from all in-force business at 31 December 2012 18,591 Add: Free surplus of life operations held at 31 December 2012 2,957 Less: Time value of guarantees (683) Other non-modelled items* note 15 1,401
The total number of securities available for issue under the scheme is 10,852 which represents 0.001 per cent of the issued share capital at 31 December 2012. The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £7.00.
Date of grant Exercise price £ Beginning End Beginning of period Granted Exercised Cancelled Forfeited Lapsed End of period 28 Sep 2006 4.75 01 Dec 2011 31 May 2012 5,386 – (3,366) – – (2,020) – 26 Apr 2007 5.72 01 Jun 2012 30 Nov 2012 15,557 – (2,778) – – – 12,779 27 Sep 2007 5.52 01 Dec 2010 31 May 2011 7,607 – – (7,607) – – – 27 Sep 2007 5.52 01 Dec 2012 31 May 2013 2,970 – – – – – 2,970 25 Apr 2008 5.51 01 Jun 2011 30 Nov 2011 4,589 – – (4,589) – – – 25 Apr 2008 5.51 01 Jun 2013 30 Nov 2013 3,834 – – – – – 3,834 25 Sep 2008 4.38 01 Dec 2011 31 May 2012 40,488 – (37,857) (2,631) – – – 25 Sep 2008 4.38 01 Dec 2013 31 May 2014 13,708 – – – – – 13,708 27 Apr 2009 2.88 01 Jun 2012 30 Nov 2012 874,201 – (846,669) – – – 27,532 27 Apr 2009 2.88 01 Jun 2014 30 Nov 2014 714,326 – – (14,564) (13,396) – 686,366 25 Sep 2009 4.25 01 Dec 2012 31 May 2013 46,446 – (29,770) – – – 16,676 25 Sep 2009 4.25 01 Dec 2014 31 May 2015 11,717 – – – – – 11,717 28 Sep 2010 4.61 01 Dec 2013 31 May 2014 1,118,575 – – (10,141) (11,692) – 1,096,742 28 Sep 2010 4.61 01 Dec 2015 31 May 2016 375,352 – – (6,502) – – 368,850 16 Sep 2011 4.66 01 Dec 2014 31 May 2015 644,407 – – (14,491) (20,973) – 608,943 16 Sep 2011 4.66 01 Dec 2016 31 May 2017 266,624 – – (3,942) – – 262,682 21 Sep 2012 6.29 01 Dec 2015 31 May 2016 – 443,315 – – – – 443,315 21 Sep 2012 6.29 01 Dec 2017 31 May 2018 – 97,731 – (1,431) – – 96,300
The total number of securities available for issue under the scheme is 3,652,414 which represents 0.143 per cent of the issued share capital at 31 December 2012. The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £7.11. The weighted average fair value of options granted under the plan in the period was £2.28.
A d d itio n al in fo rm atio n 385Prudential plc Annual Report 2012
In the future, the adverse effects of such factors would be felt principally through the following items: AAAAAAAAAAAAA investment impairments or reduced investment returns, which could impair Prudential’s ability to write signifi cant volumes of new business and would have a negative impact on its assets under management and profi t; AAAAAAAAAAAAA higher credit defaults and wider credit and liquidity spreads resulting in realised and unrealised credit losses; AAAAAAAAAAAAA Prudential in the normal course of business enters into a variety of transactions with counterparties, including derivative transactions. Failure of any of these counterparties to discharge their obligations, or where adequate collateral is not in place, could have an adverse impact on Prudential’s results; and
AAAAAAAAAAAAA estimates of the value of fi nancial instruments being diffi cult because in certain illiquid or closed markets, determining the value at which fi nancial instruments can be realised is highly subjective. Processes to ascertain value and estimates of value require substantial elements of judgment, assumptions and estimates (which may change over time). Increased illiquidity also adds to uncertainty over the accessibility of fi nancial resources and may reduce capital resources as valuations decline.
