Curian Capital, LLC OS 100.00% 1 Corporate Way, Lansing, MI 48951, USA
Digital Infrastructure Investment Partners SLP GP LLP LPI 100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
Digital Infrastructure Investment Partners SLP GP1 Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
Eastspring Investments ‑ Asian Local Bond Fund OS 97.95% 26, Boulevard Royal, L‑2449, Luxembourg
Eastspring Investments ‑ Developed and Emerging Asia Equity Fund OS 100.00%
Eastspring Investments (Luxembourg) SA OS 100.00% 26, Boulevard Royal, L‑2449, Luxembourg
Eastspring Investments (Singapore) Limited OS 100.00% 10 Marina Boulevard, #32‑01, Marina Bay Financial Centre, Tower 2, Singapore 018983
Eastspring Investments China Equity Fund OS 50.03% 26, Boulevard Royal, L‑2449, Luxembourg
Eastspring Investments Fund Management Limited Liability Company MI 100.00% 23rd Floor, Saigon Trade Center, 37 Ton Duc Thang Street, District 1, Ho Chi Minh City, Vietnam
Eastspring Investments Incorporated OS 100.00% 874 Walker Road, Suite C, Dover, DE 19904, USA
Eastspring Investments India Consumer Equity Open Limited OS 100.00% Suite 450, 4th Floor, Barkly Wharf East, Le Caudan Waterfront, Port Louis, Mauritius
Eastspring Investments India Equity Fund OS 81.09% 26, Boulevard Royal, L‑2449, Luxembourg
Eastspring Investments India Equity Open Limited OS 100.00% Suite 450, 4th Floor, Barkly Wharf East, Le Caudan Waterfront, Port Louis, Mauritius
Eastspring Investments Limited (In liquidation) OS 100.00% Level 6, Precinct Building 5, Unit 5, Dubai International Financial Centre, Dubai, United Arab Emirates
Eastspring Investments Services Pte. Ltd. OS 100.00% 10 Marina Boulevard, #32‑01, Marina Bay Financial Centre, Tower 2, Singapore 018983
Edger Investments Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
Edinburgh Park (Management) Limited LBG 100.00% 1 Exchange Crescent, Conference Square, Edinburgh, EH3 8UL, UK
Key to Classes of shares held LBG Limited by Guarantee LPI Limited Partnership Interest MI Membership Interest NSB Non‑stock basis OS Ordinary Shares PI Partnership Interest PS Preference Shares U Units
Embankment GP Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
Empire Holding SARL (In liquidation) OS 100.00% 5, rue Guillaume Kroll, L‑1882, Luxembourg
Fashion Square ECO LP (In liquidation) LPI 100.00% 1209 Orange Street, Wilmington, DE 19801, USA
Furnival Insurance Company PCC Limited OS 100.00% Third Floor, La Plaiderie Chambers, La Plaiderie, St Peter Port, Guernsey, GY1 1WG
Genny GP Limited OS 100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
Genny GP 1 LLP LPI 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
Hudson Seasons, LLC MI 100.00% 874 Walker Road, Suite C, Dover, DE 19904, USA
IFC Holdings, Inc OS 100.00% 1209 Orange Street, Wilmington, DE 19801, USA
Infracapital F1 GP2 Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
Infracapital Greenfield Partners I GP 1 Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
Infracapital Greenfield Partners I SLP2 GP LLP LPI 100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
Infracapital Long Term Income Partners GP 1 Limited (In liquidation) OS 100.00%
Infracapital Long Term Income Partners GP 2 Limited (In liquidation) OS 100.00%
Infracapital Partners II Subholdings GP LLP LPI 100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
Infracapital Partners LP LPI 33.04% Laurence Pountney Hill, London, EC4R 0HH, UK
INVEST Financial Corporation Insurance Agency Inc, of Delaware OS 100.00% 100 West 10th Street, Wilmington, DE 19801, USA
Jackson Holdings, LLC OS 100.00% 1105 North Market Street, Suite 1300, Wilmington, DE 19801, USA
Jackson National Asset Management, LLC OS 100.00% 1 Corporate Way, Lansing, MI 48951, USA
Jackson National Life Distributors, LLC OS 100.00% 1209 Orange Street, Wilmington, DE 19801, USA
Jackson National Life Insurance Company OS 100.00% 1 Corporate Way, Lansing, MI 48951, USA
Lion Credit Opportunity Fund plc – Credit Opportunity Fund XV OS 99.98% 53 Merrion Square South, Dublin 2, D02 PR63, Ireland
M&G (Guernsey) Limited OS 100.00% Dorey Court, Admiral Park, St. Peter Port, Guernsey, GY1 2HT
M&G (Lux) Investment Funds 1 ‑ M&G (Lux) Floating Rate High Yield Solution OS 93.99% 49, Avenue J.F. Kennedy, L‑1855, Luxembourg
M&G Asia Property Fund OS 54.49% 34‑38, Avenue de la Liberté, L‑1930, Luxembourg
M&G Corporate Bond Fund OS 25.71% Laurence Pountney Hill, London, EC4R 0HH, UK
M&G European Property Fund SICAV‑FIS OS 51.86% 34‑38, Avenue de la Liberté, L‑1930, Luxembourg
M&G Global Credit Investment Fund OS 67.28% 80, route d’Esch, L‑1470, Luxembourg
M&G International Investments SA OS 100.00% 34‑38, Avenue de la Liberté, L‑1930, Luxembourg
M&G Investment Funds (10) ‑ M&G Absolute Return Bond Fund OS 50.23% Laurence Pountney Hill, London, EC4R 0HH, UK
M&G Investments (Singapore) Pte. Ltd. OS 100.00% 10 Marina Boulevard, #32‑01, Marina Bay Financial Centre, Singapore 018983
M&G Luxembourg SA OS 100.00% 34‑38, Avenue de la Liberté, L‑1930, Luxembourg
M&G PFI 2018 GP LLP LPI 100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
M&G PFI 2018 GP1 Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
M&G Platform Nominees Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
M&G Real Estate Asia Holding Company Pte. Ltd. OS 100.00% 10 Marina Boulevard, #32‑01, Marina Bay Financial Centre, Singapore 018983
M&G Real Estate Funds Management SARL OS 100.00% 34‑38, Avenue de la Liberté, L‑1930, Luxembourg
M&G Real Estate Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
M&G Real Estate UK Enhanced Value LP LPI 100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
M&G RED Employee Feeder GP Limited OS 100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
M&G RED II Employee Feeder GP Limited OS 100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
M&G RPF GP Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
Manchester JV Limited OS 50.00% 40 Broadway, London, SW1H 0BU, UK
Minster Court Estate Management Limited OS 75.00% Laurence Pountney Hill, London, EC4R 0HH, UK
MM&S (2375) Limited (In liquidation) OS 100.00% c/o Mazars LLP, 90 St. Vincent Street, Glasgow, G2 5UB, UK
Murphy & Partners Fund, LP LPI 21.07% 2711 Centreville Road, Suite 400, Wilmington, DE 19808, USA
NAPI REIT, Inc OS 99.00% 300 E Lombard Street, Baltimore, MD 21202, USA
Nova Sepadu Sdn. Bhd. (In liquidation) OS 51.00% Suite 1005, 10th Floor Wisma Hamzah‑Kwong Hing, No. 1 Leboh Ampang, 50100 Kuala Lumpur, Malaysia
Optimus Point Management Company Limited OS 100.00% Barratt House Cartwright Way, Bardon Hill, Coalville, Leicestershire, LE67 1UF, UK
PGDS (UK One) Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
PGF Management Company (Ireland) Limited OS 50.00% 5 George’s Dock, Dublin 1, D01 X8N7, Ireland
PPMC First Nominees Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
Prenetics Limited PS 15.00% 7th Floor, Prosperity Millennia Plaza, 663 King’s Road, North Point, Hong Kong
Property Partners (Two Rivers) Limited OS 50.00% Bow Bells House, 1 Bread Street, London, EC4M 9HH, UK
Pru Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
Prudence Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
Prudential / M&G UKCF GP Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
www.prudential.co.uk Annual Report 2017 Prudential plc 295 01 G roup overview 02 Strategic report 03 G
Prudential Dublin Investments Limited (In liquidation) OS 100.00% IFSC, North Wall Quay, Dublin 1, D01 H104, Ireland
Prudential Dynamic 0‑30 Portfolio OS 29.81% 17 Rochester Row, London, SW1P 1QT, UK
Prudential Europe Assurance Holdings Limited (In liquidation) OS 100.00% c/o Mazars LLP, 90 St. Vincent Street, Glasgow, G2 5UB, UK
Prudential Financial Planning Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
Prudential Global Services Private Limited OS 100.00% Prudential House, Mumbai, India
Prudential Greenfield GP LLP LPI 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
Prudential Greenfield SLP GP LLP LPI 100.00% 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ, UK
Prudential Group Pensions Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
Prudential International Staff Pensions Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
Prudential Investments Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
Prudential Loan Investments 1 SARL OS 100.00% 1, Rue Hildegard von Bingen, L ‑ 1282 Luxembourg
Prudential Mauritius Holdings Limited OS 100.00% Suite 450, 4th Floor, Barkly Wharf East, Le Caudan Waterfront, Port Louis, Mauritius
Prudential Pensions Management Zambia Limited OS 49.00% Prudential House, Thabo Mbeki Road, Lusaka, Zambia
Prudential Portfolio Managers (South Africa) (Pty) Limited OS A Class OS
Prudential Property Holding Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
Prudential Staff Pensions Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
PVFC Financial Limited OS 100.00% 13th Floor, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong
Reksa Dana Eastspring IDR Fixed Income Fund (NDEIFF) OS 100.00% 23rd Floor, Prudential Tower, JI. Jendral Sudirman Kav. 79, 12910, Jakarta Selatan, Indonesia
Rhodium Investment Fund OS 100.00% 10 Marina Boulevard, #32‑01, Marina Bay Financial Centre, Singapore 018983
www.prudential.co.uk Annual Report 2017 Prudential plc 297 01 G roup overview 02 Strategic report 03 G
Smithfield Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
SM, LLC LPI 100.00% 1209 Orange Street, Wilmington, DE 19801, USA
Squire Reassurance Company II, Inc OS 100.00% 40600 Ann Arbor Road, East Suite 201, Plymouth, MI 48170, USA
St Edward Homes Limited OS 50.00% Berkeley House, 19 Portsmouth Road, Cobham, Surrey, KT11 1JG, UK
Stableview Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
Staple Limited OS 100.00% 3 Rajanakarn Building, 20th Floor, South Sathorn Road, Yannawa Subdistrict, Sathorn District, Bangkok, Thailand
Staple Nominees Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
The First British Fixed Trust Company Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
Three Snowhill Birmingham SARL OS 100.00% 5, rue Guillaume Kroll, L‑1882, Luxembourg
Two Snowhill Birmingham SARL OS 100.00% 5, rue Guillaume Kroll, L‑1882, Luxembourg
US Strategic Income Bond Fund D USD Acc OS 96.36% 26, Boulevard Royal, L‑2449, Luxembourg
Warren Farm Office Village Limited (In liquidation) OS 100.00% c/o Mazars LLP, 45 Church Street, Birmingham, B3 2RT, UK
Wynnefield Private Equity Partners II, LP LPI 99.00% 1209 Orange Street, Wilmington, DE 19801, USA
Zenith‑Prudential Life Insurance Company Limited OS 51.00% Plot 280, Ajose Adeogun Street, Victoria Island, Nigeria
Entities consolidated by the Group include Qualifying Partnerships as defined under the UK Partnerships (Accounts) Regulations 2008 (the ‘Partnerships Act’). Some of these limited partnerships have taken advantage of the exemption under regulation 7 of the Partnerships Act from the financial statements requirements. This is under regulations 4 to 6, on the basis that these limited partnerships are dealt with on a consolidated basis in these financial statements.
(iii) Structured entities Structured entities are those that have been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity. Voting rights relate to administrative tasks. Relevant activities are directed by means of contractual arrangements. The Group invests in structured entities such as: — Open‑Ended Investment Companies (OEICs); — Unit Trusts (UTs); — Limited partnerships; — Variable interest entities; — Investment vehicles within separate accounts offered through variable annuities; — Collateralised debt obligations; — Mortgage‑backed securities; and — Similar asset‑backed securities.
www.prudential.co.uk Annual Report 2017 Prudential plc 299 01 G roup overview 02 Strategic report 03 G
Other structured entities The Group holds investments in mortgage‑backed securities, collateralised debt obligations and similar asset‑backed securities, the majority of which are actively traded in a liquid market.
The Group consolidates the vehicles that hold the investments where the Group is deemed to control the vehicles. When assessing control over the vehicles, the factors considered include the purpose and design of the vehicle, the Group’s exposure to the variability of returns and the scope of the Group’s ability to direct the relevant activities of the vehicle including any kick‑out or removal rights that are held by third parties. The outcome of the control assessment is dependent on the terms and conditions of the respective individual arrangements.
