4 For the 1 January 2016 figure Barry Stowe’s beneficial interest in shares is made up of 123,328 ADRs (representing 246,656 ordinary shares), (8,513.73 of these ADRs are held within an investment account which secures premium financing for a life assurance policy). For the 31 December 2016 figure the beneficial interest in shares is made up of 132,939 ADRs (representing 265,878 ordinary shares).
6 Alistair Johnston stepped down from the Board on 19 May 2016. 7 For the 1 January 2016 and 31 December 2016 figure Alice Schroeder’s beneficial interest in shares is made up of 4,250 ADRs (representing 8,500 ordinary shares).
John Foley 20 Sep 13 901 1,627.5 01 Dec 16 31 May 17 998 – 998 – – – – John Foley 23 Sep 14 1,155 1,627.5 01 Dec 17 31 May 18 779 – – – – – 779 John Foley 21 Sep 16 1,104 1,627.5 01 Dec 19 31 May 20 – 815 – – – – 815 Penny James 21 Sep 12 629 1,627.5 01 Dec 15 31 May 16 858 – 858 – – – – Penny James 22 Sep 15 1,111 1,627.5 01 Dec 18 31 May 19 1,620 – – – – – 1,620 Michael McLintock 23 Sep 14 1,155 1,627.5 01 Dec 19 31 May 20 2,622 – – – – – 2,622 Nic Nicandrou 16 Sep 11 466 1,627.5 01 Dec 16 31 May 17 3,268 – 3,268 – – – – Nic Nicandrou 23 Sep 14 1,155 1,627.5 01 Dec 19 31 May 20 1,311 – – – – – 1,311 Nic Nicandrou 21 Sep 16 1,104 1,627.5 01 Dec 21 31 May 22 – 1,358 – – – – 1,358 Anne Richards 21 Sep 16 1,104 1,627.5 01 Dec 19 31 May 20 – 1,630 – – – – 1,630 Mike Wells 22 Sep 15 1,111 1,627.5 01 Dec 18 31 May 19 1,620 – – – – – 1,620
Directors’ terms of employment and external appointments The Directors’ remuneration policy contains further details of the terms included in Executive Director service contracts. Details of the service contracts of each Executive Director are outlined in the table below.
Executive Directors John Foley1 8 December 2010 12 months 12 months – – Penny James 1 April 2016 12 months 12 months Yes £67,000 Nic Nicandrou 26 April 2009 12 months 12 months – – Anne Richards2 4 July 2016 12 months 12 months – – Barry Stowe 18 October 2006 12 months 12 months – – Mike Wells 21 May 2015 12 months 12 months – – Tony Wilkey 1 June 2015 12 months 12 months – –
Appointing high-calibre executives to the Board and to different roles on the Board is necessary to ensure the Company is well positioned to develop and implement its strategy and deliver long-term value. As the Company operates in an international marketplace for talent, the best internal and external candidates are sometimes asked to move location to assume their new roles. Where this happens, the Company will offer relocation support. The support offered will depend on the circumstances of each move but may include paying for travel, shipping services, the provision of temporary accommodation and other housing benefits. Executives may receive support with the preparation of tax returns, but no current Executive Director is tax equalised.
Anne Richards joined the Board during the year and, as this resulted in Anne relocating to enable her to assume her role, relocation support in line with the approved Directors’ remuneration policy was provided. In addition, on joining the Company, Anne forfeited share awards granted to her by her previous employer and a buy-out award in line with the approved Directors’ remuneration policy was provided. Details of this relocation support and the buy-out award are included in the notes to the 2016 Single Figure table and in the section on long-term incentives awarded in 2016.
Michael’s employment with the Group ended on 31 July 2016 and between 7 June and 31 July he received £76,024 in respect of salary, benefits and pension in accordance with his contract of employment. In line with market practice, the Group paid the professional legal fees incurred by him in respect of finalising his termination arrangements, which amounted to £7,800. In addition, in consideration of agreeing to a confidentiality clause, Michael received £1,000. Michael did not receive a loss of office payment.
The Committee also exercised its discretion in accordance with the approved Directors’ remuneration policy and determined that Michael should be allowed to retain his unvested PLTIP and M&G LTIP awards granted in 2014 and 2015. The 2014 and 2015 awards will vest in accordance with the original timetable, subject to the original performance conditions, remain subject to malus and, for the 2015 award, clawback provisions, and were pro-rated for service. Michael did not receive a 2016 long-term incentive award.
2014 PLTIP award vesting Pierre-Olivier Bouée, Tidjane Thiam and Jackie Hunt’s employment with the Group ended on 30 June 2015, 31 May 2015 and 30 June 2016, respectively. The 2015 Directors’ remuneration report provided details of the remuneration arrangements that would apply to Pierre-Olivier, Tidjane and Jackie after they left the Board. As set out in the section ‘Remuneration in respect of performance in 2016’ the performance conditions attached to Pierre-Olivier, Tidjane and Jackie’s 2014 PLTIP awards were partially met and 70.8 per cent of these awards will be released in 2017. These awards were pro-rated for service (15 of 36 months, 14 of 36 months and 27 of 36 months, respectively) and the details of the release are set out below.
Other Directors A number of former Directors receive retiree medical benefits for themselves and their partner (where applicable). This is consistent with other senior members of staff employed at the same time. A de minimis threshold of £10,000 has been set by the Committee; any payments or benefits provided to a past Director under this amount will not be reported.
To approve the Directors’ remuneration policy (2014 AGM) 1,745,240,139 91.85% 154,778,305 8.15% 1,900,018,444 46,152,673
To approve the Directors’ remuneration report (2016 AGM) 1,714,488,665 92.80% 132,967,991 7.20% 1,847,456,656 159,010,106
This policy will apply following the AGM on 18 May 2017 (subject to shareholder approval).
As the Company has Executive Directors based in multiple geographies, and within insurance and asset management businesses, the Remuneration Committee reviews data from a number of different markets it believes to be the most relevant benchmarks.
Expatriate and relocation benefits allow Prudential to attract high-calibre executives in the international talent market and to deploy them appropriately within the Group.
— Reimbursed business expenses (including any tax liability) incurred when travelling overseas in performance of duties.
The pension provision for Executive Directors will normally be reflective of the arrangements in place for other employees in their business unit when they joined the Group.
In addition, the Chief Executive, PCA receives statutory contributions into the PCA Mandatory Provident Fund.
The AIP payments for all Executive Directors are subject to the achievement of either financial and personal objectives or functional and personal objectives. Business unit chief executives either have measures of their business unit’s financial performance in the AIP or they may participate in a business unit specific bonus plan. For example, the Chairman and CEO, NABU currently participates in the Jackson Senior Management Bonus Pool, as well as in the AIP.
The Jackson Senior Management Bonus Pool is calculated based on Jackson’s performance and distributed to Jackson’s leadership team.
Opportunity The Chief Executive, M&G has a bonus opportunity which is the lower of 0.75 per cent of M&G’s IFRS profit or six times salary.
For other Executive Directors the maximum AIP opportunity is up to 200 per cent of salary. Annual awards are disclosed in the relevant Annual report on remuneration.
In addition to the AIP, the Chairman & CEO, NABU receives a 10 per cent share of the Jackson Senior Management Bonus Pool.
Performance measures The Committee has the discretion to determine the specific performance conditions attached to each AIP cycle and to set annual targets for these measures with reference to the business plans approved by the Board. The financial measures used for the AIP will typically include profit and cash flow targets and payments depend on the achievement of minimum capital thresholds. For the measures used in 2016 and 2017, please refer to the Annual report on remuneration.
The Committee retains the discretion to adjust and/or set different performance measures if events occur (such as a change in strategy, a material acquisition and/or divestment of a Group business or a change in the share capital of the Company or a change in prevailing market conditions) which cause the Committee to determine that the measures are no longer appropriate and that amendment is required so that they achieve their original purpose.
— Group strategic priorities, such as disciplined risk and capital management.
Group Chief Risk Officer: — Relative TSR (50 per cent of award); — Group IFRS profit (20 per cent of award); and
Three-year cumulative IFRS operating profit is assessed at Group or business unit level. Threshold and maximum achievement levels will be set at the beginning of the performance periods in line with the three-year business plan. 25 per cent of this portion of the award will vest for achieving threshold performance increasing to full vesting for meeting stretch targets. The target for Group IFRS operating profit will be disclosed when the performance period ends.
Operation The share ownership guidelines for the Executive Directors are: — 400 per cent of salary for the Group Chief Executive; and
Any matter arises which the Committee believes affects or may affect the reputation of the Company or any member of the Group.
Where at any time before the fifth anniversary of the start of the performance period, either (i) there is a materially adverse restatement of the Company’s published accounts in respect of any financial year which (in whole or part) comprised part of the performance period; or (ii) it becomes apparent that a material breach of a law or regulation took place during the performance period which resulted in significant harm to the Company or its reputation, and the Committee considers it appropriate, taking account of the extent of the participants’ responsibility for the relevant restatement or breach, that clawback be applied to the relevant participant.
Notes to the remuneration policy table for Executive Directors Committee’s judgement The Committee is required to make judgements when assessing Company and individual performance under the Directors’ remuneration policy. In addition, the Committee has discretions under the Company’s share plans, for example, determining if a leaver should retain or lose their unvested awards and whether to apply malus or clawback to an award. Exercise of such discretion during the year will be reported and explained in the next Annual report on remuneration.
Setting the performance ranges for financial targets Where variable pay has performance conditions based on business plan measures (for example the financial metrics of the AIP and the IFRS profit element of the PLTIP) the performance ranges are set by the Remuneration Committee prior to, or at the beginning of, the performance period. Performance is based on annual and longer-term plans approved by the Board. These reflect the long-term ambitions of the Group and business units, in the context of anticipated market conditions.
Key differences between Directors’ remuneration and the remuneration of other employees Across the Group, remuneration is reviewed regularly with the intention that all employees are paid appropriately in the context of their local market and given their individual skills, experience and performance. Each business unit’s salary increase budget is set with reference to local market conditions. The Remuneration Committee considers salary increase budgets in each business unit when determining the salaries of Executive Directors.
Legacy payments The Committee reserves the right to make any remuneration payments and/or payments for loss of office (including exercising any discretions available to it in connection with such payments) notwithstanding that they are not in line with the policy set out above where the terms of the payment were agreed (i) before 15 May 2014 (the date the Company’s first shareholder-approved Directors’ remuneration policy came into effect); (ii) before this policy came into effect, provided that the terms of the payment were consistent with the shareholder-approved Directors’ remuneration policy in force at the time they were agreed; or (iii) at a time when the relevant individual was not a Director of the Company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming or having been a Director of the Company. For these purposes ‘payments’ includes the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment are ‘agreed’ at the time the award is granted.
References to ‘shares’ In this report, references to shares include American Depository Receipts (ADRs). Directors may receive awards denominated in ADRs rather than shares, depending on their location.
Scenarios of total remuneration The chart below provides an illustration of the future total remuneration for each Executive Director in respect of their remuneration opportunity for 2017. Three scenarios of potential outcome are provided based on underlying assumptions shown in the notes to the chart.
John Foley Penny James Nic Nicandrou Anne Richards Barry Stowe Tony Wilkey Mike Wells
Notes The scenarios in the chart above have been calculated on the following assumptions: Minimum In line with expectations Maximum
Tony Wilkey and Barry Stowe are paid in HK$ and US$ respectively and figures have been converted to GBP for the purposes of this chart.
Annual bonus No bonus paid. 50% of maximum AIP. Jackson bonus pool at the average of the last three years.
100% of maximum AIP. Jackson bonus pool at highest of the last three years.
No PLTIP vesting. 59.38% (or 58.75% for the Group Chief Risk Officer) of award under PLTIP (midway between threshold and maximum).
The table below outlines the approach that Prudential will take when recruiting a new Executive Director. This approach will also apply to internal promotions.
Base pay The salary for a new Executive Director will be set using the approach set out in the fixed pay policy table on page 135.
If a newly-appointed Executive Director forfeits one or more bonuses (including outstanding deferred bonuses) on leaving a previous employer, these payments or awards may be replaced in either cash, Prudential shares or options over Prudential shares with an award of an equivalent value. Replacement awards will normally be released on the same schedule as the foregone bonuses.
Should an executive die they would not be entitled to receive payments and benefits in respect of their notice period – provisions are made under the Company’s life assurance scheme to provide for this circumstance (see ‘Benefits’ in the policy table).