Global fi nancial markets have experienced, and continue to experience, signifi cant uncertainty brought on, in particular, by concerns over European and US sovereign debt, as well as concerns about a general slowing of global demand refl ecting an increasing lack of confi dence among consumers, companies and governments. Upheavals in the fi nancial markets may affect general levels of economic activity, employment and customer behaviour. For example, 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. 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 profi tability. New challenges related to market fl uctuations and general economic conditions may continue to emerge.
For some non-unit-linked investment products, in particular those written in some of the Group’s Asia operations, it may not be possible to hold assets which will provide cash fl ows to match exactly those relating to policyholder liabilities. This is particularly true in those countries where bond markets are not developed and in certain markets where regulated surrender values are set with reference to the interest rate environment prevailing at the time of policy issue. This results in a mismatch due to the duration and uncertainty of the liability cash fl ows and the lack of suffi cient assets of a suitable duration. While this residual asset/liability mismatch risk can be managed, it cannot be eliminated. Where interest rates in these markets remain lower than interest rates used to calculate surrender values over a sustained period, this could have an adverse impact on Prudential’s reported profi t.
In the US, fl uctuations in prevailing interest rates can affect results from Jackson, which has a signifi cant spread-based business, with the majority of its assets invested in fi xed income securities. In particular, fi xed annuities and stable value products written by Jackson expose Prudential to the risk that changes in interest rates, which are not fully refl ected in the interest rates credited to customers, will reduce spread. The spread is the difference between the rate of return Jackson is able to earn on the assets backing the policyholders’ liabilities and the amounts that are credited to policyholders in the form of benefi t increases, subject to minimum crediting rates.
d d itio n al in fo rm atio n Risk factors
Prudential is subject to the risk of potential sovereign debt credit deterioration owing to the amounts of sovereign debt obligations held in its investment portfolio Prudential is subject to the risk of potential sovereign debt credit deterioration on the amounts of sovereign debt obligations, principally for UK, other European, US and Asia countries held in its investment portfolio. In recent years, rating agencies have downgraded the sovereign debt of some Continental European countries, the UK and the US. There is a risk of further downgrades for these countries. In addition, for some European countries the risk of default has also increased. Investing in such instruments creates exposure to the direct or indirect consequences of political, social or economic changes (including changes in governments, heads of states or monarchs) in the countries in which the issuers are located and the creditworthiness of the sovereign. Investment in sovereign debt obligations involves risks not present in debt obligations of corporate issuers. In addition, the issuer of the debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or pay interest when due in accordance with the terms of such debt, and Prudential may have limited recourse to compel payment in the event of a default. A sovereign debtor’s willingness or ability to repay principal and to pay interest in a timely manner may be affected by, among other factors, its cashfl ow situation, its relations with its central bank, the extent of its foreign currency reserves, the availability of suffi cient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the sovereign debtor’s policy toward local and international lenders, and the political constraints to which the sovereign debtor may be subject. Periods of economic uncertainty may affect the volatility of market prices of sovereign debt to a greater extent than the volatility inherent in debt obligations of other types of issuers. If a sovereign were to default on its obligations, this could have a material adverse effect on Prudential’s fi nancial condition and results of operations.
Prudential is subject to the risk of exchange rate fl uctuations owing to the geographical diversity of its businesses Due to their geographical diversity, Prudential’s businesses are subject to the risk of exchange rate fl uctuations. Prudential’s operations in the US and Asia, which represent a signifi cant proportion of operating profi t based on longer-term investment returns and shareholders’ funds, generally write policies and invest in assets denominated in local currency. Although this practice limits the effect of exchange rate fl uctuations on local operating results, it can lead to signifi cant fl uctuations in Prudential’s consolidated fi nancial statements upon translation of results into pounds sterling. The currency exposure relating to the translation of reported earnings is not currently separately managed. 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 (defi ned as debt over debt plus shareholders’ funds).