Statement of financial position line items Equity securities and portfolio holdings in unit trusts 20,718 130,528 – 16,489 120,411 – Debt securities – – 10,894 – – 12,220
As at 31 December 2017, the Group does not have an agreement, contractual or otherwise, or intention to provide financial support to structured entities that could expose the Group to a loss.
Policy fees charged on linked and unitised with‑profits policies for mortality, asset management and policy administration are recognised as revenue when related services are provided.
(e) Financial investments other than instruments classified as long-term business contracts (i) Investment classification The Group holds financial investments in accordance with IAS 39, whereby subject to specific criteria, financial instruments are required to be accounted for under one of the following categories: — Financial assets and liabilities at fair value through profit or loss – this comprises assets and liabilities designated by management as fair value through profit or loss on inception and derivatives that are held for trading. These investments are measured at fair value with all changes thereon being recognised in investment return in the income statement; — Financial investments on an available‑for‑sale basis – this comprises assets that are designated by management as available‑for‑sale and/or do not fall into any of the other categories. These assets are initially recognised at fair value plus attributable transaction costs. Available‑for‑sale assets are subsequently measured at fair value. Interest income is recognised on an effective interest basis in the income statement. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset. Except for foreign exchange gains and losses on debt securities, which are included in the income statement, unrealised gains and losses are recognised in other comprehensive income. Upon disposal or impairment, accumulated unrealised gains and losses are transferred from other comprehensive income to the income statement as realised gains or losses; and
(ii) Derivatives and hedge accounting Derivative financial instruments are used to reduce or manage investment, interest rate and currency exposures, to facilitate efficient portfolio management and for investment purposes.
The Group does not regularly seek to apply fair value or cash flow hedging treatment under IAS 39. The Group has no fair value and cash flows hedges under IAS 39 at 31 December 2017 and 2016.
All derivatives that are not designated as hedging instruments are carried at fair value, with movements in fair value being recorded in the income statement.
The primary areas of the Group’s continuing operations where derivative instruments are held are the UK with‑profits funds and annuity business, and Jackson.
For UK with‑profits funds the derivative programme is used for the purposes of efficient portfolio management or reduction in investment risk.
(iii) Embedded derivatives Embedded derivatives are present in host contracts issued by various Group companies, in particular Jackson. They are embedded within other non‑derivative host financial instruments and insurance contracts to create hybrid instruments. Embedded derivatives meeting the definition of an insurance contract are accounted for under IFRS 4. Where economic characteristics and risks of the embedded derivatives are not closely related to the economic characteristics and risks of the host instrument, and where the hybrid instrument is not measured at fair value with the changes in fair value recognised in the income statement, the embedded derivative is bifurcated and carried at fair value as a derivative measured in accordance with IAS 39.
(iv) Securities lending and reverse repurchase agreements The Group is party to various securities lending agreements (including repurchase agreements) under which securities are loaned to third parties on a short‑term basis. The loaned securities are not derecognised; rather, they continue to be recognised within the appropriate investment classification. The Group’s policy is that collateral in excess of 100 per cent of the fair value of securities loaned is required from all securities’ borrowers and typically consists of cash, debt securities, equity securities or letters of credit.
(v) Derecognition of financial assets and liabilities The Group’s policy is to derecognise financial assets when it is deemed that substantially all the risks and rewards of ownership have been transferred.
(vi) Financial liabilities designated at fair value through profit or loss Consistent with the Group’s risk management and investment strategy and the nature of the products concerned, the Group has designated under IAS 39 classification certain financial liabilities at fair value through profit or loss as these instruments are managed and their performance evaluated on a fair value basis. These instruments include liabilities related to consolidated collateralised debt obligations and net assets attributable to unit holders of consolidated unit trusts and similar funds.
(f) Segments Under IFRS 8 ‘Operating Segments’, the Group determines and presents operating segments based on the information that is internally provided to the Group Executive Committee which is the Group’s chief operating decision maker.
The plan assets of the Group’s pension schemes include several insurance contracts that have been issued by the Group. These assets are excluded from plan assets in determining the pension surplus or deficit recognised in the consolidated statement of financial position. The aggregate of the actuarially determined service costs of the currently employed personnel, and the net interest on the net defined benefit liability (asset) at the start of the period, is charged to the income statement. Actuarial and other gains and losses as a result of changes in assumptions or experience variances are recognised as other comprehensive income.
The Company has established trusts to facilitate the delivery of Prudential plc shares under employee incentive plans and savings‑ related share option schemes. The cost to the Company of acquiring these treasury shares held in trusts is shown as a deduction from shareholders’ equity.
www.prudential.co.uk Annual Report 2017 Prudential plc 303 01 G roup overview 02 Strategic report 03 G
(k) Tax Prudential is subject to tax in numerous jurisdictions and the calculation of the total tax charge inherently involves a degree of estimation and judgement. Current tax expense is charged or credited based upon amounts estimated to be payable or recoverable as a result of taxable amounts for the current year and adjustments made in relation to prior years. The positions taken in tax returns where applicable tax regulation is subject to interpretation are recognised in full in the determination of the tax charge in the financial statements if the Group considers that it is probable that the taxation authority will accept those positions. Otherwise, provisions are established based on management’s estimate and judgement of the likely amount of the liability, or recovery, by providing for the single best estimate of the most likely outcome or the weighted average expected value where there are multiple outcomes.
The total tax charge includes tax expense attributable to both policyholders and shareholders. The tax expense attributable to policyholders comprises the tax on the income of the consolidated with‑profits and unit‑linked funds. In certain jurisdictions, such as the UK, life insurance companies are taxed on both their shareholders’ profits and on their policyholders’ insurance and investment returns on certain insurance and investment products. Although both types of tax are included in the total tax charge in the Group’s consolidated income statement, they are presented separately in the consolidated income statement to provide the most relevant information about tax that the Group pays on its profits.
(l) Business acquisitions and disposals Business acquisitions are accounted for by applying the purchase method of accounting, which adjusts the net assets of the acquired company to fair value at the date of purchase. The excess of the acquisition consideration over the fair value of the assets and liabilities of the acquired entity is recorded as goodwill. Expenses related to acquiring new subsidiaries are charged to the income statement in the period in which they are incurred. Income and expenses of acquired entities are included in the income statement from the date of acquisition.
(p) Shareholders’ dividends Interim dividends are recorded in the period in which they are paid. Final dividends are recorded in the period in which they are approved by shareholders.
www.prudential.co.uk Annual Report 2017 Prudential plc 305 01 G roup overview 02 Strategic report 03 G
Transactions with owners, recorded directly in equity New share capital subscribed 1 12 – 13 Share based payment transactions – – 6 6
www.prudential.co.uk Annual Report 2017 Prudential plc 307 01 G roup overview 02 Strategic report 03 G
Prudential plc (the Company) is a parent holding company. The Company together with its subsidiaries (collectively, the Group) is an international financial services group with operations in Asia, the US, UK and Europe and Africa. In Asia, the Group has operations in Hong Kong, Indonesia, Malaysia, Singapore and other markets. In the US, the Group’s principal subsidiary is Jackson National Life Insurance Company. In UK and Europe, the Group operates through its subsidiaries, primarily The Prudential Assurance Company Limited and M&G Investment Management Limited. In August 2017 the Company announced that it was bringing together M&G with Prudential’s UK and European savings and retirement business to form M&G Prudential.
As the consolidated financial statements of the Group include the equivalent disclosures, the Company has also applied the exemptions available under FRS 101 in respect of the following disclosures: — IFRS 2 ‘Share Based Payments’ in respect of Group‑settled share‑based payments; and — Disclosure required by IFRS 7 ‘Financial Instrument Disclosures’ and IFRS 13 ‘Fair Value Measurement’.
Amounts owed by subsidiary undertakings Amounts owed by subsidiary undertakings are shown at cost, less provisions.
Foreign currency translation Assets and liabilities denominated in foreign currencies, including borrowings that have been used to finance 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 profit and loss account for the year.
Tax Current tax expense is charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of taxable amounts for the current year. To the extent that losses of an individual UK company are not offset in any one year, they can be carried back for one year or carried forward indefinitely to be offset against profits arising from the same company.
Share-based payments The Group offers share award and option plans for certain key employees and a Save As You Earn (‘SAYE’) plan for all UK and certain overseas employees. The share‑based payment plans operated by the Group are mainly equity‑settled plans with a few cash‑settled plans.
Under IFRS 2 ‘Share‑based payment’, where the Company, as the parent company, has the obligation to settle the options or awards of its equity instruments to employees of its subsidiary undertakings, and such share‑based payments are accounted for as equity‑ settled in the Group financial statements, the Company records an increase in the investment in subsidiary undertakings for the value of the share options and awards granted with a corresponding credit entry recognised directly in equity. The value of the share options and awards granted is based upon the fair value of the options and awards at the grant date, the vesting period and the vesting conditions.
The parent company financial statements are prepared in accordance with FRS 101 and the Group financial statements are prepared in accordance with IFRS as issued by the IASB and endorsed by the EU. At 31 December 2017, there were no differences between FRS 101 and IFRS as issued by the IASB and endorsed by the EU in terms of their application to the parent company.
Profit after tax Profit for the financial year of the Company (including dividends from subsidiaries) in accordance with
Net equity Shareholders’ equity of the Company in accordance with FRS 101 and IFRS 7,629 7,505 Share in the IFRS net equity of the Group* 8,458 7,161
Shareholders’ equity of the Group in accordance with IFRS 16,087 14,666 * The ‘share in the IFRS result and net equity of the Group’ lines represent the parent company’s equity in the earnings and net assets of its subsidiaries and associates.
The profit for the financial year of the Company in accordance with IFRS includes dividends received in the year from subsidiary undertakings of £1,685 million and £1,318 million for the years ended 31 December 2017 and 2016, respectively.
As stated in note 3, under FRS 101, the Company accounts for its investments in subsidiary undertakings at cost less impairment. For the purpose of this reconciliation, no adjustment is made to the Company in respect of any valuation adjustments to shares in subsidiary undertakings that would be eliminated on consolidation.
The liquidation in 2016 related to a central finance subsidiary in order to simplify the Group’s corporate structure. Other movements comprise £6 million (2016: £6 million) in respect of share‑based payments, reflecting the value of payments settled by the Company for employees of its subsidiary undertakings, less £67 million (2016: £61 million) relating to cash received from subsidiaries in respect of share awards.
Cross‑currency swap 5 – 4 – Inflation‑linked swap – 443 – 447
Derivative financial instruments are held to manage certain macro‑economic exposures. The change in fair value of the derivative financial instruments of the Company was a gain before tax of £5 million (2016: loss of £122 million).
Notes on the parent company financial statements continued 7 Pension scheme financial position
At 31 December 2005, the allocation of surpluses and deficits attaching to the Scheme between the Company and the unallocated surplus of The Prudential Assurance Company Limited (PAC) with‑profits fund was apportioned in the ratio 30/70 following detailed consideration of the sourcing of previous contributions. This ratio was applied to the base deficit position at 1 January 2006 and for the purpose of determining the allocation of the movements in that position up to 31 December 2017. The IAS 19 service charge and ongoing employer contributions are allocated by reference to the cost allocation for current activity.
Fair value of Scheme assets 7,231 243 7,474 7,490 137 7,627 Present value of benefit obligations (6,753) (6,910)
Surplus in the Scheme recognised by the Company† 71 48 * 93 per cent (2016: 96 per cent) of the bonds are investment graded. † The surplus in the Scheme recognised in the balance sheet of the Company represents the amount that is recoverable through reduced future contributions and is net of the apportionment to the PAC with‑profits fund.
The changes in the fair value of the underlying Scheme assets and the present value of the underlying benefit obligations are as follows: 2017 £m
Actuarial gains (losses) note (ii) 949 (1,226) (277) 274 (3) Contributions paid by the employer note (iii) 11 – 11 – 11 Contributions paid by the employee 1 (1) – – – Benefits paid (307) 307 – – –
Notes (i) The weighted average duration of the benefit obligations of the Scheme is 17 years (2016: 18 years). The following table provides an expected maturity analysis of the undiscounted benefit obligations as at 31 December: £m 1 year or less After 1 year to 5 years After 5 years to 10 years After 10 years to 15 years After 15 years to 20 years Over 20 years Total
(ii) The actuarial gains attributable to policyholders and shareholders are analysed as follows: Return on Scheme assets excluding interest income* 40 949 Actuarial gains (losses) Experience gains on Scheme liabilities 70 87 Actuarial (losses) – demographic assumptions (10) (32) Actuarial (losses) – financial assumptions (93) (1,281)
Company. In 2017, the gains included a credit of £31 million (2016: £87 million) for the adjustment to the unrecognised portion of surplus. The gains after tax of £28 million (2016: £4 million) are recorded in other comprehensive income.
(iii) Employer contributions to be paid into the Scheme for the year ending 31 December 2018 are expected to amount to £10 million, comprising ongoing service contributions and expenses.