Should an Executive Director step down from the Board but remain employed by the Group, they would retain any outstanding deferred bonus awards. These awards would remain subject to the original rules and vesting schedule applied to them when they were awarded.
On death, disablement and in other exceptional circumstances, the Committee has discretion to release unvested long-term incentive awards earlier than the end of the vesting period. The clawback provisions will continue to apply.
Awards made under the M&G Executive LTIP will be released immediately should the Executive Director leave due to disablement or death and would be pro-rated based on time employed.
The treatment of vested long-term incentives will be decided by the Committee taking into account the circumstances of the departure.
Should an Executive Director die whilst serving as an employee a time pro-rated bonus may be awarded. In such circumstances, deferral will not be applied and the payment will be made solely in cash.
The Committee may decide to award an executive stepping down from the Board but remaining with the Group a bonus pro-rated to reflect the portion of the financial year which had elapsed on the date of their change of role. This would be calculated with reference to financial and personal or functional and personal performance measures in the usual way. The Committee may determine that a portion of such a bonus must be deferred.
— By way of settlement or compromise of any claim arising in connection with the termination of a Director’s office or employment.
— Continue in accordance with the rules of the plan; and/or
In the case of a corporate transaction (eg takeover, material merger, winding up etc), the Remuneration Committee will determine whether awards will: — Be exchanged for replacement awards (either in cash or shares) of equal value unless the Committee and successor company agree that the original award will continue; or
Where awards are released the Remuneration Committee will have regard to the performance of the Company, the time elapsed between the date of grant and the relevant event and any other matter that the Remuneration Committee considers relevant or appropriate.
Service contracts Executive Directors’ service contracts provide details of the broad types of remuneration to which they are entitled, and about the kinds of plans in which they may be invited to participate. The service contracts offer no certainty as to the value of performance-related reward and confirm that any variable payment will be at the discretion of the Company.
Statement of consideration of conditions elsewhere in the Company Across the Group, remuneration is reviewed regularly with the intention that all employees are paid appropriately in the context of their local market and given their individual skills, experience and performance. Each business unit’s salary increase budget is set with reference to local market conditions. The Remuneration Committee considers salary increase budgets in each business unit when determining the salaries of Executive Directors.
All Non-executive Directors receive a basic fee for their duties as a Board member. Additional fees are paid for added responsibilities such as chairmanship and membership of committees or acting as the Senior Independent Director. Fees are paid to Non-executive Directors, subject to the appropriate deductions.
Non-executive Directors do not currently receive benefits, a pension allowance or participate in the Group’s employee pension schemes.
Travel and business expenses for Non-executive Directors are incurred in the normal course of business, for example, in relation to attendance at Board and Committee meetings. The costs associated with these are all met by the Company, including any tax liabilities arising on these business expenses.
The Chairman has a share ownership guideline of one times his annual fee and is expected to attain this level of share ownership within five years of the date of his appointment.
The Chief Executive, M&G received annual awards under the M&G Executive LTIP in the period up to and including 2016. Under this plan an annual award of phantom shares was made with a notional starting share price of £1. The phantom share price at vesting is determined by the performance of M&G over the three-year performance period.
In the event of a change of control, the Committee may determine that the award will vest immediately or continue until the original vest date.
See pages 143 to 145 for details of the Committee’s powers in respect of M&G Executive LTIP participants joining or leaving the Group.
Opportunity The Chief Executive, M&G received an award with an initial value of 300 per cent of salary under the M&G Executive LTIP.
If profits in the third year of the performance period are less than the average annual profit generated over the performance period the award will be reduced, potentially down to zero.
This arrangement was put in place in accordance with Listing Rule 9.4.2, which allows an individual scheme to be put in place to assist with the recruitment of an Executive Director, and is consistent with the previous Directors’ remuneration policy approved by shareholders in 2014. Anne is the sole participant in this arrangement and no further awards will be made to Anne under the arrangement.
Benefits Under both the current and proposed new policy, benefits included health and wellness benefits, protection and security benefits, transport benefits, family and education benefits, all employee share plans and savings plans and relocation and expatriate benefits.
In addition, under the proposed new policy, benefits also include reimbursed business expenses (including any associated tax liability) incurred when travelling overseas in performance of duties.
As this tax is incurred in performance of the Directors’ duties, and is in addition to the tax paid by the Director in the country in which he or she is resident, the Company pays this tax. The Company does not pay the tax due on salary in the country in which the Director is resident.
The Committee has the power to recover all, or a portion of, deferred bonus awards made since 2015 in specific circumstances and within a defined time frame.
Executive Directors are required to hold their net of tax vested PLTIP shares, awarded in 2017 and subsequent years, for two years following the end of the three-year performance period, creating a five-year performance and holding period.
— Increased from 200% of base salary to 250% of base salary for other Executive Directors.
The policy on replacement awards on recruitment of an Executive Director has been clarified to: — Specifically include options over Prudential shares (in addition to cash and Prudential shares); and
The updates to the policy are intended to clarify the treatment of leavers in specific circumstances.
A new section has been added to the policy to cover corporate transactions and the Committee’s discretion in these circumstances to: — Allow full or partial vesting or continuation or lapse and exchange of deferred bonus awards; and
The policy on Non-executive Directors’ fees has been clarified to permit new or additional fees should a new committee be formed or the remit of an existing committee expanded.
Statement of implementation in 2017 Executive Directors Executive Directors’ remuneration packages were reviewed in 2016 with changes effective from 1 January 2017. When the Committee took these decisions, it considered the salary increases awarded to other employees in 2016 and the expected increases in 2017. The external market reference points used to provide context to the Committee were identical to those used for 2016 salaries.
All Executive Directors, other than the Chief Executive, M&G and the Group Chief Risk Officer, received a salary increase of 2 per cent. The Chief Executive, M&G received no salary increase and the Group Chief Risk Officer received a salary increase of 5 per cent. The 2017 salary increase budgets for other employees across the Group’s business units were between 2.5 per cent and 6 per cent. No changes have been made to executives’ maximum opportunities under either the annual incentive or the long-term incentive plans.
In 2017, the AIP performance measures have been simplified from seven to four measures and Executive Directors’ 2017 bonuses will be determined by the achievement of IFRS operating profit, operating free surplus, NBP EEV profit and cash flow, which are aligned to the Group’s growth and cash generation focus. This reflected the Committee’s objective to simplify the AIP metrics.
As detailed in the new Directors’ remuneration policy, all long-term incentive awards made to Executive Directors in 2017 will be made under the PLTIP. The vesting of these awards will depend on: — Relative TSR (25 per cent of award); — Group or business unit IFRS profit (50 per cent of award); and
— Balanced scorecard of strategic measures (30 per cent of award).
TSR is measured on a local currency basis since this has the benefit of simplicity and directness of comparison.
Diversity measure Percentage of the Leadership Team that is female at the end of 2019. The target for this metric will be based on progress towards the goal that the Company set when it signed the Women in Finance Charter, specifically that 30 per cent of our Leadership Team will be female at the end of 2021. For this portion of PLTIP awards made in 2017 to vest, at least 27 per cent of our Leadership Team must be female at the end of 2019.
3 A dividend equivalent was accumulated on these awards. 4 The PCA LTIP is an arrangement for executives and senior management of PCA. Tony Wilkey was a participant of this plan until his appointment to the Board on 1 June 2015 and has not been eligible to new awards since this date. The column above marked ‘Date of end of performance period’ for the PCA LTIP reflects the end of the vesting period as there are no performance conditions on these awards.
Note Under the M&G Executive LTIP, the value of each unit at award is £1. The value of units changes based on M&G’s profit growth and investment performance over the performance period. For the 2013 award of 1,112,400 units, the unit price at the end of the performance period was £1.79, which resulted in a payment of £1,991,196 to Michael McLintock in 2016. For the 2014 award of 1,146,000 units, the unit price at the end of the performance period was £1.60, which will result in a payment of £1,577,398 to Michael McLintock in 2017.
Deferred 2014 annual incentive award 2015 42,062 1,589 43,651 31 Dec 17 1,672
Deferred 2015 annual incentive award 2016 63,320 2,393 65,713 31 Dec 18 1,279
Deferred 2015 annual incentive award 2016 13,290 501 13,791 31 Dec 18 1,279
Deferred 2012 annual incentive award 2013 40,646 40,646 – 31 Dec 15 31 Mar 16 1,055 1,301
Deferred 2013 annual incentive award 2014 31,754 1,196 32,950 31 Dec 16 1,317
Deferred 2013 annual incentive award 2014 104,636 3,942 108,578 31 Dec 16 1,317
Deferred 2014 annual incentive award 2015 116,304 4,382 120,686 31 Dec 17 1,672
Deferred 2015 annual incentive award 2016 103,210 3,902 107,112 31 Dec 18 1,279
Deferred 2015 annual incentive award 2016 34,625 1,308 35,933 31 Dec 18 1,279
Notes 1 The Group deferred bonus plan is an arrangement for executives and senior management. Penny James was a participant of this plan until her appointment to the Board on 1 September 2015 and has not been eligible to new awards from this date.
From 2014 participants could elect to enter into savings contracts of up to £500 per month for a period of three or five years. At the end of this term, participants may exercise their options within six months and purchase shares. If an option is not exercised within six months, participants are entitled to a refund of their cash savings plus interest if applicable under the rules. Shares are issued to satisfy those options which are exercised. No options may be granted under the schemes if the grant would cause the number of shares which have been issued, or which remain issuable pursuant to options granted in the preceding 10 years under the scheme and any other option schemes operated by the Company, or which have been issued under any other share incentive scheme of the Company, to exceed 10 per cent of the Company’s ordinary share capital at the proposed date of grant.
Share Incentive Plan (SIP) UK-based Executive Directors are also eligible to participate in the Company’s Share Incentive Plan (SIP). From April 2014, all UK-based employees were able to purchase Prudential plc shares up to a value of £150 per month from their gross salary (partnership shares) through the SIP. For every four partnership shares bought, an additional matching share is awarded which is purchased by Prudential on the open market. Dividend shares accumulate while the employee participates in the plan. If the employee withdraws from the plan, or leaves the Group, matching shares may be forfeited.
Share Incentive Plan awards held in Trust at 1 Jan 2016
Dilution Releases from the Prudential Long Term Incentive Plan are satisfied using new issue shares rather than by purchasing shares in the open market. Shares relating to options granted under all-employee share plans are also satisfied by new issue shares. The combined dilution from all outstanding shares and options at 31 December 2016 was 1 per cent of the total share capital at the time. Deferred bonus awards will continue to be satisfied by the purchase of shares in the open market.
Their emoluments were within the following bands: Number of five highest paid employees 2016
Section A: Background and critical accounting policies 167 A1 Basis of preparation and exchange rates 167 A2 Adoption of new accounting pronouncements in 2016 A3 Accounting policies 168 A3.1 Critical accounting policies, estimates and judgements 176 A3.2 New accounting pronouncements not yet effective
Section D: Other notes 281 D1 Held for sale Korea life business 282 D2 Contingencies and related obligations 283 D3 Post balance sheet events 283 D4 Related party transactions 283 D5 Commitments 284 D6 Investments in subsidiary undertakings, joint ventures and associates
Earned premiums, net of reinsurance B1.4 36,961 35,506 Investment return B1.4 32,511 3,304 Other income B1.4 2,370 2,495
Share of profits from joint ventures and associates, net of related tax D6 182 238
Profit before tax (being tax attributable to shareholders’ and policyholders’ returns)* 3,212 3,321 Less tax charge attributable to policyholders’ returns (937) (173)
Profit before tax attributable to shareholders B1.1 2,275 3,148 Total tax charge attributable to policyholders and shareholders B5 (1,291) (742) Adjustment to remove tax charge attributable to policyholders’ returns 937 173 Tax charge attributable to shareholders’ returns B5 (354) (569)
Total comprehensive income for the year attributable to the equity holders of the Company 3,020 2,090
Reserve movements in respect of share-based payments – – (51) – – (51) – (51)
Share capital and share premium New share capital subscribed C10 1 12 – – – 13 – 13
Total other comprehensive income (loss) – – 22 118 (629) (489) – (489)
Equity securities and portfolio holdings in unit trusts 198,552 157,453 Debt securities C3.2 170,458 147,671 Derivative assets C3.4 3,936 2,958 Other investments 5,465 4,395
Assets held for sale D1 4,589 2 Cash and cash equivalents 10,065 7,782
Liabilities Insurance contract liabilities C4.1 316,436 260,753 Investment contract liabilities with discretionary participation features C4.1 52,837 42,959 Investment contract liabilities without discretionary participation features C4.1 19,723 18,806 Unallocated surplus of with-profits funds C4.1 14,317 13,096 Core structural borrowings of shareholder-financed operations C6.1 6,798 5,011 Operational borrowings attributable to shareholder-financed operations C6.2 2,317 1,960 Borrowings attributable to with-profits operations C6.2 1,349 1,332 Obligations under funding, securities lending and sale and repurchase agreements 5,031 3,765 Net asset value attributable to unit holders of consolidated unit trusts and similar funds 8,687 7,873 Deferred tax liabilities C8.1 5,370 4,010 Current tax liabilities C8.2 649 325 Accruals, deferred income and other liabilities 13,825 10,416
Derivative liabilities C3.4 3,252 3,119 Liabilities held for sale D1 4,293 –
Included within equity securities and portfolio holdings in unit trusts, debt securities and other investments are £8,545 million (2015: £5,995 million) of lent securities and assets subject to repurchase agreements.