As part of a global initiative to identify G-SIFIs, in May 2012, the IAIS published proposed assessment methodology for designating Globally Systemically Important Insurers (G-SIIs). For those groups that are designated by the FSB as G-SII, additional policy measures including enhanced supervision and higher loss absorbency requirements could be proposed. Further detail of the proposals is expected during 2013 and implementation is likely to be over a period of years. Furthermore, the FSA is considering the designation of a Domestically Systemically Important Insurer (D-SII) for those UK insurers that are signifi cant in UK terms. It is not yet clear what the impact of this designation may be.
ComFrame is also being developed by the IAIS to provide common global requirements for the supervision of insurance groups. The framework is designed to develop common principles for supervision and so may increase the focus of regulators in some jurisdictions. It is also possible that some prescriptive requirements, including regarding group capital, could be proposed. Further clarity on ComFrame is expected during the second half of 2013.
The Solvency II Directive covers valuations, the treatment of insurance groups, the defi nition of capital and the overall level of capital requirements. A key aspect of Solvency II is that the assessment of risks and capital requirements are intended to be aligned more closely with economic capital methodologies, and may allow Prudential to make use of its internal economic capital models, if approved by the Financial Services Authority (FSA) or other relevant supervisory authority. The Solvency II Directive was formally approved by the Economic and Financial Affairs Council in November 2009. Representatives from the European Parliament, the European Commission and the Council of the European Union are currently discussing the Omnibus II Directive which, once approved, will amend certain aspects of the original Solvency II Directive. In addition, the European Commission is continuing to develop the detailed rules that will complement the high-level principles of the Directive, referred to as ‘implementing measures’. The Omnibus II Directive is not currently scheduled to be fi nalised until late 2013, while the implementing measures cannot be fi nalised until after Omnibus II. There is a signifi cant uncertainty regarding the fi nal outcome of this process. In particular, the Solvency II rules relating to the determination of the liability discount rate and to the treatment of the US business remain unclear. As a result there is a risk that the effect of the measures fi nally adopted could be adverse for Prudential, including potentially a signifi cant increase in capital required to support its business and that Prudential may be placed at a competitive disadvantage to other European and non-European fi nancial services groups.
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Within the UK, Prudential’s principal competitors in the life market include many of the major retail fi nancial services companies including, in particular, Aviva, Legal & General, Lloyds Banking Group and Standard Life.
Jackson’s competitors in the US include major stock and mutual insurance companies, mutual fund organisations, banks and other fi nancial services companies such as AIG, AXA Financial Inc., Hartford Life Inc., Prudential Financial, Lincoln National, MetLife and TIAA–CREF.
The resolution of several issues aff ecting the fi nancial services industry could have a negative impact on Prudential’s reported results or on its relations with current and potential customers Prudential is, and in the future may be, subject to legal and regulatory actions in the ordinary course of its business, both in the UK and internationally. These actions could involve a review of business sold in the past under acceptable market practices at the time, such as the requirement in the UK to provide redress to certain past purchasers of pension and mortgage endowment policies, changes to the tax regime affecting products and regulatory reviews on products sold and industry practices, including, in the latter case, businesses it has closed.
In the US, federal and state regulators have focused on, and continue to devote substantial attention to, the mutual fund, fi xed index annuity and insurance product industries. This focus includes new regulations in respect of the suitability of sales of certain products. As a result of publicity relating to widespread perceptions of industry abuses, there have been numerous regulatory inquiries and proposals for legislative and regulatory reforms.
Downgrades in Prudential’s fi nancial strength and credit ratings could signifi cantly impact its competitive position and hurt its relationships with creditors or trading counterparties Prudential’s fi nancial strength and credit ratings, which are used by the market to measure its ability to meet policyholder obligations, are an important factor affecting public confi dence in most of Prudential’s products, and as a result its competitiveness. Downgrades in Prudential’s ratings, as a result of, for example, decreased profi tability, increased costs, increased indebtedness or other concerns, could have an adverse effect on its ability to market products; retain current policyholders; and on the Group’s fi nancial fl exibility. In addition, the interest rates Prudential pays on its borrowings are affected by its debt credit ratings, which are in place to measure the Group’s ability to meet its contractual obligations.