Borrowings are repayable as follows: Notes (i) Further details on the core structural borrowings of the Company are provided in note C6.1 of the Group financial statements. (ii) The interests of the holders of the subordinated liabilities are subordinate to the entitlements of other creditors of the Company. (iii) These borrowings support a short‑term fixed income securities programme.
alue (EEV ) basis results 07 A dditional inform ation 11 Retained profit of the Company
Retained profit at 31 December 2017 amounted to £5,552 million (2016: £5,449 million). The retained profit includes distributable reserves of £3,066 million and non‑distributable reserves of £2,486 million. The non‑distributable reserves comprise £2,405 million relating to gains made by intermediate holding companies following the transfer at fair value of certain subsidiaries to other parts of the Group as part of internal restructuring exercises in previous years and £81 million of share‑based payment reserves. The amount of £2,405 million is not able to be regarded as part of the distributable reserves of the parent company because the gains relate to intra‑group transactions.
In determining the dividend payment in any year the directors follow the Group dividend policy described in the Chief Financial Officer’s report section of this Annual Report. The directors consider the Company’s ability to pay current and future dividends twice a year by reference to the Company’s business plan and certain stressed scenarios.
12 Other information a Information on directors’ remuneration is given in the directors’ remuneration report section of this Annual Report and note B2.3 of the Group financial statements.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
alue (EEV ) basis results 07 A dditional inform ation 1 Our opinion is unmodified We have audited the financial statements of Prudential plc (‘the Group and parent company’) for the year ended 31 December 2017 which comprise: — The consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity, consolidated statement of financial position and consolidated statement of cash flows, and the related notes, including accounting policies in notes A3 and E1; and
— The financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.
Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (‘ISAs (UK)’) and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the audit committee.
Subjective valuation This is an area that involves significant judgement over uncertain future outcomes, mainly the ultimate total settlement value of long‑term policyholder liabilities. Economic assumptions, including investment return, credit risk and associated discount rates, and operating assumptions including mortality, morbidity, expenses and persistency (including consideration of policyholder behaviour) are the key inputs used to estimate these long‑term liabilities, in addition to the appropriate design and calibration of reserving models.
The specific application of these judgements to individual components is explained below.
For the US component, the valuation of the guarantees in the variable annuity (‘VA’) business is complex as it involves exercising significant judgement over the relationship between the investment return attaching to these products and the guarantees contractually provided to policyholders and the likely policyholder behaviour in response to changes in investment performance.
— Evaluating the analysis of the movements in policyholder liabilities during the year, including consideration of whether the movements were in line with the methodology and assumptions adopted.
For the Asia component, the valuation of the policyholder liabilities requires significant judgement over the setting of mortality and morbidity assumptions.
Benchmarking assumptions and sector experience — Assessing the assumptions for investment mix and projected investment returns by comparing to company specific and industry data and for future growth rates by comparing to market trends and market volatility; and
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Model evaluation — Evaluating the appropriateness of the calibration of the Continuous Mortality Investigation model adopted based on the analysis of the characteristics of the policyholder population and actual mortality experience.
We used our own valuation models to perform an independent recalculation of a sample of policyholder liabilities to ensure that the selected model calibration has been appropriately implemented.
— Evaluating the experience investigations in respect of the mortality and morbidity assumptions by reference to actual experience in order to assess whether this supported the year‑end assumptions adopted.
Benchmarking assumptions — Used the results of our industry benchmarking of assumptions and actuarial market practice together with available industry data to inform our challenge of the assumptions in the areas noted above.
Model evaluation — We have assessed the reserving models by checking the accuracy of the cash flow projections including by reference to product features. We have also assessed the impact of modelling and assumption changes by inspecting pre‑ and post‑change model runs and comparing the outcomes of the changes to our expectations.
Assessing transparency We considered whether the disclosures in relation to the assumptions used in the valuation of policyholder liabilities are compliant with the relevant accounting requirements and appropriately represent the sensitivities of the liabilities to alternative scenarios and inputs.
Our result We found the valuation of policyholder liabilities to be acceptable (2016: acceptable).
The portfolio of quoted investments and investments that are valued primarily using observable inputs, make up 89 per cent of the Group’s total assets (by value). We do not consider these investments to be at a high risk of significant misstatement, or to be subject to a significant level of judgement because they comprise liquid, quoted investments. However, due to their materiality in the context of the financial statements as a whole, they are considered to be one of the areas which had the greatest effect on our overall audit strategy and allocation of resources in planning and completing our audit.
Subjective valuation The area that involved significant audit effort and judgement in 2017 was the valuation of harder to value positions within the financial investments portfolio representing 2 per cent of the Group’s total assets. These included unlisted equity, unlisted debt securities, certain derivatives and loans such as commercial mortgage loans and bridge loans. For these positions a reliable third party price was not readily available and therefore involved the application of expert judgement in the valuations adopted.
We used our own valuation specialists in order to assist us in performing our procedures in this area.
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Recoverability and amortisation of deferred acquisition costs (‘DAC’) (2017: £9,233 million, 2016: £9,178 million). The risk compared to the prior year is unchanged. Refer to page 105 (Audit Committee report), page 172 (accounting policy) and pages 254 to 256 (financial disclosures)
Benchmarking assumptions and market experience We provided challenge on the reasonableness of the selected assumptions relating to projected investment return based on our understanding of developments in the business and our expectations derived from market experience. Our work included comparing the projected investment returns against the investment portfolio mix and market return data, and corroborating the rationale for any key differences.
Historical comparison We have also assessed the appropriateness of the assumptions used in determining the estimated future profit profile and the extent of the associated adjustment necessary to the amortisation of the DAC asset. Our work included critically assessing the judgements that determine the future profit profiles in the context of actual historical experience as well as by reference to market trends. We also compared the estimated future profits to the carrying value of the DAC asset to assess recoverability.
We do not consider the amounts recognised on the parent company balance sheet in respect of the defined benefit pension scheme to be at a high risk of significant misstatement. However, in the context of the parent company financial statements, we note that the valuation of the defined benefit pension obligation and the computation of the asset ceiling are the aspects of our audit of the pension asset (restricted surplus) that had the greatest effect on our overall audit strategy and allocation of resources in planning and completing our audit given the number of assumptions involved.
The calculation of the defined benefit obligation requires the determination of a number of assumptions and judgement is required to determine the appropriateness of these. The most significant assumptions include mortality and the inflation rate.
Tests of detail We assessed the reasonableness of the mortality assumptions and inflation rate by reference to entity specific data in respect of the demographic characteristics of the population of pension scheme members and factors such as salary inflation.
Benchmarking assumptions We challenged, with the support of our own pension specialists, the key assumptions applied, being the inflation and mortality rates, against externally derived data.
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We agreed to report to the Group audit committee any corrected or uncorrected identified misstatements exceeding £18 million (2016: £18 million) in addition to other identified misstatements that warrant reporting on qualitative grounds.
These components accounted for the following percentages of the Group’s results: Group revenue Group profit before tax
Full scope for Group audit purposes 2017 Audit of account balances 2017 Full scope for Group audit purposes 2016 Audit of account balances 2016 Residual components
The Group audit team held a global planning conference with component auditors to identify audit risks and decide how each component team should address the identified audit risks. The Group audit team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported. The Group audit team approved the component materialities, which ranged from £80 million to £186 million (2016: unchanged) across the components, having regard to the size and risk profile of the Group. The work on 13 components (2016: 14 components) was performed by component auditors and work on the remaining component, which was the parent company, was performed by the Group audit team.
The Group audit team visited 13 component locations, comprising: the insurance operations in the UK, US, Hong Kong, Indonesia, Singapore, Malaysia, Thailand, Taiwan, Vietnam and China; the fund management operations in M&G and Eastspring Singapore; and Prudential Capital. Video and telephone conference meetings were also held with these component auditors. At these visits and telephone conference meetings, an assessment was made of audit risk and strategy, the findings reported to the Group audit team were discussed in more detail, key working papers were inspected and any further work required by the Group audit team was then performed by the component auditor.
5 We have nothing to report on the other information in the Annual Report The Directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon.
Directors’ remuneration report In our opinion the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
Disclosures of principal risks and longer-term viability Based on the knowledge we acquired during our audit, we have nothing material to add or draw attention to in relation to: — The Directors’ confirmation within the viability statement on page 62, that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity; — The principal risks disclosures on pages 50 to 63 describing these risks and explaining how they are being managed and mitigated; and
We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the 11 provisions of the UK Corporate Governance Code specified by the Listing Rules for our review.
Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud, other irregularities, or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. The risk of not detecting a material misstatement resulting from fraud or other irregularities is higher than for one resulting from error, as they may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control and may involve any area of law and regulation not just those directly affecting the financial statements.
A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities
Irregularities – ability to detect Our audit aimed to detect non‑compliance with relevant laws and regulations (irregularities) that could have a material effect on the financial statements. We identified relevant areas of laws and regulations from our sector experience, through discussion with the Directors (as required by auditing standards) and from inspection of the Group’s regulatory and legal correspondence.
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Notes on the EEV basis results 1 Basis of preparation 331 2 Results analysis by business area 331 3 Analysis of new business contribution 332 4 Operating profit from business in force 333 5 Short‑term fluctuations in investment returns 335 6 Effect of changes in economic assumptions 336 7 Impact of US tax reform 337 8 Net core structural borrowings of shareholder‑financed operations 9 Reconciliation of movement in shareholders’ equity 338 10 Analysis of movement in net worth and value of in‑force for long‑term business 11 Analysis of movement in free surplus 342 12 Expected transfer of value of in‑force business and required capital to free surplus 13 Sensitivity of results to alternative assumptions 345 14 Methodology and accounting presentation 347 16 Insurance new business premiums 357 17 Disposal of businesses 358 18 Post balance sheet events 358
The EEV basis results have been prepared in accordance with the EEV Principles dated April 2016, issued by the European Insurance CFO Forum. The EEV Principles provide consistent definitions, a framework for setting actuarial assumptions, and an approach to the underlying methodology and disclosures.
Long‑term business 6,863 5,688 Asset management and general insurance commission 578 486 Other results (843) (677)
Notes (i) EEV basis other income and expenditure represents the post‑tax IFRS basis results for other operations (including Group and Asia Regional Head Office, holding company borrowings, Africa operations and Prudential Capital) less the unwind of expected margins on the internal management of the assets of the covered business (as explained in note 14(a)(vii)).
(ii) Restructuring costs comprise the post‑tax charge recognised on an IFRS basis and the additional amount recognised on an EEV basis for the shareholders’ share incurred by the PAC with‑profits fund. The costs are primarily incurred in UK and Europe and Asia and represent business transformation and integration costs.
(iii) The comparative results have been prepared using previously reported average exchange rates for the year. The 2016 comparative results have been re‑presented from those previously published following the reassessment of the Group’s operating segments as described in note B1.3 of the IFRS financial statements. This approach has been adopted consistently throughout this supplementary information.
Based on post‑tax operating profit including longer‑term investment returns after non‑controlling interests (in pence) 257.0p 214.7p
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Profit for the year attributable to equity holders of the Company 8,750 4,516 Items taken directly to equity: Exchange movements on foreign operations and net investment hedges (2,045) 4,211 External dividends (1,159) (1,267) Mark to market value movements on Jackson assets backing surplus and required capital 40 (11) Other reserve movements 144 (367)
Representing: Net assets attributable to equity holders of the Company excluding acquired goodwill, holding company net borrowings and non‑controlling interests 45,917 1,562 47,479 40,597 948 41,545
Total assets less liabilities, before deduction for insurance funds* 434,608 407,928 Less insurance funds: Policyholder liabilities (net of reinsurers’ share) and unallocated surplus of with‑profits funds (418,521) (393,262) Less shareholders’ accrued interest in the long‑term business 9 28,611 24,302
Share capital 129 129 Share premium 1,948 1,927 IFRS basis shareholders’ reserves 14,010 12,610
The EEV basis results have been prepared in accordance with the EEV Principles dated April 2016, issued by the European Insurance CFO Forum. Where appropriate, the EEV basis results include the effects of adoption of EU‑endorsed IFRS.
The 2016 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases. The 2016 CER comparative results are translated at 2017 average exchange rates.
Operating profit based on longer-term investment returns 6,598 5,497 5,743 20% 15%
Operating profit based on longer‑term investment returns 6,598 5,497 5,743 20% 15%
Short‑term fluctuations in investment returns 5 2,111 (507) (567) Effect of changes in economic assumptions 6 (102) (60) (54) Mark to market value movements on core structural borrowings (326) (4) (4) Impact of US tax reform 7 390 – – Profit (loss) attaching to disposal of businesses 17 80 (410) (445) Total non‑operating profit (loss) 2,153 (981) (1,070) 319% 301%
Movement in unwind of discount and other expected returns: Effects of changes in: Growth in opening value 251 Interest rates and other economic assumptions (47) Foreign exchange 68
Unwind of discount and other expected returns note (a) 1,007 866 Effect of changes in operating assumptions note (b) 241 54 Experience variances and other items note (c) 89 124
Notes (a) The £141 million increase in unwind of discount and other expected returns to £1,007 million for 2017 is driven by the growth in the in‑force book, with offsetting effects arising from foreign exchange (£38 million) and movements in long‑term interest rates and changes in other economic assumptions (£(38) million).