Cash flows from operating activities Profit before tax (being tax attributable to shareholders’ and policyholders’ returns) note (i) 3,212 3,321 Non-cash movements in operating assets and liabilities reflected in profit before tax: Other non-investment and non-cash assets (2,490) (1,063) Policyholder liabilities (including unallocated surplus) 31,135 6,067 Other liabilities (including operational borrowings) 7,861 1,761
Cash flows from investing activities Purchases of property, plant and equipment C13 (348) (256) Proceeds from disposal of property, plant and equipment 102 30 Acquisition of subsidiaries and intangibles (303) (286) Sale of businesses – 43
Issue of subordinated debt, net of costs 1,227 590 Interest paid (335) (288)
Interest paid (9) (9) Equity capital: Issues of ordinary share capital 13 7 Dividends paid (1,267) (974)
Net increase in cash and cash equivalents 1,281 1,390 Cash and cash equivalents at beginning of year 7,782 6,409 Effect of exchange rate changes on cash and cash equivalents 1,002 (17)
Prudential plc (the Company) together with its subsidiaries (collectively, the Group or Prudential) is an international financial services group. Principal operations are in Asia, the US and the UK. Prudential offers a wide range of retail financial products and services and asset management services throughout these territories. The retail financial products and services primarily include life insurance, pensions and annuities as well as collective investment schemes.
Basis of preparation These statements have been prepared in accordance with IFRS Standards as issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union (EU) as required by EU law (IAS Regulation EC1606/2032). EU-endorsed IFRS Standards may differ from IFRS Standards issued by the IASB if, at any point in time, new or amended IFRS Standards have not been endorsed by the EU. At 31 December 2016, there were no unendorsed standards effective for the two years ended 31 December 2016 affecting the consolidated financial information of the Group. There were no differences between IFRS Standards endorsed by the EU and IFRS Standards issued by the IASB in terms of their application to the Group. These statements have been prepared on a going concern basis. The parent company statement of financial position prepared in accordance with the UK Generally Accepted Accounting Practice (including Financial Reporting Standard 101 Reduced Disclosure Framework) is presented on page 309.
Certain notes to the financial statements present 2015 comparative information at Constant Exchange Rates (CER), in addition to the reporting at Actual Exchange Rates (AER) used throughout the consolidated financial statements. AER are actual historical exchange rates for the specific accounting period, being the average rates over the period for the income statement and the closing rates for the balance sheet at the balance sheet date. CER results are calculated by translating prior period results using the current period foreign exchange rate ie current period average rates for the income statement and current period closing rates for the balance sheet.
* The exchange rate movement unallocated to a segment mainly reflects the translation of currency borrowings that have been designated as a net investment hedge against the currency risk of the investment in Jackson.
† 2015 included the cumulative exchange loss of the Japan life business of £46 million.
The Group has adopted the following new accounting pronouncements which were effective in 2016: — Annual improvements to IFRSs 2012 to 2014 cycle; — Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38); and — Disclosure Initiative (Amendments to IAS 1).
The preparation of these financial statements requires Prudential to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. Prudential evaluates its estimates, including those related to long-term business provisioning and the fair value of assets. Below are set out those critical accounting policies the application of which requires the Group to make critical estimates and judgements. Also set out are further critical accounting policies, and other items which require the application of critical estimates and judgements.
A modified statutory basis of reporting was adopted by the Group on first time adoption of IFRS in 2005. This was set out in the Statement of Recommended Practice issued by Association of British Insurers (ABI SORP). An exception was for UK regulated with-profits funds which were measured under FRS 27 as discussed below.
Measurement of insurance contract liabilities and investment contracts with discretionary participation features liabilities.
US insurance operations The policyholder liabilities for Jackson’s conventional protection-type policies are determined under US GAAP principles with locked in assumptions for mortality, interest, policy lapses and expenses along with provisions for adverse deviations. For other policies, the policyholder liabilities include the policyholder account balance.
UK insurance operations The UK regulated with-profits funds’ liabilities are the realistic basis liabilities in accordance with FRS 27. The realistic basis requires the value of liabilities to be calculated as: — A with-profits benefits reserve; plus — Future policy-related liabilities; plus — The realistic current liabilities of the fund.
Investment contracts without fixed and guaranteed terms are designated as fair value through profit or loss because the resulting liabilities are managed and their performance is evaluated on a fair value basis. Where the contract includes a surrender option its carrying value is subject to a minimum carrying value equal to its surrender value.
Liability adequacy test The Group performs adequacy testing on its insurance liabilities to ensure that the carrying amounts (net of related deferred acquisition costs) and, where relevant, present value of acquired in-force business is sufficient to cover current estimates of future cash flows. Any deficiency is immediately charged to the income statement.
The practical application for Jackson is in the context of the deferred acquisition cost asset and the liabilities for Jackson’s insurance contracts being determined in accordance with US GAAP. The liabilities include those in respect of the separate accounts (which reflect separate account assets), policyholder account values, and guarantees measured as described in note C4.2. Under US GAAP, most of Jackson’s products are accounted for under Accounting Standard no. 97 of the Financial Accounting Standards Board (FAS 97) whereby deferred acquisition costs are amortised in line with expected gross profits. Recoverability of the deferred acquisition costs in the balance sheet is tested against the projected value of future profits using current estimates and therefore no additional liability adequacy test is required by IFRS 4. The DAC recoverability test is performed in line with US GAAP requirements which in practice is at a grouped level of those contracts managed together.
Measurement and presentation of derivatives and debt securities of US insurance operations
Jackson holds a number of derivative instruments and debt securities. The selection of the accounting approach for these items significantly affects the volatility of IFRS profit before tax.
£7,616 million of US income statement investment return arises from such derivatives and debt securities
For derivative instruments of Jackson that are entered into to mitigate economic exposures, the Group has considered whether it is appropriate to undertake the necessary operational changes to qualify for hedge accounting so as to achieve matching of value movements in hedging instruments and hedged items in the performance statements. The key factors considered in this assessment were the complexity of asset and liability matching in Jackson’s product range and the difficulty and cost of applying the macro hedge provisions under IAS 39 (which are more suited to banking arrangements) to Jackson’s derivative book.
The Group has decided that, except for occasional circumstances, applying hedge accounting using IAS 39 to derivative instruments held by Jackson would not improve the relevance or reliability of the financial statements to such an extent that would justify the difficulty and cost of applying these provisions. As a result of this decision, the total income statement results are more volatile as the movements in the fair value of Jackson’s derivatives are reflected within it. This volatility is reflected in the level of short-term fluctuations in investment returns, as shown in notes B1.1 and B1.2.
Profit before tax attributable to shareholders is £2,275 million and compares to profit before tax of £3,212 million.
The total tax charge for the Group reflects tax that, in addition to relating to shareholders’ profits, is also attributable to policyholders and unallocated surplus of with-profits funds and unit-linked policies. Further detail is provided in note B5. Reported profit before the total tax charge is not representative of pre-tax profits attributable to shareholders. Accordingly, in order to provide a measure of pre-tax profits attributable to shareholders the Group has chosen to adopt an income statement presentation of the tax charge and pre-tax results that distinguishes between policyholder and shareholder components.
The Group uses operating profit based on longer-term investment returns as the segmental measure of its results.
Total segmental operating profit is £4,972 million as shown in note B1.2.
For shareholder-backed business, with the exception of debt securities held by Jackson and assets classified as loans and receivables at amortised cost, all financial investments and investment property are designated as assets at fair value through profit or loss. Short-term fluctuations in fair value affect the result for the year and the Group provides additional analysis of results before and after the effects of short-term fluctuations in investment returns, together with other items that are of a short-term, volatile or one-off nature. The effects of short-term fluctuations include asymmetric impacts where the measurement bases of the liabilities and associated derivatives used to manage the Jackson annuity business differ as described in note B1.2.
Short-term fluctuations in investment returns on assets held by with-profits funds in the UK, Hong Kong, Malaysia and Singapore, do not affect directly reported shareholder results. This is because (i) the unallocated surplus of with-profits funds is accounted for as a liability and (ii) excess or deficits of income and expenditure of the funds over the required surplus for distribution are transferred to or from unallocated surplus.
The Group applies judgement and makes estimates in assessing whether adjustments to the carrying value or amortisation profile of deferred acquisition cost assets are necessary.
Except for acquisition costs of with-profits contracts of the UK regulated with-profits funds, which are accounted for under FRS 27, costs of acquiring new insurance business are accounted for in a way that is consistent with the principles of the ABI SORP with deferral and amortisation against margins in future revenues on the related insurance policies. In general, this deferral is shown by an explicit carrying value in the balance sheet. However, in some Asia operations the deferral is implicit through the reserving methodology. The recoverability of the deferred acquisition costs is measured and are deemed impaired if the projected margins are less than the carrying value. To the extent that the future margins differ from those anticipated, then an adjustment to the carrying value will be necessary.
For US variable annuity business, a key assumption is the long-term investment return from the separate accounts, which is determined using a mean reversion methodology. Under the mean reversion technique applied by Jackson, the projected level of return for each of the next five years is adjusted from period to period so that in combination with the actual rates of return for the preceding three years, including the current period, the assumed long-term annual return (gross of asset management fees and other charges to policyholders, but net of external fund management fees) is realised on average over the entire eight-year period. Projected returns after the mean reversion period revert back to the long-term investment return. For further details, refer to note C7.3(iv).
UK insurance operations For UK regulated with-profits funds where FRS 27 is applied, the basis of setting liabilities is such that it would be inappropriate for acquisition costs to be deferred, therefore these costs are expensed as incurred. The majority of the UK shareholder-backed business is individual and group annuity business where the deferral of acquisition costs is negligible.
Financial Investments held at fair value represent £349.8 billion of the Group’s total assets.
The Group applies valuation techniques to determine the balance recognised for financial investments held at fair value.
The Group holds the majority of its financial investments at fair value (either through profit and loss or available for sale). Financial Investments held at amortised cost primarily comprise of Loans and Deposits.
Determination of fair value The Group uses current bid prices to value its investments with quoted prices. Actively traded investments without quoted prices are valued using prices provided by third parties as described further in note C3.1.
If the market for a financial investment of the Group is not active, the fair value is determined by using valuation techniques. The Group establishes fair value for these financial investments by using quotations from independent third parties, such as brokers or pricing services, or by using internally developed pricing models. Priority is given to publicly available prices from independent sources when available, but overall the source of pricing and/or the valuation technique is chosen with the objective of arriving at a fair value measurement which reflects the price at which an orderly transaction would take place between market participants on the measurement date. The valuation techniques include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option-adjusted spread models and, if applicable, enterprise valuation and may include a number of assumptions relating to variables such as credit risk and interest rates. Changes in assumptions relating to these variables could positively or negatively impact the reported fair value of these financial investments.
In estimating any required impairment for US residential mortgage-backed and other asset-backed securities held as available for sale, the expected value of future cash flows is determined using a model, the key assumptions of which include how much of the currently delinquent loans will eventually default and assumed loss severity.
If a loss event that will have a detrimental effect on cash flows is identified, an impairment loss is recognised in the income statement. The loss recognised is determined as the difference between the book cost and the fair value of the relevant impaired assets. This loss comprises the effect of the expected loss of contractual cash flows and any additional marketprice -driven temporary reductions in values.