Prudential’s long-term senior debt is rated as A2 by Moody’s, A+ by Standard & Poor’s and A by Fitch. The Moody’s and Fitch ratings are on stable outlook and the Standard & Poor’s rating is on negative outlook.
Jackson’s fi nancial strength is rated AA by Standard & Poor’s and Fitch, A1 by Moody’s, and A+ by AM Best. The Moody’s, Fitch and AM Best ratings are on stable outlook and the Standard & Poor’s rating is on negative outlook.
Another example is the impact of epidemics and other effects that cause a large number of deaths. Signifi cant infl uenza epidemics have occurred three times in the last century, but the likelihood, timing, or the severity of future epidemics cannot be predicted. The effectiveness of external parties, including governmental and non-governmental organisations, in combating the spread and severity of any epidemics could have a material impact on the Group’s loss experience.
As a holding company, Prudential is dependent upon its subsidiaries to cover operating expenses and dividend payments The Group’s insurance and investment management operations are generally conducted through direct and indirect subsidiaries.
Asset backed security A security whose value and income payments are derived from and collateralised (or ‘backed’) by a specifi ed pool of underlying assets. The pool of assets is typically a group of small and illiquid assets that are unable to be sold individually.
Available for sale (AFS) Securities that have been acquired neither for short-term sale nor to be held to maturity. Shown at fair value on the statement of fi nancial position and changes in value are taken straight to equity instead of the income statement.
AAAAAAAAAAAAA That are contractually based on asset, fund, company or other entity performance as discussed in IFRS 4.
Dividend cover Dividend cover is calculated as operating profi t after tax on an IFRS basis, divided by the current year interim dividend plus the proposed fi nal dividend.
Endowment product An ordinary individual life insurance product that provides the insured party with various guaranteed benefi ts if it survives specifi c maturity dates or periods stated in the policy. Upon the death of the insured party within the coverage period, a designated benefi ciary receives the face value of the policy.
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 fl exible payout options. The contract holder pays the insurer a premium, which is credited to the contract holder’s account. Periodically, interest is credited to the contract holder’s account and administrative charges are deducted, as appropriate.
Fixed indexed annuities These are similar to fi xed annuities in that the contract holder pays the insurer a premium, which is credited to the contract holder’s account, and periodically, interest is credited to the contract holder’s account and administrative charges are deducted, as appropriate. An annual minimum interest rate may be guaranteed, although actual interest credited may be higher and is linked to an equity index over its indexed option period.
Funds under management These comprise funds of the Group held in the statement of fi nancial position and external funds that are managed by Prudential asset management operations.
Guaranteed annuities Policies that pay out a fi xed amount of benefi t for a defi ned period.
Guaranteed minimum accumulation benefi t (GMAB) (US) A guarantee that ensures that the contract value of a variable annuity contract will be at least equal to a certain minimum amount after a specifi ed number of years.
Immediate annuity An annuity in which payments to the annuitant or benefi ciary start at once upon establishment of the annuity plan or scheme. Such annuities are almost always purchased with a single (lump sum) payment.
In-force An insurance policy or contract refl ected on records that has not expired, matured or otherwise been surrendered or terminated.
Net premiums Life insurance premiums net of reinsurance premiums ceded to third-party reinsurers.
Participating funds Distinct portfolios where the policyholders have a contractual right to receive at the discretion of the insurer additional benefi ts based on factors such as the performance of a pool of assets held within the fund, as a supplement to any guaranteed benefi ts. The insurer may either have discretion as to the timing of the allocation of those benefi ts to participating policyholders or may have discretion as to the timing and the amount of the additional benefi ts. For Prudential, the most signifi cant participating funds are with-profi ts funds for business written in the UK, Hong Kong, Malaysia and Singapore.