(b) The effect of changes in operating assumptions of £241 million reflects the net benefit for EEV arising from the annual review of experience, together with the benefit of management actions reflecting our ongoing focus on managing the in‑force book for value. It includes a £107 million benefit arising in China from adopting the principles for embedded value reporting under the China Risk Oriented Solvency System (C‑ROSS) regime in 2017 (see note 14(a)(v)).
(c) The £89 million effect of experience variances and other items in 2017 is driven by positive mortality and morbidity experiences in a number of business units, together with positive persistency variances from participating and health and protection products, partially offset by unfavourable persistency variances on unit‑linked products. Experience variances also include expense overruns where these are expected to be short‑lived, including businesses that are growing rapidly or are sub‑scale.
Notes (a) The £111 million increase in unwind of discount and other expected returns to £694 million for 2017 represents a positive £87 million effect for the growth in the in‑force book
Notes (a) The £20 million increase in unwind of discount and other expected returns to £465 million for 2017 is mainly driven by the underlying growth in the in‑force book. (b) The £195 million relates to changes to annuitant mortality assumptions primarily reflecting the adoption of the Continuous Mortality Investigation 2015 model as the basis for future mortality improvements.
(iv) UK and Europe operations The short‑term fluctuations in investment returns for UK and Europe operations comprise: Insurance operations: Shareholder‑backed annuity business note (a) 387 431 With‑profits and other business note (b) 229 438
Notes (a) Short‑term fluctuations in investment returns for shareholder‑backed annuity business include: – gains on surplus assets compared to the expected long‑term rate of return reflecting reductions in corporate bond and gilt yields; and – the difference between actual and expected default experience.
The effects of changes in economic assumptions for in‑force business included in the profit for the year arise as follows: (i) Group summary for long-term business operations
Asia note (ii) (95) 70 US note (iii) (136) 45 UK and Europe note (iv) 129 (175)
(ii) Asia The effect of changes in economic assumptions for Asia comprises: Hong Kong (321) 85
The negative effect in 2017 of £(95) million largely arises from movements in long‑term interest rates, driven by lower assumed fund earned rates in Hong Kong, partially offset by profits arising from the beneficial impact of valuing future profits at lower discount rates in Indonesia, Malaysia and Singapore (see note 15(i)). In addition, various changes to the basis of setting economic assumptions were made with an overall impact of £5 million (see note 14(a)(viii), note 15(i) and note 15(iv)).
(iv) UK and Europe The effect of changes in economic assumptions for UK and Europe comprises: Shareholder‑backed annuity business 28 (113) With‑profits and other business 101 (62)
On 22 December 2017, a significant US tax reform package, The Tax Cuts and Jobs Act, was enacted into law effective from 1 January 2018. The tax reform package as a whole, which includes a reduction in the corporate income tax rate from 35 per cent to 21 per cent, and a number of specific measures affecting US life insurers, results in a £390 million benefit in non‑operating profit. The positive impact on an EEV basis represents the benefit of future profits being taxed at a lower rate, partially offset by a reduction in the net deferred tax asset held in the balance sheet to reflect remeasurement at the new lower tax rate, together with a reduction in the benefit from the dividend received deduction on taxable profits from variable annuity business.
In accordance with our usual methodology, the new business contribution and unwind of discount and other expected returns are determined by applying operating and economic assumptions as at the end of the year, including the effect of US tax reform. This led to an increase in new business profit of £76 million.
In October 2017, the Company issued core structural borrowings of US$750 million 4.875 per cent Tier 2 perpetual subordinated notes. The proceeds, net of costs, were £565 million. In December 2017, the Company repaid its US$1,000 million 6.5 per cent Tier 2 perpetual subordinated notes. The movement in IFRS basis core structural borrowings from 2016 to 2017 also includes foreign exchange effects.
Notes on the EEV basis results continued 9 Reconciliation of movement in shareholders’ equity 2017 £m
Operating profit based on longer-term investment returns 3,846 2,150 1,358 (756) 6,598
Net increase in shareholders’ equity 2,493 1,483 1,462 292 5,730 Shareholders’ equity at beginning of year 18,855 12,009 12,165 (4,061) 38,968
Shareholders’ equity at end of year 21,348 13,492 13,627 (3,769) 44,698
Representing: IFRS basis shareholders’ equity: Total IFRS basis shareholders’ equity 5,681 5,248 8,245 (3,087) 16,087 Additional retained profit (loss) on an EEV basis 15,667 8,244 5,382 (682) 28,611
Balance at beginning of year: IFRS basis shareholders’ equity: Total IFRS basis shareholders’ equity 5,130 5,408 7,832 (3,704) 14,666 Additional retained profit (loss) on an EEV basis 13,725 6,601 4,333 (357) 24,302
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Notes (i) Other operations of £(3,769) million represents the shareholders’ equity of £(4,013) million as shown in the movement in shareholders’ equity and includes goodwill of £244 million
Total IFRS basis shareholders’ equity 16,624 2,550 (3,087) 16,087 15,938 2,432 (3,704) 14,666 Additional retained profit (loss) on an EEV
Notes on the EEV basis results continued 10 Analysis of movement in net worth and value of in-force for long-term business 2017 £m
Group Shareholders’ equity at beginning of year 5,364 10,296 15,660 24,937 40,597
Intra‑group dividends and investment in operations (1,535) – (1,535) – (1,535)
Shareholders’ equity at end of year 6,242 10,265 16,507 29,410 45,917
Existing business – transfer to net worth 1,275 (146) 1,129 (1,129) – Expected return on existing business note 4 51 48 99 908 1,007 Changes in operating assumptions and
Sale of Korea life business note 17 76 (76) – – –
Existing business – transfer to net worth 1,329 (219) 1,110 (1,110) – Expected return on existing business note 4 56 53 109 585 694 Changes in operating assumptions and
alue (EEV ) basis results 07 A dditional inform ation 2017 £m
Note The net value of in‑force business comprises the value of future margins from current in‑force business less the cost of holding required capital for long‑term business as shown below: Asia US UK and Europe Total Asia US
Value of in‑force business before deduction of cost of capital and time value of guarantees 17,539 10,486 3,648 31,673 15,371 8,584 3,468 27,423
Cost of time value of guarantees (186) (650) – (836) (87) (911) – (998)
Net value of in‑force business 16,765 9,604 3,041 29,410 14,807 7,354 2,776 24,937
Total embedded value note 9(iv) 20,947 13,257 11,713 45,917 18,472 11,805 10,320 40,597
Notes on the EEV basis results continued 11 Analysis of movement in free surplus
For EEV covered business, free surplus is the excess of the regulatory basis net assets for EEV reporting purposes (net worth) over the capital required to support the covered business. Where appropriate, adjustments are made to the net worth so that backing assets are included at fair value rather than cost so as to comply with the EEV Principles. In Asia and US operations, assets deemed to be inadmissible on local regulatory basis are included in net worth where considered fully recognisable on an EEV basis. Free surplus for asset management operations and the UK general insurance commission is taken to be IFRS basis post‑tax earnings and shareholders’ equity, net of goodwill. Free surplus for other operations (including Group and Asia Regional Head Office, holding company borrowings, Africa operations and Prudential Capital) is taken to be EEV basis post‑tax earnings and shareholders’ equity net of goodwill, with subordinated debt recorded as free surplus to the extent that it is classified as available capital under Solvency II.
Asia operations Underlying free surplus generated from in‑force life business 1,407 1,210 1,273 16% 11% Investment in new business note (iii)(a) (484) (476) (500) (2)% 3%
UK and Europe operations Underlying free surplus generated from in‑force life business 1,070 923 923 16% 16% Investment in new business note (iii)(a) (175) (129) (129) (36)% (36)%
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Underlying free surplus generated from in‑force life business before restructuring costs 4,052 3,999 4,157 1% (3)%
Investment in new business note (iii)(a) (913) (903) (942) (1)% 3%
Asset management and general insurance commission 578 486 492 19% 17%
Underlying free surplus generated before restructuring costs 1,078 1,328 1,311 3,717 (746) 2,971
Net movement in free surplus 328 685 317 1,330 712 2,042 Balance at beginning of year 1,814 1,733 1,689 5,236 936 6,172
Balance at end of year 2,142 2,418 2,006 6,566 1,648 8,214
Mark to market value movements on Jackson assets backing surplus and required capital note 9 – 40 – 40 – 40 2016 £m
Mark to market value movements on Jackson assets backing surplus and required capital – (11) – (11) – (11)
alue (EEV ) basis results 07 A dditional inform ation 12 Expected transfer of value of in-force business and required capital to free surplus
The discounted value of in‑force business and required capital for long‑term business operations can be reconciled to the 2017 and 2016 totals for the emergence of free surplus as follows: Required capital note 10 10,265 10,296 Value of in‑force business (VIF) note 10 29,410 24,937 Add back: deduction for cost of time value of guarantees note 10 836 998 Free surplus generation from the sale of Korea life business – (76) Other items* (1,371) (1,430)
The table below shows how the VIF generated by the in‑force business and the associated required capital for long‑term business operations is modelled as emerging into free surplus over future years.
Expected period of conversion of future post-tax distributable earnings and required capital flows to free surplus 1-5 years 6-10 years 11-15 years 16-20 years 21-40 years 40+ years 2016 total as shown above 2016 £m
— 5 per cent proportionate decrease in base mortality and morbidity rates (ie increased longevity).
(a) Methodology Overview The embedded value is the present value of the shareholders’ interest in the earnings distributable from assets allocated to covered business after sufficient allowance has been made for the aggregate risks in that business. The shareholders’ interest in the Group’s long‑term business comprises: — The present value of future shareholder cash flows from in‑force covered business (value of in‑force business), less deductions for: – The cost of locked‑in required capital; and – The time value of cost of options and guarantees; — Locked‑in required capital; and — The shareholders’ net worth in excess of required capital (free surplus).
The value of future new business is excluded from the embedded value. Notwithstanding the basis of presentation of results as explained in note 14(b)(iii), no smoothing of market or account balance values, unrealised gains or investment return is applied in determining the embedded value or profit. Separately, the analysis of profit is delineated between operating profit based on longer‑term investment returns and other constituent items, as explained in note 14(b)(i).
(i) Covered business The EEV results for the Group are prepared for ‘covered business’, as defined by the EEV Principles. Covered business represents the Group’s long‑term insurance business, including the Group’s investments in joint venture and associate insurance operations, for which the value of new and in‑force contracts is attributable to shareholders. The post‑tax EEV basis results for the Group’s covered business are then combined with the post‑tax IFRS basis results of the Group’s asset management and other operations (including Group and Asia Regional Head Office, holding company borrowings, Africa operations and Prudential Capital). Under the EEV Principles, the results for covered business incorporate the projected margins of attaching internal asset management, as described in note 14(a)(vii).
The definition of long‑term business operations comprises those contracts falling under the definition for regulatory purposes together with, for US operations, contracts that are in substance the same as guaranteed investment contracts (GICs) but do not fall within the technical definition.
The results for any covered business conceptually reflect 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, reflects the market value movements recognised on an IFRS basis.
However, in determining the movements on the additional shareholders’ interest, the basis for calculating the EEV result for Jackson acknowledges that, for debt securities backing liabilities, the aggregate EEV results reflect the fact that the value of in‑force business instead incorporates the discounted value of future spread earnings. This value is not affected generally by short‑term market movements on securities that, broadly speaking, are held for the longer term.
Fixed income securities backing the free surplus and required capital for Jackson are accounted for at fair value. However, consistent with the treatment applied under IFRS for Jackson securities classified as available‑for‑sale, movements in unrealised appreciation/ depreciation on these securities are accounted for in equity rather than in the income statement, as shown in the movement in shareholders’ equity.
Where required, capital is held within a with‑profits long‑term fund, the value placed on surplus assets in the fund is already discounted to reflect its release over time and no further adjustment is necessary in respect of required capital.
(iv) Financial options and guarantees Nature of financial options and guarantees in Prudential’s long-term business Asia Subject to local market circumstances and regulatory requirements, the guarantee features described below in respect of UK and Europe business broadly apply to similar types of participating contracts which are principally written in Hong Kong, Singapore and Malaysia. Participating products have both guaranteed and non‑guaranteed elements.
US (Jackson) The principal financial options and guarantees in Jackson are associated with the fixed annuity (FA) 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 both years, depending on the particular product, jurisdiction where issued, and date of issue. For both years, 87 per cent of the account values on fixed annuities are for policies with guarantees of 3 per cent or less, and the average guarantee rate is 2.6 per cent.