For US residential mortgage-backed and other asset-backed securities, all of which are classified as available-for-sale, impairment is estimated using a model of expected future cash flows. Key assumptions used in the model include assumptions about how much of the currently delinquent loans will eventually default and assumed loss severity.
Reversal of impairment losses If, in subsequent periods, an impaired debt security held on an available-for-sale basis or an impaired loan or receivable recovers in value (in part or in full), and this recovery can be objectively related to an event occurring after the impairment, then the previously recognised impairment loss is reversed through the income statement (in part or in full).
The Group applies judgement when considering whether indicators of impairment exist for intangible assets representing distribution rights.
In September 2016, the IASB published Amendments to IFRS 4, ‘Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts’ to address the temporary consequences of the different effective dates of IFRS 9 and the new insurance contracts standard. The amendments include an optional temporary exemption from applying IFRS 9 that is available to companies whose predominant activity is to issue insurance contracts. Such a deferral will be available until the new Insurance Contracts Standard (IFRS 17) comes into effect (but it cannot be used after 1 January 2021). The Group meets the criteria and intends to take advantage of the temporary exemption afforded by the amendments to IFRS 4 from applying IFRS 9 until IFRS 17 comes into effect, which is expected to be in 2021. The amendments to IFRS 4 are not yet endorsed by the EU. However, the European Financial Reporting Advisory Group (EFRAG) has provided advice to the European Commission recommending endorsement.
The Group will be assessing the impact of this IFRS 9 in conjunction with the requirements of the IASB’s proposals for insurance contracts accounting as they are developed to a final standard. The adoption of the requirements of IFRS 9 may result in reclassification of certain of the Group’s financial assets and hence lead to a change in the measurement of these instruments or the performance reporting of value movements. In addition, for any investments classified as FVOCI, as noted above, the impairment provisioning approach is altered from the current IAS 39 approach. The Group does not currently apply hedge accounting for most of its derivative programmes but will reconsider its approach in light of new requirements under the standard on adoption.
Accounting pronouncements not yet endorsed by the EU IFRS 16, ‘Leases’ In January 2016, the IASB published a new standard, IFRS 16 ‘Leases’ effective for periods beginning on or after 1 January 2019, with earlier adoption permitted if IFRS 15 ‘Revenue from Contracts with Customers’ has also been applied.
This new standard is of particular relevance to the operating leases for major assets where Prudential is a lessee, which relate to leases of properties occupied by the Group’s businesses. Under IFRS 16, these leases will be brought on to the statement of financial position with a ‘right to use’ asset being established and a corresponding liability representing the obligation to make lease payments. The current rental accrual charge in the profit and loss account will be replaced with a depreciation charge for the ‘right to use’ asset and the interest expense on the lease liability. The Group is currently assessing the impact of this new standard.
Amendments to IAS 12: Income Taxes In January 2016, the IASB issued amendments to IAS 12 Income Taxes clarifying the requirements on recognition of deferred tax assets for unrealised losses on a debt instrument measured at fair value. The amendments are effective from 1 January 2017. The Group has assessed the requirements of these amendments and concluded that they do not require any changes to the Group’s accounting policy for deferred tax.
Other new accounting pronouncements In addition to the above, the Group is also assessing the impact of the following new accounting pronouncements but are not expecting them to have a significant impact on the Group’s financial statements: — Amendments to IAS 7 Statement of Cash Flows: Disclosure Initiative, issued in January 2016 and effective from 1 January 2017; — Amendments to IFRS 2: Classification and measurement of share-based payment transactions, issued in June 2016 and effective from 1 January 2018; — Annual Improvements to IFRS Standards 2014-2016 Cycle, issued in December 2016 and effective from 1 January 2017/1 January 2018; — IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration, issued in December 2016 and effective from 1 January 2018; and
Other income and expenditure Investment return and other income 1 14 14 (93)% (93)% Interest payable on core structural borrowings (360) (312) (312) (15)% (15)%
Based on operating profit based on longer-term investment returns 131.3p 124.6p 136.0p 5% (3)% Based on profit for the year 75.0p 101.0p 110.1p (26)% (32)%
* To facilitate future comparisons of operating profit based on longer-term investment returns that reflect the Group’s retained operations, the results attributable to the held for sale Korea life business are included separately within the supplementary analysis of profit above.
Insurance operations: Asia note (i) (225) (137) US note (ii) (1,455) (424) UK note (iii) 198 (120)
* To facilitate comparisons of operating profit based on longer-term investment returns that reflect the Group’s retained operations, the short-term fluctuations in investment returns attributable to the held for sale Korea life business are included separately within the supplementary analysis of profit.
In Asia, the short-term fluctuations of negative £(225) million (2015: negative £(137) million) principally reflect the impact of changes in interest rates across the region on bonds, and equity market falls in China.
The result comprises the net effect of: 1 The accounting value movements on the variable and fixed index annuity guarantee liabilities. This includes: – The Guaranteed Minimum Death Benefit (GMDB), and the ‘for life’ portion of Guaranteed Minimum Withdrawal Benefit (GMWB) guarantees which are measured under
the US GAAP basis applied for IFRS in a way that is substantially insensitive to the effect of current period equity market and interest rate changes; and – The ‘not for life’ portion of GMWB embedded derivative liabilities which are required to be measured under IAS 39 using a basis under which the projected future growth
rate of the account balance is based on current swap rates (rather than expected rates of return) with only a portion of the expected future guarantee fees included. Reserve value movements on these liabilities are sensitive to changes to levels of equity markets, implied volatility and interest rates.
factors include: – The variable annuity guarantees and fixed index annuity embedded options being only partially fair valued under ‘grandfathered’ US GAAP; – The interest rate exposure being managed through the other than equity-related derivative programme explained in note (b) below; and – Jackson’s management of its economic exposures for a number of other factors that are treated differently in the accounting frameworks such as future fees and assumed
volatility levels. (b) Other than equity-related derivatives The fluctuations for this item comprise the net effect of: – Fair value movements on free-standing, other than equity-related derivatives; – Accounting effects of the Guaranteed Minimum Income Benefit (GMIB) reinsurance; and – Related amortisation of DAC.
The free-standing, other than equity-related derivatives, are held to manage interest rate exposures and durations within the general account and the variable annuity
guarantees and fixed index annuity embedded options described in note (a) above. The direct GMIB liability is valued using the US GAAP measurement basis applied for IFRS reporting in a way that substantially does not recognise the effects of market
movements. Reinsurance arrangements are in place so as to essentially fully insulate Jackson from the GMIB exposure. Notwithstanding that the liability is essentially fully reinsured, as the reinsurance asset is net settled, it is deemed a derivative under IAS 39 which requires fair valuation.
in operating profit with variations from year to year included in the short-term fluctuations category. The risk margin reserve charge for longer-term credit-related losses included in operating profit based on longer-term investment returns of Jackson for 2016 is based on an average annual risk margin reserve of 21 basis points (2015: 23 basis points) on average book values of US$56.4 billion (2015: US$54.6 billion) as shown below: Moody’s rating category (or equivalent under NAIC ratings of mortgage-backed securities)
Risk margin reserve charge to operating profit for longer-term credit related losses (97) (72) (103) (67)
In addition to the accounting for realised gains and losses described above for Jackson general account debt securities, included within the statement of other comprehensive income is a pre-tax credit for unrealised losses on debt securities classified as available-for-sale net of related change in amortisation of deferred acquisition costs of £48 million (2015: charge for net unrealised losses £(968) million). Temporary market value movements do not reflect defaults or impairments. Additional details of the movement in the value of the Jackson portfolio are included in note C3.2(b).
(iii) UK insurance operations The positive short-term fluctuations in investment returns for UK insurance operations of £198 million (2015: negative £(120) million) mainly reflects gains on bonds backing the
capital of the shareholder-backed annuity business following the fall in 15-year gilt yields over 2016. (iv) Other The negative short-term fluctuations in investment returns for other operations of £(196) million (2015: negative £(74) million) include unrealised value movements on financial
instruments driven by the fall in interest rates. (v) Default losses The Group incurred default losses of £(4) million on its shareholder-backed debt securities for 2016 wholly in respect of Jackson’s portfolio (2015: £nil).
Performance measure The performance measure of operating segments utilised by the Company is IFRS operating profit attributable to shareholders based on longer-term investment returns, as described below. This measurement basis distinguishes operating profit based on long-term investment returns from other constituents of the total profit as follows: — Short-term fluctuations in investment returns on shareholder-backed business. This includes the impact of short-term market effects on the carrying value of Jackson’s guarantee liabilities and related derivatives as explained below.
— Amortisation of acquisition accounting adjustments arising on the purchase of business. This comprises principally the charge for the adjustments arising on the purchase of REALIC in 2012;
Segment results that are reported to the Group Executive Committee include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items are mainly in relation to the Group Head Office and the Asia Regional Head Office.
(iv) Business where policyholder liabilities are sensitive to market conditions Under IFRS, the degree to which the carrying values of liabilities to policyholders are sensitive to current market conditions varies between territories depending upon the nature of the ‘grandfathered’ measurement basis. In general, in those instances where the liabilities are particularly sensitive to routine changes in market conditions, the accounting basis is such that the impact of market movements on the assets and liabilities is broadly equivalent in the income statement, and operating profit based on longer-term investments returns is not distorted. In these circumstances, there is no need for the movement in the liability to be bifurcated between the elements that relate to longer-term market conditions and short-term effects.
Except in the case of assets backing liabilities which are directly matched (such as unit-linked business) or closely correlated with value movements (as discussed below) operating profit based on longer-term investment returns for shareholder-financed business is determined on the basis of expected longer-term investment returns.
At 31 December 2016, the level of unamortised interest-related realised gains and losses related to previously sold bonds for the Group was a net gain of £969 million (2015: £567 million).
(c) US Insurance operations (i) Separate account business For such business the policyholder unit liabilities are directly reflective of the asset value movements. Accordingly, the operating results based on longer-term investment returns reflect the current period value movements in unit liabilities and the backing assets.
Embedded derivatives for variable annuity guarantee minimum income benefit The GMIB liability, which is essentially fully reinsured, subject to a deductible and annual claim limits, is accounted for in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic 944-80 Financial Services – Insurance – Separate Accounts (formerly SOP 03-1) under IFRS using ‘grandfathered’ US GAAP. As the corresponding reinsurance asset is net settled, it is considered to be a derivative under IAS 39, ‘Financial Instruments: Recognition and Measurement’, and the asset is therefore recognised at fair value. As the GMIB is economically reinsured, the mark-to-market element of the reinsurance asset is included as a component of short-term fluctuations in investment returns.
The operating result based on longer-term investment returns reflects the impact of value movements on policyholder liabilities for annuity business within the non-profit sub-fund of The Prudential Assurance Company (PAC) after adjustments to allocate the following elements of the movement to the category of ‘short-term fluctuations in investment returns’: — The impact on credit risk provisioning of actual upgrades and downgrades during the period; — Credit experience compared with assumptions; and — Short-term value movements on assets backing the capital of the business.
(ii) Non-linked shareholder-financed business For debt securities backing non-linked shareholder-financed business of the UK insurance operations (other than the annuity business) the realised gains and losses are principally interest related. Accordingly, all realised gains and losses to date for these operations are being amortised over the period to the date those securities would otherwise have matured, with no explicit risk margin reserve charge.
Remeasurement of carrying value of Korea life business classified as held for saleD1 (238) – – – – – – (238) – (238)
Profit (loss) before tax (being tax attributable to shareholders’ and policyholders’ returns) note (i) 1,198 529 1,808 433 (29) (4) 141 4,076 (864) 3,212
Profit (loss) before tax (being tax attributable to shareholders’ and policyholders’ returns) note (i) 1,105 1,199 1,179 441 (45) 11 115 4,005 (684) 3,321
Notes (i) This measure is the formal profit (loss) before tax measure under IFRS but is not the result attributable to shareholders. (ii) Other income from external customers includes £8 million (2015: £19 million) relating to financial instruments that are not held at fair value through profit or loss. These fees
primarily related to prepayment fees, late fees and syndication fees. (iii) In addition to the results of the central operations, unallocated to a segment includes intra-group eliminations. This column includes the elimination of the intra-group reinsurance
contract between the UK with-profits and Asia with-profits operations. (iv) Interest income includes £3 million (2015: £3 million) accrued in respect of impaired securities. (v) In Asia, revenue from external customers from no individual country exceeds 10 per cent of the Group total except for Hong Kong in 2016 (2015: no individual country exceeded
Realised gains and losses on the Group’s investments for 2016 recognised in the income statement amounted to a net loss of £1.6 billion (2015: a net gain of £3.0 billion).