Participating policies or participating business Contracts of insurance where the policyholders have a contractual right to receive, at the discretion of the insurer, additional benefi ts based on factors such as investment performance, as a supplement to any guaranteed benefi ts. This is also referred to as with-profi ts business.
Risk margin reserve (RMR) charge An RMR is included within operating profi t based on longer-term investment returns and represents a charge for long-term expected defaults of debt securities, determined by reference to the credit quality of the portfolio.
Scottish Amicable Insurance Fund (SAIF) SAIF is a ring-fenced sub-fund of the Prudential Assurance Company’s long-term fund following the acquisition of the mutually owned Scottish Amicable Life Assurance Society in 1997. The fund is solely for the benefi t of policyholders of SAIF. Shareholders of Prudential plc have no interest in the profi ts of this fund although they are entitled to asset management fees on this business.
Time value of options and guarantees The value of fi nancial options and guarantees comprises two parts, the intrinsic value and the time value. The intrinsic value is given by a deterministic valuation on best estimate assumptions. The time value is the additional value arising from the variability of economic outcomes in the future.
Universal life An insurance product where the customer pays fl exible premiums, subject to specifi ed limits, that are accumulated in an account and are credited with interest (at a rate either set by the insurer or refl ecting returns on a pool of matching assets). The customer may vary the death benefi t and the contract may permit the customer to withdraw the account balance, typically subject to a surrender charge.
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 fl uctuate, 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.
Ex dividend date 27 March 2013 28 March 2013 27 March 2013 28 March 2013 Record date 2 April 2013 2 April 2013 2 April 2013 2 April 2013
Annual General Meeting The 2013 Annual General Meeting (AGM) will be held on 16 May 2013 at 11.00am in the Churchill Auditorium at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE. The directors believe the AGM is an important opportunity to communicate directly with shareholders. The Notice of Meeting and all other details for the AGM are available on our website at www.prudential.co.uk/investors/AGM information
For enquiries about shareholdings, including dividends and lost share certifi cates, please contact the Company’s registrars: By post Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA
Irish branch register The Company operates a branch register for shareholders in Ireland. All enquiries regarding Irish branch register accounts should be directed to Capita Registrars (Ireland) Limited, 2 Grand Canal Square, Dublin 2. Telephone: +353 1 553 0050
Hong Kong branch register The Company operates a branch register for shareholders in Hong Kong. All enquiries regarding Hong Kong branch register accounts should be directed to Computershare Hong Kong Investor Services Limited, 17M Floor, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong. Telephone: +852 2862 8555
Electronic communications Shareholders are encouraged to elect to receive shareholder documents electronically by registering with Shareview at www.shareview.co.uk – this will save on printing and distribution costs, and create environmental benefi ts. Shareholders who have registered will be sent an email notifi cation whenever shareholder documents are available on the Company’s website and a link will be provided to that information. When registering, shareholders will need their shareholder reference number which can be found on their share certifi cate or proxy form. The option to receive shareholder documents electronically is not available to shareholders holding shares through The Central Depository (Pte) Limited (CDP). Please contact Equiniti if you require any assistance or further information.
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 on page 396 or telephone 0871 384 2248. They also offer a telephone and internet dealing service, Shareview, which provides a simple and convenient way of selling Prudential plc shares. For telephone sales call 0871 384 2020 between 8.30am and 4.30pm, Monday to Friday, and for internet sales log on to www.shareview.co.uk/dealing
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Registered offi ce Laurence Pountney Hill London EC4R 0HH Registered number 1397169 www.prudential.co.uk
Prudential plc is a company incorporated, subsidiaries of which are authorised and regulated, as applicable, by the Prudential Regulation Authority and the Financial Conduct Authority. The Prudential Regulation Authority and the Financial Conduct Authority replaced the Financial Services Authority on 1 April 2013.
Prudential plc is a holding company, subsidiaries of which are authorised and regulated, as applicable, by the Prudential Regulation Authority and the Financial Conduct Authority.
The Prudential Regulation Authority and the Financial Conduct Authority replaced the Financial Services Authority on 1 April 2013.