Jackson issues VA contracts for which it contractually guarantees to the contract holder, subject to specific conditions, 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 specified anniversary date adjusted for any withdrawals following the specified contract anniversary. These guarantees include benefits that are payable upon depletion of funds (Guaranteed Minimum Withdrawal Benefit (GMWB)), as death benefits (Guaranteed Minimum Death Benefits (GMDB)) or as income benefits (Guaranteed Minimum Income Benefits (GMIB)). These guarantees generally protect the policyholders’ value in the event of poor equity market performance. Jackson hedges the GMWB and GMDB guarantees through the use of equity options and futures contracts, and essentially fully reinsures the GMIB guarantees.
UK and Europe (M&G Prudential) For covered business the only significant financial options and guarantees in M&G Prudential arise in the with‑profits fund.
Time value The value of financial options and guarantees comprises two parts: — The first part arises from a deterministic valuation on best estimate assumptions (the intrinsic value). — The second part arises from the variability of economic outcomes in the future (the time value).
In all instances, the modelled actions are in accordance with approved local practice and therefore reflect the options actually available to management. For the PAC with‑profits fund, the actions assumed are consistent with those set out in the Principles and Practices of Financial Management which explains how regular and final bonus rates within the discretionary framework are determined, subject to the general legislative requirements applicable.
(vii) Internal asset management The in‑force and new business results from long‑term business include the projected value of profits or losses from asset management and service companies that support the Group’s covered insurance businesses. The results of the Group’s asset management operations include the current year profits from the management of both internal and external funds. EEV basis shareholders’ other income and expenditure is adjusted to deduct the unwind of the expected internal asset management profit margin for the year as included in ‘Other operations’. The deduction is on a basis consistent with that used for projecting the results for covered insurance business. Group operating profit accordingly includes the variance between actual and expected profit in respect of management of the assets for covered business.
(viii) Allowance for risk and risk discount rates Overview Under the EEV Principles, discount rates used to determine the present value of future cash flows are set by reference to risk‑free rates plus a risk margin.
For Asia and the US, the risk‑free rates are based on 10‑year local government bond yields. For UK and Europe, the EEV risk‑free rate is based on the full term structure of interest rates, ie a yield curve, which is used to determine the embedded value at the end of the reporting period.
Since financial options and guarantees are explicitly valued under the EEV methodology, risk discount rates under EEV are set excluding the effect of these product features.
The risk margin represents the aggregate of the allowance for market risk, additional allowance for credit risk where appropriate, and allowance for non‑diversifiable non‑market risk. No allowance is required for non‑market risks where these are assumed to be fully diversifiable.
Market risk allowance The allowance for market risk represents the beta multiplied by an equity risk premium. Except for UK shareholder‑backed annuity business (as explained below), such an approach has been used for the Group’s businesses.
The beta of a portfolio or product measures its relative market risk. The risk discount rates reflect the market risk inherent in each product group and hence the volatility of product cash flows. These are determined by considering how the profits 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‑specific beta.
Additional credit risk allowance The Group’s methodology is to allow appropriately for credit risk. The allowance for total credit risk is to cover: — Expected long‑term defaults; — Credit risk premium (to reflect the volatility in downgrade and default levels); and — Short‑term downgrades and defaults.
The practical application of the allowance for credit risk varies depending upon the type of business as described below: Asia For Asia, the allowance for credit risk incorporated in the projected rates of return and the market risk allowance are sufficient. Accordingly, no additional allowance for credit risk is required.
The risk discount rate incorporates an additional allowance for credit risk premium and short‑term downgrades and defaults (0.2 per cent for variable annuity business and 1.0 per cent for non‑variable annuity business for both years), as shown in note 15(ii). In determining this allowance a number of factors have been considered. These factors, in particular, include: — How much of the credit spread on debt securities represents an increased short‑term credit risk not reflected 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
UK and Europe (M&G Prudential) (1) Shareholder-backed annuity business For shareholder‑backed annuity business, Prudential has used a market consistent embedded value (MCEV) approach to derive an implied risk discount rate which is then applied to the projected best estimate cash flows.
(3) With-profits fund holdings of debt securities The with‑profits fund holds debt securities as part of its investment portfolio backing policyholder liabilities and unallocated surplus. The assumed earned rate for with‑profit holdings of corporate bonds is defined as the risk‑free rate plus an assessment of the long‑term spread over risk free, net of expected long‑term defaults. This approach is similar to that applied for equities and properties for which the projected earned rate is defined as the risk‑free rate plus a long‑term risk premium.
(ix) Foreign currency translation Foreign currency profits and losses have been translated at average exchange rates for the year. Foreign currency assets and liabilities have been translated at year‑end exchange rates. The principal exchange rates are shown in note A1 of the IFRS financial statements.
(x) Taxation In determining the post‑tax profit for the year for covered business, the overall tax rate includes the impact of tax effects determined on a local regulatory basis. Tax payments and receipts included in the projected cash flows to determine the value of in‑force business are calculated using rates that have been announced and substantively enacted by the end of the reporting period.
(b) Accounting presentation (i) Analysis of post-tax profit To the extent applicable, the presentation of the EEV post‑tax profit for the year is consistent in the classification between operating and non‑operating results with the basis that the Group applies for the analysis of IFRS basis results. Operating results reflect underlying results including longer‑term investment returns (which are determined as described in note 14(b)(ii)) and incorporate the following: — New business contribution, as defined in note 14(a)(ii); — Unwind of discount on the value of in‑force business and other expected returns, as described in note 14(b)(iii); — The impact of routine changes of estimates relating to operating assumptions, as described in note 14(b)(iv); and — Operating experience variances, as described in note 14(b)(v).
In addition, non‑operating results include the effect of the disposal of businesses (see note 17) and in 2017, the impact of US tax reform (see note 7).
(ii) Investment returns included in operating profit For the investment element of the assets covering the net worth of long‑term insurance business, investment returns are recognised in operating results at the expected long‑term rate of return. These expected returns are calculated by reference to the asset mix of the portfolio. For the purpose of calculating the longer‑term investment return to be included in the operating result of the PAC with‑profits fund of M&G Prudential, where assets backing the liabilities and unallocated surplus are subject to market volatility, asset values at the beginning of the reporting period are adjusted to remove the effects of short‑term market movements as explained in note 14(b)(iii).
For the purpose of determining the long‑term returns for debt securities of US operations for fixed annuity and other general account business, a risk margin reserve charge is included which reflects the expected long‑term rate of default based on the credit quality of the portfolio. For Jackson, interest‑related realised gains and losses are amortised to the operating results over the maturity period of the sold bonds and for equity‑related investments, a long‑term rate of return is assumed, which reflects the aggregation of end‑of‑period risk‑free rates and equity risk premium. For US variable annuity separate account business, operating profit includes the unwind of discount on the opening value of in‑force business adjusted to reflect end‑of‑period projected rates of return with the excess or deficit of the actual return recognised within non‑operating profit, together with related hedging activity.
For UK annuity business, rebalancing of the asset portfolio backing the liabilities to policyholders may, from time to time, take place to align it more closely with the internal benchmark of credit quality that management applies. Such rebalancing will result in a change in the projected yield on the asset portfolio and the allowance for default risk. The net effect of these changes is included in the operating result for the year.
In applying this general approach, the unwind of discount included in operating profit for M&G Prudential is described below.
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For with‑profits business, the opening value of in‑force is adjusted for the effect of short‑term investment volatility due to market movements (ie smoothed). In the summary statement of financial position and for total profit reporting, asset values and investment returns are not smoothed. At 31 December 2017 the shareholders’ interest in the smoothed surplus assets used for this purpose only were £57 million lower (31 December 2016: £77 million lower) than the surplus assets carried in the statement of financial position.
(v) Operating experience variances Operating profit includes the effect of experience variances on non‑economic assumptions, such as persistency, mortality and morbidity, expenses and other factors, which are calculated with reference to the end‑of‑year assumptions.
Principal economic assumptions The EEV basis results for the Group’s operations have been determined using economic assumptions where the long‑term expected rates of return on investments and risk discount rates are set by reference to year‑end risk‑free rates of return (defined below for each of the Group’s insurance operations). 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 profit that emerges over the lifetime of an individual contract as calculated using the embedded value basis is the same over time as that calculated under the IFRS basis. Since the embedded value basis reflects discounted future cash flows, under this methodology the profit emergence is advanced, thus more closely aligning the timing of the recognition of profit with the efforts and risks of current management actions, particularly with regard to business sold during the year.
The risk‑free rates of return for Asia are defined as 10‑year government bond yields at the end of the year. In order to reflect Prudential’s most recent assessment of the growth prospects of the region compared to other developed markets and the historically strong relationship between long‑term economic growth and long‑term equity returns, in a number of Asia business units, equity risk premiums were increased during 2017 by between 25 basis points and 75 basis points from those applied at 2016. The related expected return on equity and risk discount rates have also been increased by equivalent amounts. In addition, for a few Asia business units, expected long‑term inflation assumptions were revised during 2017 to better reflect central bank inflation targets and to align with the currency of the underlying exposures.
Inflation %New business In-force business 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec 31 Dec
(b) For Hong Kong the assumptions shown are for US dollar denominated business. For other business units, the assumptions are for local currency denominated business. (c) Equity risk premiums in Asia range from 4.0 per cent to 9.4 per cent (2016: from 3.5 per cent to 8.7 per cent). (d) The mean equity return assumptions for the most significant equity holdings of the Asia operations are: Hong Kong 6.4 6.5
Institutional business 0.50 0.50 Allowance for long‑term defaults included in projected spread note 14(a)(viii) 0.19 0.21 Risk discount rate: Variable annuity: Risk discount rate 6.8 6.9 Additional allowance for credit risk included in risk discount rate note 14(a)(viii) 0.2 0.2
(iii) UK and Europe The risk‑free rate is based on the full term structure of interest rates, ie a yield curve, which is used to determine the embedded value at the end of the reporting period. These yield curves are used to derive pre‑tax expected long‑term nominal rates of investment return and risk discount rates. For the purpose of determining the unwind of discount in the analysis of operating profit, these yield curves are used to derive a single implied risk discount rate, as explained in note 14(a)(viii).
This single implied risk discount rate is shown, along with the 15‑year nominal rate of investment return and 15‑year rate of inflation based on the yield curve.
(v) US (Jackson) — Interest rates and equity returns are projected using a log‑normal generator reflecting historical market data; — Corporate bond returns are based on treasury yields plus a spread that reflects current market conditions; and — The volatility of equity returns ranges from 18 per cent to 27 per cent for both years, and the standard deviation of interest rates ranges from 2.5 per cent to 2.8 per cent (2016: from 2.3 per cent to 2.6 per cent).
— The standard deviation of equities and property ranges from 14 per cent to 20 per cent (2016: from 15 per cent to 20 per cent).
Expense assumptions Expense levels, including those of service companies that support the Group’s long‑term business operations, are based on internal expense analysis and are appropriately allocated to acquisition of new business and renewal of in‑force business. Exceptional expenses are identified and reported separately. For mature business, it is Prudential’s policy not to take credit for future cost reduction programmes until the actions to achieve the savings have been delivered. Expense overruns are reported where these are expected to be short‑lived, including businesses that are growing rapidly or are sub‑scale.
For Asia operations, the expenses comprise costs borne directly and recharged costs from the Asia Regional Head Office that are attributable to covered business. The assumed future expenses for these operations also include projections of these future recharges. Development expenses are charged as incurred.
(viii) Tax rates The assumed long‑term effective tax rates for operations reflect the incidence of taxable profits and losses in the projected cash flows as explained in note 14(a)(x).
alue (EEV ) basis results 07 A dditional inform ation 16 Insurance new business premiums note (i)
Notes (i) The tables shown above are provided as an indicative volume measure of transactions undertaken in the reporting period that have the potential to generate profits for shareholders. The amounts shown are not, and not intended to be, reflective of premium income recorded in the IFRS income statement. A reconciliation of APE and gross earned premiums on an IFRS basis is provided in note II(l) within the unaudited financial information.
On 18 May 2017, the Group announced it had completed the sale of its life insurance subsidiary in Korea, PCA Life Insurance, to Mirae Asset Life Insurance for KRW 170 billion (£117 million at 17 May 2017 closing exchange rate) following regulatory approval. The proceeds, net of £(9) million of related expenses, were £108 million. Upon disposal, £76 million of required capital was released and a corresponding increase in free surplus was recognised. There were no other impacts on the 2017 results.
Sale of £12.0 billion* UK annuity portfolio In March 2018, M&G Prudential also announced the sale of £12.0 billion* of its shareholder annuity portfolio to Rothesay Life. Under the terms of the agreement, M&G Prudential has reinsured £12.0 billion* of liabilities to Rothesay Life, which is expected to be followed by a Part VII transfer of the portfolio by the end of 2019. Further details are set out in the CFO report.