The profit included in the income statement in respect of asset management operations for the year is as follows: M&G Prudential
Revenue (excluding NPH broker-dealer fees) 1,188 62 235 391 1,876 1,964 NPH broker-dealer fees note (i) – – 550 – 550 522
Charges (excluding NPH broker-dealer fees) (768) (91) (239) (304) (1,402) (1,497) NPH broker-dealer fees note (i) – – (550) – (550) (522)
Short-term fluctuations in investment returns 8 (56) – – (48) (65)
amounts are also wholly reflected as charges within the income statement. After allowing for these charges, there is no effect on profit from this item. The presentation in the table above shows separately the amounts attributable to this item so that the underlying revenue and charges can be seen.
Underlying profit before performance-related fees 379 406 Share of associate results 13 14 Performance-related fees 33 22
Total M&G operating profit based on longer-term investment returns 425 442
Total acquisition costs and other expenditure includes: (a) Total depreciation and amortisation expense of £(242) million (2015: £(755) million) relates primarily to amortisation of deferred acquisition costs of insurance contracts and asset management contracts.
B3.1 Staff and employment costs The average number of staff employed by the Group during the year was: Business operations: Asia operations 15,439 15,030 US operations 4,447 4,562 UK operations 6,381 5,920
The Company operates a number of deferred bonus schemes including the Group Deferred Bonus Plan, the Prudential Corporation Asia Deferred Bonus Plan (PCA DBP), the Prudential Capital Deferred Bonus Plan (PruCap DBP) and other arrangements. There are no performance conditions attached to deferred share awards made under these arrangements.
The weighted average share price of Prudential plc for the year ended 31 December 2016 was £13.56 compared to £15.49 for the year ended 31 December 2015.
Between £5 and £6 – – – – – – – – – –
Risk-free interest rates are taken from government bond spot rates with projections for two-year, three-year and five-year terms to match corresponding vesting periods. Dividend yield is determined as the average yield over a period of 12 months up to and including the date of grant. For the Prudential LTIP (TSR), volatility and correlation between Prudential and a basket of 18 competitor companies is required. For grants in 2016, the average volatility for the basket of competitors was 24.88 per cent. Correlations for the basket are calculated for each pairing from the log of daily TSR returns for the three years prior to the valuation date. Market implied volatilities are used for both Prudential and the components of the index. Changes to the subjective input assumptions could materially affect the fair value estimate.
The share-based payments charge comprises £12.9 million (2015: £10.4 million), which is determined in accordance with IFRS 2, ‘Share-based Payment’ (see note B3.2) and £5.8 million (2015: £5.1 million) of deferred share awards.
In addition, there were fees incurred by pension schemes of £0.1 million (2015: £0.1 million) for audit services and £0.1 million (2015: £nil) for other assurance services.
Prudential Retirement Income Limited (PRIL) was the principal company writing the UK’s shareholder-backed annuity business. In 2016, the business of PRIL was transferred into PAC following a Part VII transfer under the Financial Services and Markets Act 2000.
The reserves for credit risk allowance at 31 December 2016 for the UK shareholder-backed business (both for ex-PRIL and the legacy PAC shareholder annuity business) were £1.7 billion (31 December 2015: £1.6 billion).
Longevity reinsurance and other management actions A number of management actions were taken in 2016 to improve the Solvency II position of the UK insurance operations and further mitigate market risk, which have generated combined profits of £332 million. Similar actions were also taken in 2015.
Of this amount £197 million related to profit from additional longevity reinsurance transactions covering £5.4 billion of annuity liabilities on an IFRS basis, with the balance of £135 million reflecting the effect of repositioning the fixed income portfolio and other actions.
The contribution to profit from similar longevity reinsurance transactions in 2015 was £231 million, covering £6.4 billion of annuity liabilities (on a Pillar 1 basis). Other asset-related management actions generated a further £169 million in 2015.
At 31 December 2016, longevity reinsurance covered £14.4 billion of IFRS annuity liabilities equivalent to 42 per cent of total annuity liabilities.
With-profits sub-fund For the with-profits sub-fund, the aggregate effect of assumption changes in 2016 was a net charge to unallocated surplus of £78 million (2015: net charge of £114 million).
The total deferred tax credit (charge) arises as follows: Unrealised gains and losses on investments (437) 272 Balances relating to investment and insurance contracts (90) (55) Short-term temporary differences 573 (200) Capital allowances 4 1 Unused tax losses 36 (26)
In 2016, a deferred tax credit of £22 million (2015: credit of £333 million) has been taken through other comprehensive income.
The 2016 expected and actual tax rates as shown include the impact of the re-measurement loss on the held for sale Korea life business. The 2016 tax rates for Asia insurance and Group, excluding the impact of the held for sale Korea life business, are as follows: Asia insurance Attributable to
Expected tax rate on total profit 22% 24% Actual tax rate: Operating profit based on longer-term investment returns 17% 21% Total profit 19% 14%
The £20 million reconciling item ‘items related to taxation of life insurance businesses’ reflects where the basis of tax is not the accounting profits, primarily in: — Hong Kong where the taxable profit is based on the net insurance premiums; and — Indonesia and Philippines where investment income is subject to withholding tax at source and no further corporation tax.
inclusion in the profit before tax of Prudential’s share of the profits after tax from the joint ventures and associates, with no equivalent item included in Prudential’s tax charge. The decrease reflects a lower profit from joint ventures and associates in 2016.
The £81 million non-recurring reconciling item ‘adjustments to tax charge in relation to prior years’ arose as a result of the finalisation of the dividend received deduction in the 2015 tax return as compared to the estimate included in the tax charge at 2015.
UK insurance operations There are no significant reconciling items or significant movements from 2015.
Other operations The £26 million reconciling item ‘deductions not allowable for tax purposes’ primarily relates to non-tax deductible foreign exchange movements on debt instruments.
Total actual tax charge (credit) 165 236 203 (35) 569 173 742
Loss attaching to held for sale Korea life business D1 (227) (4) (231) (9.0)p (9.0)p Amortisation of acquisition accounting
Profit attaching to held for sale Korea life business D1 56 (14) 42 1.7p 1.7p Cumulative exchange loss on the sold Japan life
Weighted average number of shares for calculation of: Basic earnings per share 2,560 2,553 Shares under option at end of year 7 9 Number of shares that would have been issued at fair value on assumed option price (5) (6)
Dividends relating to reporting year: First interim ordinary dividend 12.93p 333 12.31p 315 Second interim ordinary dividend 30.57p 789 26.47p 681 Special dividend – – 10.00p 257
Dividend per share For the year ended 31 December 2015 the second interim ordinary dividend of 26.47 pence per ordinary share and the special dividend of 10.00 pence per ordinary share were paid to eligible shareholders on 20 May 2016. The 2016 first interim ordinary dividend of 12.93 pence per ordinary share was paid to eligible shareholders on 29 September 2016.
The second interim ordinary dividend for the year ended 31 December 2016 of 30.57 pence per share will be paid on 19 May 2017 in sterling to shareholders on the principal register and the Irish branch register at 6.00pm (BST) on 31 March 2017 (Record Date), and in Hong Kong dollars to shareholders on the Hong Kong branch register at 4.30pm Hong Kong time on the Record Date (HK Shareholders). Holders of US American Depositary Receipts (US Shareholders) will be paid their dividends in US dollars on or about 26 May 2017. The second interim ordinary dividend will be paid on or about 26 May 2017 in Singapore dollars to shareholders with shares standing to the credit of their securities accounts with The Central Depository (Pte.) Limited (CDP) at 5.00pm Singapore time on the Record Date (SG Shareholders). The dividend payable to the HK Shareholders will be translated using the exchange rate quoted by the WM Company at the close of business on 13 March 2017. The exchange rate at which the dividend payable to the SG Shareholders will be translated into Singapore dollars, will be determined by CDP.
Unallocated surplus of with-profits funds C4.1 2,667 – 11,650 – – – – – – 14,317
Borrowings attributable to with-profits operations C6.2(b) 4 – 1,345 – – – – – – 1,349
Net asset value attributable to unit holders of consolidated unit trusts and similar funds 3,093 – 5,594 – – – – – – 8,687
Unallocated surplus of with-profits funds 2,553 – 10,543 – – – – – – 13,096
Analysed as: Expected to be settled within one year 5,548 4,273 Expected to be settled after one year 624 433
Analysed as: Held centrally and available for general use by the Group 247 365 Other funds not available for general use by the Group, including funds held for the benefit of policyholders 9,818 7,417
Accruals and deferred income 1,150 952 Other creditors 6,788 4,876 Creditors arising from direct insurance and reinsurance operations 2,520 1,828 Interest payable 90 70 Funds withheld under reinsurance of the REALIC business 2,851 2,347 Other items 426 343
Total intra-group debt represented by operational borrowings at Group level 1,651 1,705
Property, plant and equipment 89 – 32 121 73 Reinsurers’ share of insurance contract liabilities 43 – 1,496 1,539 797 Deferred tax assets – – 98 98 66
accounted for using the equity method – – 688 688 475
discretionary participation features C4.1 – 254 – 254 181 Unallocated surplus of with-profits funds 2,667 – – 2,667 2,553 Operational borrowings attributable to
shareholder-financed operations – 12 7 19 – Borrowings attributable to with-profits
Accruals, deferred income and other liabilities 2,837 108 2,942 5,887 4,476
Assets Deferred acquisition costs and other intangible assets – 8,323 8,323 6,168 Property, plant and equipment – 237 237 192 Reinsurers’ share of insurance contract liabilities – 7,224 7,224 6,211 Deferred tax assets – 3,861 3,861 2,448 Current tax recoverable – 95 95 307 Accrued investment income – 549 549 473
Equity securities and portfolio holdings in unit trusts 120,411 336 120,747 91,216
Equity securities and portfolio holdings in unit trusts 38,803 15,183 51 15,234 54,037 47,593
Unallocated surplus of with-profits funds C4.1 11,650 – – – 11,650 10,543 Operational borrowings attributable to shareholder-
unit trusts and similar funds 3,513 2,066 15 2,081 5,594 5,049
Liabilities held for sale note (ii) 535 – – – 535 –
Notes (i) Includes the Scottish Amicable Insurance Fund which, at 31 December 2016, have total assets and liabilities of £6,101 million (2015: £6,230 million). The PAC with-profits sub-fund
(WPSF) mainly contains with-profits business but it also contains some non-profit business (unit-linked, term assurances and annuities). The PAC with-profits fund includes £11.2 billion (2015: £10.8 billion) of non-profits annuities liabilities.
(ii) The assets and liabilities held for sale for the UK insurance operations at 31 December 2016 comprise the investment properties and consolidated venture investments of the PAC with-profits fund, for which the sales had been agreed but not yet completed at the year end.
C2 Analysis of segment statement of financial position by business type continued
The loans and receivables have been shown net of provisions for impairment. The fair value of loans have been estimated from discounted cash flows expected to be received. The rate of discount used was the market rate of interest where applicable.
Total financial investments, net of derivative liabilities 151,775 4,820 27 156,622
Equity securities and portfolio holdings in unit trusts 1,966 3 10 1,979
Total financial investments, net of derivative liabilities 23,853 68,063 3,450 95,366
Other financial liabilities held at fair value – (385) (2,851) (3,236)
All assets and liabilities held at fair value are classified as fair value through profit or loss, except for £40,645 million (2015: £33,984 million) of debt securities classified as available-for-sale.
In addition to the financial instruments shown above, the assets and liabilities held for sale on the consolidated statement of financial position at 31 December 2016 in respect of Korea life business included a net financial instruments balance of £3,200 million, primarily for equity securities and debt securities. Of this amount, £2,763 million was classified as level 1 and £437 million as level 2.
Equity securities and portfolio holdings in unit trusts 1,150 10 31 1,191
Total financial investments, net of derivative liabilities 195,689 108,616 7,491 311,796 Investment contract liabilities without discretionary participation features
held at fair value – (16,022) – (16,022) Net asset value attributable to unit holders of consolidated unit trusts and
operations note (ii) – (7,220) – (7,220) (6,798) Operational borrowings attributable to shareholder-financed
Borrowings attributable to the with-profits funds – (1,220) (133) (1,353) (1,349) Obligations under funding, securities lending and sale and
operations note (ii) – (5,419) – (5,419) (5,011) Operational borrowings attributable to shareholder-financed
The fair value included for the subordinated and senior debt issued by the parent company is determined using quoted prices from independent third parties.