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Statement of Directors’ responsibilities in respect of the European Embedded Value (EEV) basis supplementary information
When compliance with the EEV Principles is stated, those principles require the Directors to prepare supplementary information in accordance with the Embedded Value Methodology (EVM) contained in the EEV Principles and to disclose and explain any non‑compliance with the EEV guidance included in the EEV Principles.
In preparing the EEV supplementary information, the Directors have: — Prepared the supplementary information in accordance with the EEV Principles; — Identified and described the business covered by the EVM; — Applied the EVM consistently to the covered business; — Determined assumptions on a realistic basis, having regard to past, current and expected future experience and to any relevant external data, and then applied them consistently; — Made estimates that are reasonable and consistent; and
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Index to the additional unaudited financial information 362 Risk factors 391 Glossary 398 Shareholder information 402 How to contact us 406
I IFRS profit and loss information a Analysis of long‑term insurance business pre‑tax
IFRS operating profit based on longer‑term investment returns by driver b Asia operations – analysis of IFRS operating profit by business unit c Analysis of asset management operating profit based on longer‑term investment returns d Contribution to UK life financial metrics from specific management actions undertaken to position the balance sheet more efficiently under the Solvency II regime
II Other information a Holding company cash flow 373 b Funds under management 374 c Return on IFRS shareholders’ funds 375 d IFRS gearing ratio 375 e IFRS shareholders’ funds per share 375 f Solvency II capital position at 31 December 2017 376 g Reconciliation of expected transfer of value of in‑force business (VIF) and required capital to free surplus h Foreign currency source of key metrics 384 i Option schemes 385 j Selected historical financial information of Prudential 387 k Reconciliation between IFRS and EEV shareholders’ funds 389 l Reconciliation of APE new business sales to earned premiums m Calculation of return on embedded value 390 n Calculation of EEV shareholders’ funds per share 390
— Fee income represents profits driven by net investment performance, being asset management fees that vary with the size of the underlying policyholder funds net of investment management expenses.
— With-profits business represents the gross of tax shareholders’ transfer from the with‑profits fund for the year. — Insurance margin primarily represents profits derived from the insurance risks of mortality and morbidity. — Margin on revenues primarily represents amounts deducted from premiums to cover acquisition costs and administration expenses. — Acquisition costs and administration expenses represent expenses incurred in the year attributable to shareholders. It excludes items such as restructuring costs and Solvency II costs which are not included in the segment profit for insurance, as well as items that are more appropriately included in other sources of earnings lines (eg investment expenses are netted against investment income as part of spread income or fee income as appropriate).
Margin on revenues 2,097 – 189 2,286 Expenses: Expected return on shareholder assets 121 4 104 229
Margin on revenues 2,004 – 207 2,211 Expenses: Expected return on shareholder assets 104 13 110 227
I(a) Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver continued
Margin on revenues 2,097 1,919 2,004 Expenses: DAC adjustments note (v) 241 148 153
Analysis of Asia operating profit drivers: — Spread income has increased on a constant exchange rate basis by 9 per cent (AER: 15 per cent) to £220 million in 2017, predominantly reflecting the growth of the Asia non‑linked policyholder liabilities.
— Acquisition costs have increased by 11 per cent at constant exchange rates (AER: 16 per cent) to £1,489 million, compared to the 1 per cent increase in APE sales, resulting in an increase in the acquisition costs ratio. The analysis above uses shareholder acquisition costs as a proportion of total APE. If with‑profits sales were excluded from the denominator the acquisition cost ratio would become 66 per cent (2016: 70 per cent at CER), the decrease being the result of product and country mix.
— Fee income has increased by 15 per cent at constant exchange rates (AER: increased by 21 per cent) to £2,343 million during 2017, primarily due to higher average separate account balances due to positive net flows from variable annuity business and market appreciation during the year.
Total operating profit before acquisition costs and DAC adjustments 2,830 2,830 2,685 2,685 2,816 2,816
Life and other business note (c) 109 206 216 (47)% (50)%
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— Fee income principally represents asset management fees from unit‑linked business, including direct investment only business to group pension schemes, where liability flows are driven by a small number of large single mandate transactions and fee income mostly arises within our UK asset management business. Excluding these schemes, the fee margin on the remaining balances was 39 bps (2016: 40 bps).
— Margin on revenues represents premium charges for expenses of shareholder‑backed business and other sundry net income. — Acquisition costs decreased from £89 million in 2016 to £68 million in 2017, equivalent to 5 per cent of total APE sales in 2017 (2016: 8 per cent). The ratio above expresses the percentage of shareholder acquisition costs as a percentage of total APE sales. It is therefore impacted by the level of with‑profits business in the year. Acquisition costs expressed as a percentage of shareholder‑backed APE sales remained broadly consistent at 38 per cent (2016: 37 per cent).
South-east Asia Operations including Hong Kong 1,529 1,292 1,347 18% 14%
Business in force 1,711 1,469 1,535 Non‑recurrent items note (ii) 75 67 70 * The IFRS new business result corresponds to approximately 0.4 per cent of new business APE premiums for 2017 (2016: approximately (0.8) per cent of new business APE).
† Cost/income ratio represents cost as a percentage of operating income before performance‑related fees. ‡ Institutional includes internal funds.
Operating profit from in‑force business 673 375 New business profit 342 268 * Before restructuring costs.
UK and Europe net remittances to the Group With‑profits remittance 215 215 Shareholder‑backed insurance business remittance 105 85 Asset management remittance 323 290 Other UK paid to the Group (including Prudential Capital)4 25 192
Operating holding company cash flow before dividend 1,318 1,302 Dividend paid (1,159) (1,267)
Operating holding company cash flow after dividend* 159 35 Non‑operating net cash flow2 (511) 335
Cash and short-term investments at end of year3 2,264 2,626 * The holding company cash flow differs from the IFRS cash flow statement, which includes all cash flows in the period including those relating to both policyholder and shareholder funds. The holding company cash flow is therefore a more meaningful indication of the Group’s central liquidity.
3 Including central finance subsidiaries. 4 2016 remittance principally represents the outcome of actions completed in that year that facilitated access to central resources previously held at intermediary, holding and other companies.
Total investments per the consolidated statement of financial position 451.4 421.7 External funds of M&G Prudential and Eastspring Investments (as analysed in no te b) 219.8 182.5 Internally managed funds held in joint ventures and other adjustments (1.9) (1.9)
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Opening shareholders’ funds 14,666 12,955 Return on shareholders’ funds 25% 26%
II(e) IFRS shareholders’ funds per share IFRS shareholders’ funds per share is calculated as closing IFRS shareholders’ funds divided by the number of issued shares at the balance sheet date.
II(f) Solvency II capital position at 31 December 2017 The estimated Group shareholder Solvency II surplus at 31 December 2017 was £13.3 billion, before allowing for payment of the 2017 second interim ordinary dividend and reflects approved regulatory transitional measures as at 31 December 2017.
– No diversification benefits are taken into account between Jackson and the rest of the Group. — Matching adjustment for UK annuities and volatility adjustment for US dollar denominated Hong Kong with‑profits business, based on approvals from the Prudential Regulation Authority and calibrations published by the European Insurance and Occupational Pensions Authority; and
— UK transitional measures, which have been recalculated using management’s estimate of the impact of operating and market conditions at the valuation date. An application to recalculate the transitional measures as at 31 December 2017 has been approved by the Prudential Regulation Authority and this recalculation will therefore be reflected in the formal regulatory Quantitative Reporting Templates as at 31 December 2017.
The Group shareholder Solvency II capital position excludes: — A portion of Solvency II surplus capital (£1.7 billion at 31 December 2017) relating to the Group’s Asian life operations, including due to the Solvency II definition of ‘contract boundaries’, which prevents some expected future cash flows from being recognised; — The contribution to Own Funds and the Solvency Capital Requirement from ring‑fenced with‑profits funds in surplus (representing £4.8 billion of surplus capital from UK with‑profits funds at 31 December 2017) and from the shareholders’ share of the estate of with‑profits funds; and
Analysis of movement in Group capital position A summary of the estimated movement in Group Solvency II surplus from £12.5 billion at year end 2016 to £13.3 billion at year end 2017 is set out in the table below. The movement from the Group Solvency II surplus at 31 December 2015 to the Solvency II surplus at 31 December 2016 is included for comparison.
Estimated Solvency II surplus at beginning of period 12.5 9.7 Underlying operating experience 3.2 2.3 Management actions 0.4 0.4
Impact of: 20% instantaneous fall in equity markets 0.7 9% 0.0 3%
50 basis points reduction in interest rates2,3 (1.0) (14)% (0.6) (9)% 100 basis points increase in interest rates3 1.2 21% 1.0 13% 100 basis points increase in credit spreads4 (1.4) (6)% (1.1) (3)%
The Group believes it is positioned to withstand significant deteriorations in market conditions and we continue to use market hedges to manage some of this exposure across the Group, where we believe the benefit of the protection outweighs the cost. The sensitivity analysis above allows for predetermined management actions and those taken to date, but does not reflect all possible management actions which could be taken in the future.
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On the same basis as above, the estimated shareholder Solvency II surplus for The Prudential Assurance Company Limited (‘PAC’) and its subsidaries2 at 31 December 2017 was £6.1 billion, after allowing for recalculation of transitional measures as at 31 December 2017. This relates to shareholder‑backed business including future with‑profits shareholder transfers, but excludes the shareholders’ share of the estate in line with Solvency II requirements.
While there is a large surplus in the UK with‑profits funds, this is ring‑fenced from the shareholder balance sheet and is therefore excluded from both the Group and the UK shareholder Solvency II surplus results. The estimated UK with‑profits funds Solvency II surplus at 31 December 2017 was £4.8 billion, after allowing for recalculation of transitional measures as at 31 December 2017.
* The solvency positions include management’s estimate of UK transitional measures reflecting operating and market conditions at each valuation date. An application to recalculate the transitional measures as at 31 December 2017 has been approved by the Prudential Regulation Authority.
Statement of independent review in respect of Solvency II Capital Position at 31 December 2017 The methodology, assumptions and overall result have been subject to examination by KPMG LLP.
II(g) Reconciliation of expected transfer of value of in-force business (VIF) and required capital to free surplus The tables below show how the value of in‑force business (VIF) generated by the in‑force long‑term business and the associated required capital is modelled as emerging into free surplus over the next 40 years. Although a small amount (less than 4 per cent) of the Group’s embedded value emerges after this date, analysis of cash flows emerging in the years shown in the tables is considered most meaningful. The modelled cash flows use the same methodology underpinning the Group’s embedded value reporting and so are subject to the same assumptions and sensitivities used to prepare our 2017 results.
In addition to showing the amounts, both discounted and undiscounted, expected to be generated from all in‑force business at 31 December 2017, the tables also present the expected future free surplus to be generated from the investment made in new business during 2017 over the same 40‑year period for long‑term business operations.
Total free surplus expected to emerge in the next 40 years 37,770 18,644 13,706 70,120 5,507 2,017 861 8,385 * The analysis excludes amounts incorporated into VIF at 31 December 2017 where there is no definitive time frame for when the payments will be made or receipts received. In particular, it excludes the value of the shareholders’ interest in the with‑profits estate. It also excludes any free surplus emerging after 2057.
The above amounts can be reconciled to the new business amounts as follows: 2017 £m
Discounted expected free surplus generation for years 2018 to 2057 2,354 1,328 522 4,204 Discounted expected free surplus generation for years after 2057 442 – 1 443 Less: Free surplus investment in new business (484) (254) (175) (913)
Post‑tax EEV new business profit for long‑term business operations 2,368 906 342 3,616
† Other items represent the impact of the time value of options and guarantees on new business, foreign exchange effects and other non‑modelled items. Foreign exchange effects arise as EEV new business profit amounts are translated at average exchange rates and the expected free surplus generation uses year end closing rates.
Less: Amounts expected to be realised in the current year (3,441) – – – – – – (3,441)
Non‑operating and other movements – 184 290 280 286 280 2,668 3,660 2017 expected free surplus generation for years 2018 to 2057 – 3,528 3,462 3,456 3,467 3,318 52,889 70,120
£m £m £m £m £m £m Other £m Total £m 2016 expected free surplus generation for years 2017 to 2056 1,446 1,279 1,273 1,281 1,282 1,152 8,257 15,970
Less: Amounts expected to be realised in the current year (1,446) – – – – – – (1,446)
UK and Europe £m £m £m £m £m £m Other £m Total £m 2016 expected free surplus generation for years 2017 to 2056 675 669 636 622 606 591 9,984 13,783
Add: Expected free surplus to be generated in year 2057* – – – – – – 38 38
2017 expected free surplus generation for years 2018 to 2057 – 671 685 674 660 638 10,378 13,706 * Excluding 2017 new business.
At 31 December 2017, the total free surplus expected to be generated over the next five years (2018 to 2022 inclusive), using the same assumptions and methodology as those underpinning our 2017 embedded value reporting was £17.2 billion, an increase of £1.4 billion from the £15.8 billion expected over an equivalent period from the end of 2016.
This increase primarily reflects the new business written in 2017, which is expected to generate £1,838 million of free surplus over the next five years.
Transfer to free surplus in 2017 1,275 1,329 675 3,279 Expected return on free assets 51 56 31 138 Changes in operating assumptions and experience variances 81 190 364 635
Underlying free surplus generated from in-force life business before restructuring costs in 2017 1,407 1,575 1,070 4,052 2017 free surplus expected to be generated at 31 December 2016 1,320 1,446 675 3,441
The equivalent discounted amounts of the undiscounted expected transfers from in‑force business and required capital into free surplus shown previously are as follows: Expected period of emergence
Total discounted free surplus expected to emerge in the next 40 years 17,139 12,455 7,970 37,564 2,354 1,328 522 4,204
II(h) Foreign currency source of key metrics The tables below show the Group’s key free surplus, IFRS and EEV metrics analysis by contribution by currency group: 2017 Free surplus and Group IFRS results
US dollar linked note (1) 13% 24% 21% Other Asia currencies 17% 18% 16%
Notes (1) US dollar linked comprise the Hong Kong and Vietnam operations where the currencies are pegged to the US dollar and the Malaysia and Singapore operations where the currencies are managed against a basket of currencies including the US dollar.
(3) For shareholders’ funds, the US dollar grouping includes US dollar denominated core structural borrowings. Sterling operating profits include all interest payable as sterling denominated, reflecting interest rate currency swaps in place.
The options schemes will terminate as follows, unless the directors resolve to terminate the plans at an earlier date: — UK savings‑related share option scheme: 16 May 2023; — International savings‑related share option scheme: 19 May 2021; — Prudential International Assurance sharesave plan: 3 August 2019; and — International savings‑related share option scheme for non‑employees 2012: 12 May 2022.
The weighted average share price of Prudential plc for the year ended 31 December 2017 was £17.51 (2016: £13.56). Particulars of options granted to directors are included in the Directors’ remuneration report on page 123. The closing price of the shares immediately before the date on which the options were granted during the year was £17.67. The following analyses show the movement in options for each of the option schemes for the year ended 31 December 2017.
The total number of securities available for issue under the scheme is 3,425,069, which represents 0.132 per cent of the issued share capital at 31 December 2017.
The weighted average fair value of options granted under the plan in the period was £3.29.
The total number of securities available for issue under the scheme is 104,044 which represents 0.004 per cent of the issued share capital at 31 December 2017.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £16.99.
The weighted average fair value of options granted under the plan in the period was £3.32.
Prudential International Assurance sharesave plan There are no securities available for issue under the scheme at 31 December 2017.
The total number of securities available for issue under the scheme is 2,919,740 which represents 0.113 per cent of the issued share capital at 31 December 2017.
II(j) Selected historical financial information of Prudential The following table sets forth Prudential’s selected consolidated financial data for the periods indicated. Certain data is derived from Prudential’s audited consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and as adopted by the European Union (EU) and European Embedded Value (EEV).
Acquisition costs and other expenditure (10,165) (8,848) (8,208) (6,752) (6,861) Finance costs: interest on core structural borrowings of
Share of profits from joint ventures and associates, net of related tax 302 182 238 303 147
Profit before tax (being tax attributable to shareholders’ and policyholders’ returns) note 1 3,970 3,212 3,321 3,154 2,082
Profit before tax attributable to shareholders 3,296 2,275 3,148 2,614 1,635 Tax charge attributable to shareholders’ returns (906) (354) (569) (398) (289)
Based on profit for the year attributable to the equity holders of the Company: Basic earnings per share (in pence) 93.1p 75.0p 101.0p 86.9p 52.8p Diluted earnings per share (in pence) 93.0p 75.0p 100.9p 86.8p 52.7p
Profit before tax attributable to shareholders 3,296 2,275 3,148 2,614 1,635
Core structural borrowings of shareholder‑financed operations 6,280 6,798 5,011 4,304 4,636
EEV shareholders’ equity, excluding non‑controlling interests 45.0 39.0 32.4 29.2 24.9 Group shareholder Solvency II surplus note 4 13.4 12.5 9.7 n/a n/a Insurance Groups Directive capital surplus before final dividend n/a n/a 5.5 4.7 5.1
Notes 1 This measure is the formal profit (loss) before tax measure under IFRS but is not the result attributable to shareholders. 2 Operating profits are determined on the basis of including longer‑term investment returns. EEV and IFRS operating profits are stated after excluding the effect of short‑term fluctuations in investment returns against long‑term assumptions, gain on dilution of the Group’s holdings, the costs arising from the domestication of the Hong Kong business, profit (loss) attaching to the sale of Japan life and profit (loss) attaching to the held for sale Korea life business. Separately on the IFRS basis, operating profit also excludes amortisation of acquisition accounting adjustments. In addition, for EEV basis results, operating profit excludes the effect of changes in economic assumptions, the market value movement on core borrowings and in 2012, the gain arising on the acquisition of REALIC.
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EEV shareholders’ funds 44,698 38,968 Less: Value of in‑force business of long‑term business note (a) (29,410) (24,937) Deferred acquisition costs assigned zero value for EEV purposes 9,227 9,170 Other note (b) (8,428) (8,535)
Notes (a) The EEV shareholders’ funds comprises the present value of the shareholders’ interest in the value of in‑force business, net worth of long‑term business operations and IFRS shareholders’ funds of asset management and other operations. The value of in‑force business reflects the present value of future shareholder cash flows from long‑term in‑force business which are not captured as shareholders’ interest on an IFRS basis. Net worth represents the net assets for EEV reporting purposes that reflect the regulatory basis position, sometimes with adjustments to achieve consistency with the IFRS treatment of certain items.
(b) Other adjustments represent asset and liability valuation differences between IFRS and the local regulatory reporting basis used to value net worth for long‑term insurance operations. For the UK, this would be the difference between IFRS and Solvency II. It also includes the mark to market of the Group’s core structural borrowings which are fair valued under EEV but not IFRS. The most significant valuation differences relate to changes in the valuation of insurance liabilities. For example, in Jackson where IFRS liabilities are higher than the local regulatory basis as they are principally based on policyholder account balances (with a deferred acquisition costs recognised as an asset) whereas the local regulatory basis used for EEV is based on future cash flows due to the policyholder on a prudent basis with consideration of an expense allowance as applicable, but with no separate deferred acquisition cost asset.
II(n) Calculation of EEV shareholders’ funds per share EEV shareholders’ funds per share is calculated as closing EEV shareholders’ funds divided by the number of issued shares at the balance sheet date. EEV shareholders’ funds per share excluding goodwill attributable to shareholders is calculated in the same manner, except goodwill attributable to shareholders is deducted from closing EEV shareholders’ funds.
Closing EEV shareholders' funds excluding goodwill attributable to shareholders (£ million) 43,240 37,493 Number of issued shares at year end (millions) 2,587 2,581
Shareholders' funds per share excluding goodwill attributable to shareholders (in pence) 1,671p 1,453p
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A number of risk factors affect Prudential’s operating results and financial condition and, accordingly, the trading price of its shares. The risk factors mentioned below should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties. The information given is as of the date of this document, and any forward‑looking statements are made subject to the reservations specified below under ‘Forward‑Looking Statements’.
Prudential’s approaches to managing risks are explained in the ‘Report on the risks facing our business and how these are managed’ section of this document.
The adverse effects of such factors could be felt principally through the following items: — Reduced investment returns arising on the Group’s portfolios including impairment of debt securities and loans, which could reduce Prudential’s capital and impair its ability to write significant volumes of new business, increase the potential adverse impact of product guarantees, and/or have a negative impact on its assets under management and profit; — Higher credit defaults and wider credit and liquidity spreads resulting in realised and unrealised credit losses; — Failure of counterparties who have transactions with Prudential (eg banks and reinsurers) to meet commitments that could give rise to a negative impact on Prudential’s financial position and on the accessibility or recoverability of amounts due or, for derivative transactions, adequate collateral not being in place; — Estimates of the value of financial instruments becoming more difficult because in certain illiquid or closed markets, determining the value at which financial instruments can be realised is highly subjective. Processes to ascertain such values require substantial elements of judgement, assumptions and estimates (which may change over time); and
— Increased illiquidity, which also adds to uncertainty over the accessibility of financial resources and may reduce capital resources as valuations decline. This could occur where external capital is unavailable at sustainable cost, increased liquid assets are required to be held as collateral under derivative transactions or redemption restrictions are placed on Prudential’s investments in illiquid funds. In addition, significant redemption requests could also be made on Prudential’s issued funds and while this may not have a direct impact on the Group’s liquidity, it could result in reputational damage to Prudential. The potential impact of increased illiquidity is more uncertain than for other risks such as interest rate or credit risk.
Also, in the US, fluctuations in prevailing interest rates can affect results from
Jackson which has a significant spread based business, with the significant proportion of its assets invested in fixed income securities. In particular, fixed annuities and stable value products written by Jackson expose Prudential to the risk that changes in interest rates, which are not fully reflected 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 benefit increases, subject to minimum crediting rates. Declines in spread from these products or other spread businesses that Jackson conducts, and increases in surrender levels arising from interest rate rises, could have a material impact on its businesses or results of operations.
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Currently there are also a number of other global regulatory developments which could impact Prudential’s businesses in its many jurisdictions. These include the Dodd‑Frank Wall Street Reform and Consumer Protection Act (Dodd‑Frank Act) in the US, the work of the Financial Stability Board (FSB) on Global Systemically Important Insurers (G‑SIIs), the Insurance Capital Standard (ICS) being developed by the International Association of Insurance Supervisors (IAIS), the Markets in Financial Instruments Directive
(the ‘MiFID II Directive’), which recently came into force in the EU and the EU General Data Protection Regulation that comes into force in May 2018. In addition, regulators in a number of jurisdictions in which the Group operates are further developing local capital regimes; this includes potential future developments in Solvency II in the UK (as referred to above), National Association of Insurance Commissioners’ reforms in the US including any implications from the recently enacted US tax reform legislation and amendments to certain local statutory regimes in some territories in Asia. There remains a high degree of uncertainty over the potential impact of these changes on the Group.
Prudential’s designation as a G‑SII was reaffirmed on 21 November 2016. As a result of this designation, Prudential is subject to additional regulatory requirements, including a requirement to submit enhanced risk management plans (such as a Group‑wide Recovery Plan, a Systemic Risk Management Plan and a Liquidity Risk Management Plan) to a Crisis Management Group (CMG) comprised of an international panel of regulators.
The G‑SII regime also introduces capital requirements in the form of a Higher Loss Absorption (HLA) requirement. While this requirement was initially intended to come into force in 2019, this has now been postponed to 2022. The HLA is also now intended to be based on the ICS. The IAIS has announced that the implementation of ICS will be conducted in two phases – a five‑year monitoring phase followed by an implementation phase. During the monitoring phase, Internationally Active Insurance Groups, for which Prudential satisfies the criteria, will be required to report on compliance with the ICS to the group‑wide supervisor on a confidential basis, although these results will not be used as a basis to trigger supervisory
Regulators may also focus on the approach that product providers use to select third‑party distributors and to monitor the appropriateness of sales made by them. In some cases, product providers can be held responsible for the deficiencies of third‑party distributors.
In the US, there has been significant attention on the different regulatory standards applied to investment advice delivered to retail customers by different sectors of the industry. As a result of reports relating to perceptions of industry abuses, there have been numerous regulatory inquiries and proposals for legislative and regulatory reforms. This includes focus on the suitability of sales of certain products, alternative investments and the widening of the circumstances under which a person or entity providing investment advice with respect to certain employee benefit and pension plans would be considered a fiduciary (subjecting the person or entity to certain regulatory requirements, such as those adopted by the US Department of Labor (DoL). Elements of the DoL fiduciary duty rules, including the impartial conduct standards, became effective on 9 June 2017 but applicability of the remaining components of the rules has been delayed until 1 July 2019. There is a risk that new regulations introduced may have a material adverse effect on the sales of the products by Prudential and increase Prudential’s exposure to legal risks.
Litigation, disputes and regulatory investigations may adversely affect Prudential’s profitability and financial condition Prudential is, and may in the future be, subject to legal actions, disputes and regulatory investigations in various contexts, including in the ordinary course of its insurance, investment management and other business operations. These legal actions, disputes and investigations may relate to aspects of Prudential’s businesses and operations that are specific to Prudential, or that are common to companies that operate in Prudential’s markets. Legal actions and disputes may arise under contracts, regulations (including tax) or from a course of conduct taken by Prudential, and may be class actions. Although Prudential believes that it has adequately provided in all material respects for the costs of litigation and regulatory matters, no assurance can be provided that such provisions are sufficient. Given the large or indeterminate amounts of damages sometimes sought, other sanctions that might be imposed and the inherent unpredictability of litigation and disputes, it is possible that an adverse outcome could have an adverse effect on Prudential’s reputation, results of operations or cash flows.