Generally, no adjustment is made to the prices obtained from independent third parties. Adjustment is made in only limited circumstances, where it is determined that the third-party valuations obtained do not reflect fair value (eg either because the value is stale and/or the values are extremely diverse in range). These are usually securities which are distressed or that could be subject to a debt restructure or where reliable market prices are no longer available due to an inactive market or market dislocation. In these instances, prices are derived using internal valuation techniques including those as described below in this note with the objective of arriving at a fair value measurement that reflects the price at which an orderly transaction would take place between market participants on the measurement date. The techniques used require a number of assumptions relating to variables such as credit risk and interest rates. Examples of such variables include an average credit spread based on the corporate bond universe and the relevant duration of the asset being valued. Prudential determines the input assumptions based on the best available information at the measurement dates. Securities valued in such manner are classified as level 3 where these significant inputs are not based on observable market data.
Of the total level 2 debt securities of £116,257 million at 31 December 2016 (2015: £104,464 million), £12,708 million are valued internally (2015: £10,331 million). The majority of such securities are valued using matrix pricing, which is based on assessing the credit quality of the underlying borrower to derive a suitable discount rate relative to government securities of a comparable duration. Under matrix pricing, the debt securities are priced taking the credit spreads on comparable quoted public debt securities and applying these to the equivalent debt instruments factoring in a specified liquidity premium. The majority of the parameters used in this valuation technique are readily observable in the market and, therefore, are not subject to interpretation.
(d) Fair value measurements for level 3 fair valued assets and liabilities Reconciliation of movements in level 3 assets and liabilities measured at fair value The following table reconciles the value of level 3 fair valued assets and liabilities at 1 January 2016 to that presented at
Of the total net gains and losses in the income statement of £320 million (2015: £14 million), £242 million (2015: £67 million) relates to net unrealised gains of financial instruments still held at the end of the year, which can be analysed as follows: Equity securities 8 94 Debt securities 71 (12) Other investments 182 160 Derivative liabilities – (15) Net asset value attributable to unit holders of consolidated unit trusts and similar funds (18) (160) Other financial liabilities (1) –
Of the total net gains and losses in the income statement of £273 million (2015: £537 million), £286 million (2015: £505 million) relates to net unrealised gains of investment properties still held at the end of the year.
Included within these amounts were loans of £2,672 million at 31 December 2016 (2015: £2,183 million), measured as the loan outstanding balance, attached to REALIC and held to back the liabilities for funds withheld under reinsurance arrangements. The funds withheld liability of £2,851 million at 31 December 2016 (2015: £2,347 million) was also classified within level 3, accounted for on a fair value basis being equivalent to the carrying value of the underlying assets.
(b) A net liability of £(243) million (2015: £(106) million) was held to support non-linked shareholder-backed business. If the value of all the level 3 instruments held to support non-linked shareholder-backed business valued internally was varied downwards by 10 per cent, the change in valuation would be £24 million (2015: £11 million), which would reduce shareholders’ equity by this amount before tax. Of this amount, a decrease of £24 million (2015: a decrease of £10 million) would pass through the income statement substantially as part of short-term fluctuations in investment returns outside of operating profit and no impact (2015: a decrease of £1 million) would be included as part of other comprehensive income, being unrealised movements on assets classified as availablefor -sale.
Other assets at fair value – investment properties The investment properties of the Group are principally held by the UK insurance operations that are externally valued by professionally qualified external valuers using the Royal Institution of Chartered Surveyors (RICS) valuation standards. An ‘income capitalisation’ technique is predominantly applied for these properties. This technique calculates the value through the yield and rental value depending on factors such as the lease length, building quality, covenant and location. The variables used are compared to recent transactions with similar features to those of the Group’s investment properties. As the comparisons are not with properties that are virtually identical to the Group’s investment properties, adjustments are made by the valuers where appropriate to the variables used. Changes in assumptions relating to these variables could positively or negatively impact the reported fair value of the properties.
During 2016, the transfers between levels within the Group’s portfolio were primarily transfers from level 1 to level 2 of £455 million and transfers from level 2 to level 1 of £902 million. These transfers which relate to equity securities and debt securities arose to reflect the change in the observability of the inputs used in valuing these securities.
(a) Credit rating Debt securities are analysed below according to external credit ratings issued, with equivalent ratings issued by different ratings agencies grouped together. Standard and Poor’s ratings have been used where available, if this isn’t the case Moody’s and then Fitch have been used as alternatives. In the table below, AAA is the highest possible rating. Investment grade financial assets are classified within the range of AAA to BBB- ratings. Financial assets which fall outside this range are classified as below BBB-. Debt securities with no external credit rating are classified as ‘Other’.
Securities with credit ratings classified as ‘Other’ can be further analysed as follows: Asia – non-linked shareholder-backed Internally rated
Government bonds 63 162 Corporate bonds – rated as investment grade by local external ratings agencies 757 481
AAA to A- 6,939 5,570 BBB to B- 3,257 3,234 Below B- or unrated 2,079 1,578
Realised gains and losses, including impairments, recorded in the income statement are as shown in note B1.2 of this report.
(c) Movements in unrealised gains and losses on Jackson available-for-sale securities There was a movement in the statement of financial position value for debt securities classified as available-for-sale from a net unrealised gain of £592 million to a net unrealised gain of £676 million as analysed in the table below.
Fair value (as included in statement of financial position) 13,942 12,490
More than 10 years (510) (247) Mortgage-backed and other debt securities (40) (41)
With-profits operations Asia insurance operations note (i) 357 262 UK insurance operations (2016: 55% AAA, 17% AA) note (iii) 5,177 4,600
(31 December 2015: 84 per cent) are investment grade. (ii) US insurance operations US insurance operations’ exposure to asset-backed securities at 31 December comprises: RMBS RMBS sub-prime (2016: 2% AAA, 12% AA, 4% A) 180 191
(2015: £1,140 million) relates to exposure to the US markets with the remaining exposure being primarily to the UK market. (iv) Asset management operations Asset management operations’ exposure to asset-backed securities is held by Prudential Capital with no sub-prime exposure. Of the £771 million, 95 per cent (2015: 95 per cent)
(g) Impairment of US available-for-sale debt securities and other financial assets In accordance with the Group’s accounting policy set out in note A3.1, impairment reviews were performed for available-for-sale securities and loans and receivables.
During the year ended 31 December 2016, net impairment charges of £(44) million (2015: £(35) million) were recognised for availablefor -sale securities and loans and receivables analysed as follows:
Available-for-sale debt securities held by Jackson (20) (19) Loans and receivables* (24) (16)
* The impairment charges relate to loans held by the UK with-profits fund and mortgage loans held by Jackson.
In 2016, the Group realised gross losses on sales of available-for-sale securities of £152 million (2015: £85 million) with 59 per cent (2015: 57 per cent) of these losses related to the disposal of fixed maturity securities of the top 10 individual issuers, which were disposed of as part of risk reduction programmes intended to limit future credit loss exposure. Of the £152 million (2015: £ 85 million), £94 million (2015: £54 million) relates to losses on sales of impaired and deteriorating securities.
C3.3 Loans portfolio (a) Overview of loans portfolio Loans are accounted for at amortised cost net of impairment except for: — Certain mortgage loans that have been designated at fair value through profit or loss of the UK insurance operations as this loan portfolio is managed and evaluated on a fair value basis; and
† In the US, £2,672 million (2015: £2,183 million) policy loans are backing liabilities for funds withheld under reinsurance arrangements and are accounted for at fair value through profit or loss. All other policy loans are accounted for at amortised cost, less any impairment.
(b) Additional information on US loans The US insurance operations’ commercial mortgage loan portfolio does not include any single-family residential mortgage loans and is therefore not exposed to the risk of defaults associated with residential sub-prime mortgage loans. The average loan size is £12.4 million (2015: £8.6 million). The portfolio has a current estimated average loan to value of 59 per cent (2015: 59 per cent).
(c) Loans held by asset management operations These relate to loans and receivables managed by Prudential Capital. These assets are generally secured but most have no external credit ratings. Internal ratings prepared by the Group’s asset management operations, as part of the risk management process, are: Loans and receivables internal ratings: AA+ to AA- 29 –
Maturity analysis of investment contracts The table below shows the maturity profile for investment contracts on undiscounted cash flow projections of expected benefit payments.
Most investment contracts have options to surrender early, often subject to surrender or other penalties. Therefore, most contracts can be said to have a contractual maturity of less than one year, but in reality the additional charges and term of the contracts mean these are unlikely to be exercised in practice and the more useful information is to present information on expected payment.
The maturity profile above excludes certain corporate unit-linked business with gross policyholder liabilities of £11 billion (2015: £11 billion) which have no stated maturity but which are repayable on demand.
In addition, during 2016 and 2015, the Group did not take possession of any other collateral held as security. Further details of collateral and pledges are provided in note C3.4(c) below.
(iii) Foreign exchange risk As at 31 December 2016, the Group held 23 per cent (2015: 22 per cent) and 12 per cent (2015: 11 per cent) of its financial assets and financial liabilities respectively, in currencies, mainly US dollar and Euro, other than the functional currency of the relevant business unit.
Derivatives are used for efficient portfolio management to obtain cost effective and efficient management of exposure to various markets in accordance with the Group’s investment strategies and to manage exposure to interest rate, currency, credit and other business risks. The Group also uses interest rate derivatives to reduce exposure to interest rate volatility. In particular: — UK with-profits funds use derivatives for efficient portfolio management or reduction in investment risks. For UK annuity business derivatives are used to assist with asset and liability cash flow matching; — US operations and some of the UK operations hold large amounts of interest-rate sensitive investments that contain credit risks on which a certain level of defaults is expected. These businesses have purchased some swaptions to manage the default risk on certain underlying assets and hence reduce the amount of regulatory capital held to support the assets; and
At 31 December 2016, the Group had entered into reverse repurchase transactions under which it purchased securities and had taken on the obligation to resell the securities. The fair value of the collateral held in respect of these transactions was £9,319 million
The following tables present the gross and net information about the Group’s financial instruments subject to master netting arrangements: Gross amount in the consolidated statement of
Notes (i) The Group has not offset any of the amounts presented in the consolidated statement of financial position. (ii) Represents the amount that could be offset under master netting or similar arrangements where Group does not satisfy the full criteria to offset on the consolidated statement of
Comprising: – Policyholder liabilities on the consolidated statement of financial position 41,255 138,913 142,350 322,518 – Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,553 – 10,543 13,096 – Group’s share of policyholder liabilities of joint ventures and associate‡ 4,970 – – 4,970
Comprising: – Policyholder liabilities on the consolidated statement of financial position§ 53,716 177,626 157,654 388,996 – Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,667 – 11,650 14,317 – Group’s share of policyholder liabilities of joint ventures and associate‡ 6,401 – – 6,401
*The reclassification of Korea life business as held for sale reflects the value of policyholder liabilities held at 1 January 2016. No other amounts are shown within the 2016 analysis above in respect of Korea.
‡ The Group’s investment in joint ventures and associates are accounted for on an equity method basis in the Group’s balance sheet. The Group’s share of the policyholder liabilities as shown above relate to life businesses in China, India and of the Takaful business in Malaysia.
§ The policyholder liabilities of the Asia insurance operations of £53,716 million (2015: £41,255 million), shown in the table above, is after deducting the intra-group reinsurance liabilities ceded by the UK insurance operations of £1,302 million (2015: £1,261 million) to the Hong Kong with-profits business. Including this amount, total Asia policyholder liabilities are £55,018 million (2015: £42,516 million).
Net flows: Investment-related items and other movements (121) (3,824) 509 (3,436) Foreign exchange translation differences (312) 7,515 – 7,203
Income and expense included in the income statement and other comprehensive income 3,456 342 522 Foreign exchange translation differences 7,259 335 124
Income and expense included in the income statement and other comprehensive income 20,210 752 768 Foreign exchange translation differences 35,472 1,221 453
The reinsurance asset for Jackson, as shown in the table above, primarily relates to certain fully collateralised former REALIC business retained by Swiss Re through 100 per cent reinsurance agreements. Apart from the reinsurance of REALIC business, the principal reinsurance ceded by Jackson outside the Group is on term life insurance, direct and assumed accident and health business and GMIB variable annuity guarantees. Net commissions received on ceded business and claims incurred ceded to external reinsurers totalled £38 million and £500 million respectively during 2016 (2015: £41 million and £442 million respectively). There were no deferred gains or losses on reinsurance contracts in either 2016 or 2015.
In each of 2016 and 2015, the Group’s UK insurance business entered into longevity reinsurance transactions on certain aspects of the UK’s annuity liabilities. Further information on these transactions is provided in note B4(b). The gains and losses recognised in profit and loss for the other reinsurance contracts written in the year were immaterial.
C4.1(b) Asia insurance operations (i) Analysis of movements in policyholder liabilities and unallocated surplus of with-profits funds A reconciliation of the total policyholder liabilities and unallocated surplus of with-profits funds of Asia insurance operations from the beginning of the year to the end of the year is as follows: With-profits
Comprising: – Policyholder liabilities on the consolidated statement of financial position 16,510 13,874 8,321 38,705 – Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,102 – – 2,102 – Group’s share of policyholder liabilities relating to joint ventures and
Shareholders’ transfers post-tax (43) – – (43) Investment-related items and other movements (243) (536) 415 (364) Foreign exchange translation differences note (a) 506 (394) 82 194
Comprising: – Policyholder liabilities on the consolidated statement of financial position§ 27,266 14,289 12,161 53,716 – Unallocated surplus of with-profits funds on the consolidated statement of financial position 2,667 – – 2,667 – Group’s share of policyholder liabilities relating to joint ventures and
† Averages have been based on opening and closing balances and adjusted for acquisitions and disposals in the year and exclude unallocated surplus of with-profits funds. ‡ The Group’s investment in joint ventures and associate are accounted for on an equity method basis and the Group’s share of the policyholder liabilities, as shown above, relate to the life businesses in China, India and of the Takaful business in Malaysia.
Differences upon retranslation are included in foreign exchange translation differences. (b) Net flows have increased by £1,860 million to £5,782 million in 2016, after excluding Korea 2015 net inflows of £47 million from the comparative period reflecting increased flows from new business and growth in the in-force books. (c) The rate of surrenders for shareholder-backed business (expressed as a percentage of opening liabilities) was 7.7 per cent in 2016, compared with 7.6 per cent in 2015, excluding
Korea (2015: 8.7 per cent including Korea). (d) Investment-related items and other movements for 2016 principally represent realised gains on equity markets and bonds during the year. The gains were mixed across the region with the greatest impact on with-profits and unit-linked business.
Total Asia operations 54,844 43,010 * The Korea life business was accounted for as held for sale at 31 December 2016 (see note D1).
Net flows note (b) 7,887 589 8,476 Transfers from general to separate account 847 (847) – Investment-related items and other movements (4,351) 527 (3,824) Foreign exchange translation differences note (a) 4,898 2,617 7,515
US$1.24/£1.00 (2015: US$1.47/£1.00). Differences upon retranslation are included in foreign exchange translation differences. (b) Net flows were £5,198 million in 2016, reflecting continued strong in-flows into the variable annuity business. (c) Positive investment-related items and other movements in variable annuity separate account liabilities of £5,246 million for 2016 primarily reflects the increases in equities and bond values during the year. Fixed annuity, GIC and other business investment and other movements of £444 million primarily reflect the increase in guarantee reserve in the year.
(ii) Duration of liabilities The table below shows the carrying value of policyholder liabilities and maturity profile of the cash flows on a discounted basis for 2016 and 2015: Fixed annuity and other
Expected maturity: (iii) Aggregate account values The table below shows the distribution of account values for fixed annuities (fixed interest rate and fixed index), the fixed account portion of variable annuities, and interest-sensitive life business within the range of minimum guaranteed interest rates as described above as at 31 December 2016 and 2015: Minimum guaranteed interest rate
Investment-related items and other movements 1,999 579 (259) 2,319 Foreign exchange translation differences 14 – – 14
Investment-related items and other movements note (b) 11,798 2,770 4,058 18,626 Foreign exchange translation differences 527 – – 527
Comprising: – Unallocated surplus of with-profits funds 11,650 – – 11,650
* Averages have been based on opening and closing balances and exclude unallocated surplus of with-profits funds. † Includes the Scottish Amicable Insurance Fund.
(iii) Annuitant mortality For annuities in payment, the Continuous Mortality Investigation (CMI) tables used are adjusted to reflect anticipated mortality improvements. The tables and range of percentages used are set out in the table below: CMI model, with calibration to reflect future mortality improvements
Provides savings and/or protection where the basic sum assured can be enhanced by a profit share (or bonus) from the underlying fund as determined at the discretion of the Company.
With-profits contracts are predominantly sold in Hong Kong, Malaysia and Singapore. The total value of the with-profits funds is driven by the underlying asset valuation with movements reflected principally in the accounting value of policyholder liabilities and unallocated surplus.
For India and Taiwan, US GAAP is applied for measuring insurance assets and liabilities. For these countries, the future policyholder benefit provisions for non-linked business are determined using the net level premium method, with an allowance for surrenders, maintenance and claims expenses. Rates of interest used in establishing the policyholder benefit provisions vary by operation depending on the circumstances attaching to each block of business.
The other Asia operations principally adopt a net premium valuation method to determine the future policyholder benefit provisions.
The attaching liabilities reflect the unit value obligation driven by the value of the investments of the unit fund.
As explained in note A3.1 all of Jackson’s insurance liabilities are based on US GAAP. An overview of the deferral and amortisation of acquisition costs for Jackson is provided in note C5(b).
Estimated gross profits include estimates of the following, each of which will be determined based on the best estimate of amounts over the life of the book of contracts without provision for adverse deviation: — Amounts expected to be assessed for mortality less benefit claims in excess of related policyholder balances; — Amounts expected to be assessed for contract administration less costs incurred for contract administration; — Amounts expected to be earned from the investment of policyholder balances less interest credited to policyholder balances; — Amounts expected to be assessed against policyholder balances upon termination of contracts (sometimes referred to as surrender charges); and
Guaranteed minimum rates are generally set at 1.0 to 3.0 per cent. At 31 December 2016, Jackson had fixed index annuities allocated to indexed funds totalling £7.3 billion (2015: £6.4 billion) in account value with minimum guaranteed rates on index accounts ranging from 1.0 per cent to 3.0 per cent and a 1.77 per cent average guaranteed rate (2015: 1.0 per cent to 3.0 per cent and a 1.79 per cent average guaranteed rate).
Jackson also offers fixed interest accounts on some fixed index annuity products. At 31 December 2016, fixed interest accounts of fixed index annuities totalled £2.6 billion (2015: £1.9 billion) in account value.
Minimum guaranteed rates on fixed interest accounts range from 1.0 per cent to 3.0 per cent and a 2.55 per cent average guaranteed rate (2015: 1.0 per cent to 3.0 per cent and a 2.52 per cent average guaranteed rate).
Variable annuities are deferred annuities that have the same tax advantages and payout options as fixed interest rates and fixed index annuities. They are also used for asset accumulation in retirement planning and to provide income in retirement. At 31 December 2016, variable annuities accounted for 74 per cent (2015: 70 per cent) of Jackson’s policy and contract liabilities.
The rate of return depends upon the performance of the selected fund portfolio. Policyholders may allocate their investment to either the fixed account or a selection of variable accounts. Investment risk on the variable account is borne by the policyholder, while investment risk on the fixed account is borne by Jackson through guaranteed minimum fixed rates of return. At 31 December 2016, 6 per cent (2015: 6 per cent) of variable annuity funds were in fixed accounts.
Jackson had variable annuity funds in fixed accounts totalling £7.3 billion (2015: £5.5 billion) with minimum guaranteed rates ranging from 1.0 per cent to 3.0 per cent and a 1.64 per cent average guaranteed rate (2015: 1.0 per cent to 3.0 per cent and a 1.70 per cent average guaranteed rate).
The impact of any fixed account interest guarantees is reflected as they are earned in the current account value.
The benefit guarantee types are set out below: Jackson regularly evaluates estimates used and adjusts the benefit guarantee liability balances, with a related charge or credit to benefit expense if actual experience or other evidence suggests that earlier assumptions should be revised.
Benefits that are payable in the event of death (guaranteed minimum death benefit).
The liability for the GMWB ‘for life’ portion is determined similarly to GMDB above.
GMWB ‘not for life’ features are treated as embedded derivatives under IAS 39. Therefore, provisions for these benefits are recognised at fair value.
GMIB are essentially fully reinsured, subject to a deductible and annual claim limits. As this reinsurance benefit is net settled, it is considered to be a derivative under IAS 39, and is therefore recognised at fair value with the change in fair value included as a component of short-term fluctuations.
GMAB is treated as embedded derivatives under IAS 39. Therefore, provisions for these benefits are recognised at fair value. Volatility and nonperformance risk is considered as per GMWB above.
Universal life provides permanent individual life insurance for the life of the insured and includes a savings element.
Variable universal life is a type of life insurance policy that combines death benefit protection with the ability for the policyholder account to be invested in separate account funds. For certain fixed universal life plans, additional provisions are held to reflect the existence of guarantees offered in the past that are no longer supported by earnings on the existing asset portfolio, or for situations where future mortality charges are not expected to be sufficient to provide for future mortality costs.
For traditional life insurance contracts, provisions for future policy benefits are determined under US GAAP using the net level premium method and assumptions as the issue date as to mortality, interest, policy lapses and expenses plus provisions for adverse deviation.
Funding agreements feature either lump sum or periodic policyholder deposits. Interest is paid at a fixed or index linked rate. Funding agreements have a duration of between one and 30 years. In 2016 and 2015, there were no funding agreements terminable by the policyholder with less than 90 days notice.
Institutional products are classified as investment contracts, and are accounted for as financial liabilities. The currency risk on contracts that represent currency obligations other than US dollars are hedged using cross-currency swaps.
Regular bonuses are declared once a year, and once credited, are guaranteed in accordance with the terms of the particular product. Final bonus rates are guaranteed only until the next bonus declaration.
The policyholder liabilities reported for the WPSF are primarily for two broad types of business. These are accumulating and conventional with-profits contracts. The policyholder liabilities of the WPSF are accounted for in accordance with the requirements of FRS 27.
The PRA’s Peak 2 calculation under the realistic regime requirement is explained further in note A3.1 under the UK regulated with-profits section.
Mortality assumptions are set based on the results of the most recent experience analysis looking at the experience over recent years of the relevant business.
Maintenance and, for some classes of business, termination expense assumptions are expressed as per policy amounts. They are set based on the expenses incurred during the year, including an allowance for ongoing investment expenditure and allocated between entities and product groups in accordance with the operation’s internal cost allocation model.
Fixed increase Provide for a regular annuity payment which incorporates automatic increases in annuity payments by fixed amounts over the policyholder’s life.
With-profits Written in the WPSF, these combine the income features of annuity products with the investment smoothing features of with-profits products and enable policyholders to obtain exposure to investment return on the WPSF’s equity shares, property and other investment categories over time.
Unit-linked Prudential UK insurance operations also have an extensive book of unit-linked policies.
To calculate the non-unit reserves for linked business, assumptions have been set for the gross unit growth rate and the rate of inflation of maintenance expenses, as well as for the valuation interest rate as described in the annuities section above.
Application of significant judgement Determining bonuses using the table described in the material features table above requires the PAC board to apply significant judgement in many respects, including in particular the following: — Determining what constitutes fair treatment of customers; — Smoothing of investment returns; and — Determining at what level to set bonuses to ensure that they are competitive.
Key assumptions The overall rate of return on investments and the expectation of future investment returns are the most important influences in bonus rates, subject to the smoothing described below. Prudential determines the assumptions to apply in respect of these factors, including the effects of reasonably likely changes in key assumptions, in the context of the overarching discretionary and smoothing framework that applies to its with-profits business. As such, it is not possible to specifically quantify the effects of each of these assumptions, or of reasonably likely changes in these assumptions.
The degree of smoothing is illustrated numerically by comparing in the following table the relatively ‘smoothed’ level of policyholder bonuses declared as part of the surplus for distribution, with the more volatile movement in investment return and other items of income and expenditure of the UK component of the PAC with-profits fund for each year presented.