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In Asia, the Group’s principal competitors include global life insurers such as Allianz, AXA, and Manulife together with regional insurers such as AIA and Great Eastern, and multinational asset managers such as Franklin Templeton, HSBC Global Asset Management, J.P. Morgan Asset Management and Schroders. In most markets, there are also local companies that have a material market presence.
M&G Prudential’s principal competitors include many of the major retail financial services companies and fund management companies including, in particular, Aviva, Janus Henderson, Jupiter, Legal & General, Schroders and Standard Life Aberdeen.
Jackson’s competitors in the US include major stock and mutual insurance companies, mutual fund organisations, banks and other financial services companies such as Aegon, AIG, Allianz, AXA Financial Inc., Brighthouse, Lincoln Financial Group, MetLife and Prudential Financial.
The Prudential Assurance Company Limited’s financial strength is rated Aa3 by Moody’s, AA by Standard & Poor’s, and AA by Fitch. These ratings are all on a stable outlook.
Such events could, among other things, harm Prudential’s ability to perform necessary business functions, result in the loss of confidential or proprietary data (exposing it to potential legal claims and regulatory sanctions) and damage its reputation and relationships with its customers and business partners. Similarly, any weakness in administration systems
(such as those relating to policyholder records or meeting regulatory requirements) or actuarial reserving processes could have a material adverse effect on its results of operations during the effective period.
The proposed demerger of M&G Prudential carries with it execution risk and will require significant management attention The proposed demerger of M&G Prudential (Prudential’s UK business), is subject to a number of factors (including prevailing market conditions, transfer of the Hong Kong business from The Prudential Assurance Company Limited to Prudential Corporation Asia Limited and approvals from regulators and shareholders). Therefore there can be no certainty as to the timing of the demerger, or that it will be completed as proposed (or at all). Further, if the proposed demerger is completed, there can be no assurance that either Prudential plc or M&G Prudential will realise the anticipated benefits of the transaction, or that the proposed demerger will not adversely affect the trading value or liquidity of the shares of either or both of the two businesses. In addition, preparing for and implementing the proposed demerger is expected to require significant time from management, which may divert management’s attention from other aspects of Prudential’s business.
Prudential is continually enhancing its IT environment to remain secure against emerging threats, together with increasing its ability to detect system compromise and recover should such an incident occur. However, there can be no assurance that such events will not take place which may have material adverse consequential effects on Prudential’s business and financial position.
The failure to understand and respond effectively to the impacts of transitional and physical risks associated with climate change could adversely affect Prudential’s results of operations and its long-term strategy Climate change poses potentially significant risks to Prudential and its customers, not only from the physical impacts of climate change, driven by specific climate‑related events such as natural disasters, but also from the transition risks, associated with the shift to a low‑carbon economy.
The climate risk landscape continues to evolve and is moving up the agenda of many regulators, governments, non‑ governmental organisations and investors. For example, the Financial Stability Board (FSB’s) Task Force for Climate‑related Disclosures recommendations were published in 2017 to provide a voluntary framework on corporate climate‑related financial disclosures following the FSB’s concern that there may be systemic risk in the financial system related to climate change.
Prudential needs to make assumptions about a number of factors in determining the pricing of its products, for setting reserves, and for reporting its capital levels and the results of its long‑term business operations. For example, the assumption that Prudential makes about future expected levels of mortality is particularly relevant for its UK annuity business, where payments are guaranteed for at least as long as the policyholder is alive. Prudential conducts rigorous research into longevity risk, using industry data as well as its own substantial annuitant experience. As part of its pension annuity pricing and reserving policy, Prudential’s UK business assumes that current rates of mortality continuously improve over time at levels based on adjusted data and informed by models from the Continuous Mortality Investigation (CMI) as published by the Institute and Faculty of Actuaries. Assumptions about future expected levels of mortality are also of relevance to the
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A further factor is the assumption that Prudential makes about future expected levels of the rates of early termination of products by its customers (known as persistency). This is relevant to a number of lines of business in the Group, especially for Jackson’s portfolio of variable annuities. Prudential’s persistency assumptions reflect a combination of recent past experience for each relevant line of business and expert judgement, especially where a lack of relevant and credible experience data exists. Any expected change in future persistency is also reflected in the assumption. If actual levels of future persistency are significantly different than assumed, the Group’s results of operations could be adversely affected. Furthermore, Jackson’s variable annuity products are sensitive to other types of policyholder behaviour, such as the take‑up of its GMWB product features.
Certain of Prudential’s subsidiaries are restricted by applicable insurance, foreign exchange and tax laws, rules and regulations that can limit remittances. In some circumstances, this could limit Prudential’s ability to pay dividends to shareholders or to make available funds held in certain subsidiaries to cover operating expenses of other members of the Group.
Prudential operates in a number of markets through joint ventures and other arrangements with third parties, involving certain risks that Prudential does not face with respect to its consolidated subsidiaries Prudential operates, and in certain markets is required by local regulation to operate, through joint ventures and other similar arrangements. For such Group operations, management control is exercised in conjunction with other participants. The level of control exercisable by the Group depends on the terms of the contractual agreements, in particular, the allocation of control among, and continued cooperation between, the participants. In addition, the level of control exercisable by the Group could also be subject to changes in the maximum level of non‑domestic ownership imposed on foreign companies in certain jurisdictions. Prudential may face financial, reputational and other exposure (including regulatory censure) in the event that any of its partners fails to meet its obligations under the arrangements, encounters financial difficulty, or fails to comply with local or international regulation and standards such as those pertaining to the prevention of financial crime. In addition, a significant proportion of the Group’s product distribution is carried out through arrangements with third parties not controlled by Prudential and is therefore dependent upon continuation of these relationships. A temporary or permanent disruption to these distribution arrangements, such as through significant deterioration in the reputation, financial position or other circumstances of the third party or material failure in controls (such as those pertaining to the prevention of financial crime) could adversely affect the results of operations of Prudential.
Back book of business The insurance policies sold in past periods that are still in‑force and hence are still recorded on the insurer’s balance sheet.
Credit risk The risk of loss if another party fails to meet its obligations, or fails to do so in a timely fashion.
Fixed annuities Fixed annuity contracts written in the US which allow for tax‑deferred accumulation of funds, are used for asset accumulation in retirement planning and for providing income in retirement and offer flexible pay‑out options. The contract holder pays the insurer a premium, which is credited to the contract holders’ account. Periodically, interest is credited to the contract holders’ account and administrative charges are deducted, as appropriate.
Inherited estate For life insurance proprietary companies, surplus capital available on top of what is necessary to cover policyholders reasonable expectations. An inherited (orphan) estate is effectively surplus capital on a realistic basis built over time and not allocated to policyholders or shareholders.
Internal rate of return (IRR) The IRR is equivalent to the discount rate at which the present EEV value of the post‑tax cash flows expected to be earned over the life time of the business written in shareholder‑backed life funds is equal to the total invested capital to support the writing of the business. The capital included in the calculation of the IRR is equal to the amount required to pay acquisition costs and set up reserves less premiums received, plus encumbered capital. The impact of the time value of options and guarantees is included in the calculation.
Investment grade Investments rated BBB‑ or above for S&P, Baa3 or above for Moodys. Generally they are bonds that are judged by the rating agency as likely enough to meet payment obligations that banks are allowed to invest in them.
Money Market Fund (MMF) An MMF is an open‑ended mutual fund that invests in short‑term debt securities such as US treasury bills and commercial paper. The purpose of an MMF is to provide investors with a safe place to invest easily accessible cash‑equivalent assets characterised as a low‑risk, low‑return investment.
Net worth Net assets for EEV reporting purposes that reflect the regulatory basis position, sometimes with adjustments to achieve consistency with the IFRS treatment of certain items.
New business profit The profits, calculated in accordance with European Embedded Value Principles, from business sold in the financial reporting period under consideration.
Participating funds Distinct portfolios where the policyholders have a contractual right to receive at the discretion of the insurer additional benefits based on factors such as the performance of a pool of assets held within the fund, as a supplement to any guaranteed benefits. The insurer may either have discretion as to the timing of the allocation of those benefits to participating policyholders or may have discretion as to the timing and the amount of the additional benefits. For Prudential the most significant participating funds are with‑profits 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 benefits based on factors such as investment performance, as a supplement to any guaranteed benefits. This is also referred to as with‑profits business.
Risk margin reserve (RMR) charge An RMR is included within operating profit based on longer‑term investment returns and represents a charge for long‑term expected defaults of debt securities, determined by reference to the credit quality of the portfolio.
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Unallocated surplus Unallocated surplus is recorded wholly as a liability and represents the excess of assets over policyholder liabilities for Prudential’s with‑profits funds. The balance retained in the unallocated surplus represents cumulative income arising on the with‑ profits business that has not been allocated to policyholders or shareholders.
Variable annuity (VA) (US) An annuity whose value is determined by the performance of underlying investment options that frequently includes securities. A variable annuity’s value is not guaranteed and will fluctuate, depending on the value of its underlying investments. The holder of a variable annuity assumes the investment risk and the funds backing a variable annuity are held in the insurance companies separate account. VAs are similar to unit‑linked annuities in the UK.
Yield A measure of the income received from an investment compared to the price paid for the investment. Normally expressed as a percentage.
Details of the 2017 AGM, including the major items discussed at the meeting and the results of the voting, can be found on the Company’s website.
Company constitution Prudential is governed by the Companies Act 2006, other applicable legislation and regulations, and provisions in its Articles. Any change to the Articles must be approved by special resolution of the shareholders. There were no changes to the constitutional documents during 2017. The current Memorandum and Articles are available on the Company’s website.
Prudential also maintains secondary listings on the New York Stock Exchange (in the form of American Depositary Receipts which are referenced to ordinary shares on the main UK register) and the Singapore Stock Exchange.
Rights to dividends under the various schemes are set out on pages 123 to 157.
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All Directors are required to hold a minimum number of shares under guidelines approved by the Board, which they would also be expected to retain as described on page 148 of the Directors’ remuneration report.
Details of shares issued during 2017 and 2016 are given in note C10 on page 277.
Authority to purchase own shares The Directors also require authority from shareholders in relation to the purchase of the Company’s own shares. Prudential seeks authority by special resolution on an annual basis for the buyback of its own shares in accordance with the relevant provisions of the Companies Act 2006 and other related guidance. This authority has not been used since it was last granted at the AGM in 2017. This existing authority is due to expire at the end of this year’s AGM and a special resolution to renew the authority will be put to shareholders at the AGM on 17 May 2018.
Shareholders with ordinary shares standing to the credit of their CDP securities accounts
Record date 3 April 2018 3 April 2018 3 April 2018
A number of dividend waivers are in place and these relate to shares issued but not allocated under the Group’s employee share plans. These shares are held by the Trustees and will, in due course, be used to satisfy requirements under the Group’s employee share plans.
ADRs JPMorgan Chase Bank N.A, PO Box 64504, St. Paul, MN 55164‑0854, USA.
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irectors’ rem uneration report 05 Financial statem ents 06 European Em bedded V
Dividend mandates Shareholders may have their dividends paid directly to their bank or building society account. If you wish to take advantage of this facility, please call Equiniti and request a Cash Dividend Mandate form. Alternatively, shareholders may download the form from www.prudential.co.uk/investors/ shareholder‑information/forms
Anne Richards Deputy Chief Executive of M&G Prudential and Chief Executive of M&G
Prudential moves into Holborn Bars, a purpose‑built office complex designed by Alfred Waterhouse. The building becomes a London landmark, and remains part of Prudential’s property portfolio to this day.
Following the National Insurance Act, Prudential works with the government to run Approved Societies, providing sickness and unemployment benefits to five million people.
Prudential’s first overseas life branch is established in India, with the first policy being sold to a tea planter in Assam.
Prudential plc is listed on the New York Stock Exchange. Prudential becomes the first UK life insurer to enter the Mainland China market through its joint venture with CITIC Group.
M&G and Prudential UK & Europe combine to form M&G Prudential, a leading savings and investments business ideally positioned to target growing customer demand for comprehensive financial solutions.
Prudential plc announces its intention to demerge its UK and Europe business, M&G Prudential, resulting in two separately listed companies, with different investment characteristics and opportunities.
Prudential’s first policies were issued in 1849. The Company’s first annual report, published in 1850, stated that: ‘the Directors are pleased to think that they might infix habits of Prudence among many individuals’, focusing on customers such as ‘the clergyman who requires advances for the erection of his parsonage and the officer who seeks the price of his commission’.
All material used in this report has been independently certified according to the rules of the Forest Stewardship Council (FSC). All pulps used are elemental chlorine free, and the inks used are vegetable oil based. The manufacturing mills and the printer are registered to the Environmental Management System ISO 14001 and are FSC chain‑of‑custody certified.