Net income of the fund: Investment return 13,185 3,130 Claims incurred (7,410) (6,745) Movement in policyholder liabilities (11,824) (1,307) Add back policyholder bonuses for the year (as shown below) 1,934 1,943 Claims incurred and movement in policyholder liabilities
(including charge for provision for asset shares and excluding policyholder bonuses) (17,300) (6,109) Earned premiums, net of reinsurance 9,261 6,507 Other income 177 210 Acquisition costs and other expenditure (1,288) (1,318) Share of profits from investment joint ventures 22 53 Tax charge (739) (148)
Surplus for distribution allocated as follows: – 90% policyholders’ bonus (as shown above) 1,934 1,943
Attributable to: Cost At beginning of year 1,463 185 1,648 1,769 Disposal of Japan life business – – – (120) Charge for reclassification as held for sale (15) (41) (56) – Additional consideration paid on previously acquired business 1 6 7 2
Goodwill – attributable to shareholders 1,475 1,463 Venture fund investments – attributable to with-profits funds 153 185
Other goodwill represents amounts allocated to entities in Asia and the US operations. These goodwill amounts are not individually material.
Impairment testing Goodwill does not generate cash flows independently of other groups of assets and thus is assigned to cash-generating units for the purposes of impairment testing. These cash-generating units are based upon how management monitors the business and represent the lowest level to which goodwill can be allocated on a reasonable basis.
With the exception of M&G, the goodwill attributable to shareholders mainly relates to acquired life businesses. The Company routinely compares the aggregate of net asset value and acquired goodwill on an IFRS basis of acquired life business with the value of the current in-force business as determined using the EEV methodology. Any excess of IFRS over EEV carrying value is then compared with EEV basis value of current and projected future new business to determine whether there is any indication that the goodwill in the IFRS statement of financial position may be impaired. The methodology and assumptions underpinning the Group’s EEV basis of reporting are included in the EEV basis supplementary information in this Annual Report.
Deferred acquisition costs and other intangible assets attributable to shareholder 10,755 8,422 Deferred acquisition costs and other intangible assets attributable to with-profits funds 52 50
Total of deferred acquisition costs and other intangible assets 10,807 8,472
Deferred acquisition costs related to insurance contracts as classified under IFRS 4 9,114 6,948 Deferred acquisition costs related to investment management contracts, including life assurance contracts
classified as financial instruments and investment management contracts under IFRS 4 64 74
Total of deferred acquisition costs and other intangible assets 10,755 8,422
Exchange differences and other movements 138 1,270 – – 67 1,475 311 Amortisation of DAC related to net unrealised
* PVIF and other intangibles includes amounts in relation to software rights with additions of £38 million, amortisation of £32 million, reclassification to held for sale assets of £14 million, forex gains of £3 million and a balance at 31 December 2016 of £66 million.
‡ The entire £251 million for the Asia deferred acquisition costs and £14 million out of the £17 million for the PVIF and other intangibles within the ‘Disposals and transfers’ line relate to the reclassification of the Korea life business as held for sale.
Note PVIF and other intangibles comprise PVIF, distribution rights and other intangibles such as software rights. Distribution rights relate to amounts that have been paid or have become unconditionally due for payment as a result of past events in respect of bancassurance partnership arrangements in Asia. These agreements allow for bank distribution of Prudential’s insurance products for a fixed period of time.
Variable annuity business 7,844 5,713 Other business 696 703 Cumulative shadow DAC (for unrealised gains booked in other comprehensive income)* (237) (268)
Total DAC for US operations 8,303 6,148 * Consequent upon the negative unrealised valuation movement in 2016 of £28 million (2015: negative unrealised valuation movement of £1,305 million), there is a gain of £76 million (2015: a gain of £337 million) for altered shadow DAC amortisation booked within other comprehensive income. These adjustments reflect movement from period to period, in the changes to the pattern of reported gross profits that would have occurred if the assets reflected in the statement of financial position had been sold, crystallising the unrealised gains and losses, and the proceeds reinvested at the yields currently available in the market. At 31 December 2016, the cumulative shadow DAC balance, as shown in the table above, was negative £237 million (2015: negative £268 million).
Sensitivity of amortisation charge The amortisation charge to the income statement is reflected in both operating profit and short-term fluctuations in investment returns. The amortisation charge to the operating profit in a reporting period comprises: (i) A core amount that reflects a relatively stable proportion of underlying premiums or profit; and (ii) An element of acceleration or deceleration arising from market movements differing from expectations.
In periods where the cap and floor feature of the mean reversion technique (which is used for moderating the effect of short-term volatility in investment returns) are not relevant, the technique operates to dampen the second element above. Nevertheless, extreme market movements can cause material acceleration or deceleration of amortisation in spite of this dampening effect.
In 2016, the DAC amortisation charge for operating profit was determined after including a credit for decelerated amortisation of £93 million (2015: charge for accelerated amortisation of £2 million). The 2016 amount primarily reflects the impact of the positive separate account performance, which is higher than the assumed level for the year, and the effect of releasing the 2013 fund returns of 17 per cent from the mean reversion formula.
Deferred acquisition costs and other intangible assets attributable to with-profits funds Other intangible assets in the Group consolidated statement of financial position attributable to with-profits funds consist of: Deferred acquisition costs related to insurance contracts attributable to the PAC with-profits fund 2 3 Distribution rights attributable to with-profits funds of the Asia insurance operations – 27 Computer software and other intangibles attributable to with-profits funds 50 20
¤20m Medium Term Notes 2023 (Tier 2) note (vii) 17 15
Notes (i) These debt tier classifications (including those noted for the comparative balances) are consistent with the treatment of capital for regulatory purposes under the Solvency II
payable at three-month £LIBOR plus 1.2 per cent. (viii) Jackson’s borrowings are unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims of Jackson.
outlook by Moody’s in June 2016 following the UK referendum on EU membership.
Bank loans and overdrafts 19 10 Obligations under finance leases 5 4 Other borrowings note (ii) 642 241
(iii) In all instances the holders of the debt instruments issued by these subsidiaries and funds do not have recourse beyond the assets of those subsidiaries and funds.
Unit-linked business Net neutral direct exposure (indirect exposure only) Investment performance through asset management fees
Net effect of market risk arising from incidence of guarantee features and variability of asset management fees offset by derivative hedging programme
Lapse risk, but the effects of extreme events are mitigated by the application of market value adjustments
With-profits business Net neutral direct exposure (indirect exposure only) Investment performance subject to smoothing through declared bonuses
SAIF sub-fund Net neutral direct exposure (indirect exposure only) Asset management fees earned by M&G
Detailed analyses of sensitivity of IFRS basis profit or loss and shareholders’ equity to key market and other risks by business unit are provided in notes C7.2, C7.3, C7.4 and C7.5. The sensitivity analyses provided show the effect on profit or loss and shareholders’ equity to changes in the relevant risk variables, all of which are reasonably possible at the relevant balance sheet date. In the equity risk sensitivity analysis shown below, the Group has considered the impact of an instantaneous 20 per cent fall in equity markets. If equity markets were to fall by more than 20 per cent, the Group believes that this would not be an instantaneous fall, but rather would be expected to occur over a period of time, during which the Group would be able to put mitigating management actions in place. In addition, the equity risk sensitivity analysis provided assumed that all equity indices fall by the same percentage.
Impact of diversification on risk exposure The Group benefits from significant diversification benefits achieved through the geographical spread of the Group’s operations and, within those operations, through a broad mix of product types. This arises because not all risk scenarios are likely to happen at the same time and across all geographic regions. Relevant correlation factors include: Correlation across geographic regions: — Financial risk factors; and — Non-financial risk factors.
The effect of Group diversification across the Group’s life businesses is to significantly reduce the aggregate stand-alone volatility risk to IFRS operating profit based on longer-term investment returns. The effect is almost wholly explained by the correlations across risk types, in particular mortality and longevity risk.
i Sensitivity to risks other than foreign exchange risk Interest rate risk Excluding its with-profits and unit-linked businesses, the results of the Asia business are sensitive to the vagaries of routine movements in interest rates.
For the purposes of analysing sensitivity to variations in interest rates, reference has been made to the movements in the 10-year government bond rates of the territories. At 31 December 2016, 10-year government bond rates vary from territory to territory and range from 1.2 per cent to 8.1 per cent (2015: 1.0 per cent to 8.9 per cent).
Profit before tax attributable to shareholders 213 (509) 185 (339) Related deferred tax (where applicable) (41) 62 (34) 59
In addition, the degree of sensitivity of the results shown in the table above is dependent on the interest rate level at that point of time. The low interest rates in certain countries have had an adverse impact on the degree of sensitivity to a decrease in interest rates.
A 10 per cent increase (strengthening of the pound sterling) or decrease (weakening of the pound sterling) in these rates would have reduced or increased profit before tax attributable to shareholders, profit for the year and shareholders’ equity, excluding goodwill attributable to Asia operations respectively as follows: A 10% increase in local currency to £ exchange rates
C7.3 US insurance operations Exposure and sensitivity of IFRS basis profit and shareholders’ equity to market and other risks At the level of operating profit based on longer-term investment returns, Jackson’s results are sensitive to market conditions to the extent of income earned on spread-based products and indirectly in respect of variable annuity asset management fees.
Jackson is exposed primarily to the following risks: Risks Risk of loss
— Related to meeting contractual accumulation requirements in fixed index annuity contracts.
Interest rate risk — Related to meeting guaranteed rates of accumulation on fixed annuity products following a sharp and sustained fall in interest rates; — Related to increases in the present value of projected benefits related to guarantees issued in connection with its variable annuity contracts following a sharp and sustained fall in interest rates in conjunction with a fall in equity markets; — Related to the surrender value guarantee features attached to the company’s fixed annuity products and to policyholder withdrawals following a sharp and sustained increase in interest rates; and
Jackson’s derivative programme is used to manage interest rate risk associated with a broad range of products and equity market risk attaching to its equity-based products. Movements in equity markets, interest rates and credit spreads materially affect the carrying value of derivatives that are used to manage the liabilities to policyholders and backing investment assets. Combined with the use of US GAAP measurement (as ‘grandfathered’ under IFRS 4) for the insurance contracts assets and liabilities which is largely insensitive to current period market movements, the Jackson total profit (ie including short-term fluctuations in investment returns) is sensitive to market movements. In addition to these effects, the Jackson shareholders’ equity is sensitive to the impact of interest rate and credit spread movements on the value of fixed income securities. Movements in unrealised appreciation on these securities are included as movement in shareholders’ equity (ie outside the income statement).
Jackson uses free-standing derivative instruments for hedging purposes. Additionally, certain liabilities, primarily trust instruments supported by funding agreements, fixed index annuities, certain variable annuity features and reinsured Guaranteed Minimum Income Benefit variable annuity features contain embedded derivatives as defined by IAS 39, ‘Financial Instruments: Recognition and Measurement’. Jackson does not account for such derivatives as either fair value or cash flow hedges as might be permitted if the specific hedge documentation requirements of IAS 39 were followed. Financial derivatives, including derivatives embedded in certain host liabilities that have been separated for accounting and financial reporting purposes are carried at fair value.
Treasury futures contracts These derivatives are used to hedge Jackson’s exposure to movements in interest rates.
These derivatives (including various call and put options and interest rate contingent options) are used to hedge Jackson’s obligations associated with its issuance of certain VA guarantees. Some of these annuities and guarantees contain embedded options that are fair valued for financial reporting purposes.
Credit default swaps These swaps represent agreements under which Jackson has purchased default protection on certain underlying corporate bonds held in its portfolio. These contracts allow Jackson to sell the protected bonds at par value to the counterparty if a default event occurs, in exchange for periodic payments made by Jackson for the life of the agreement. Jackson does not write default protection using credit derivatives.
Combination net deposits plus minimum return, highest specified anniversary account value minus withdrawals post-anniversary * Amounts shown for GMWB comprise sums for the ‘not for life’ portion (where the guaranteed withdrawal base less the account value equals to the net amount at risk (NAR)), and a ‘for life’ portion (where the NAR has been estimated as the present value of future expected benefit payment remaining after the amount of the ‘not for life’ guaranteed benefits is zero).
Account balances of contracts with guarantees were invested in variable separate accounts as follows: Mutual fund type: Money market 994 832
Decrease Increase Decrease Increase of 20% of 10% of 20% of 10% of 20% of 10% of 20% of 10%
Pre-tax profit, net of related changes in amortisation of DAC 1,061 488 370 59 738 259 (86) (128)
Net sensitivity of profit after tax and shareholders’ equity 690 317 241 38 480 168 (56) (83)
Debt securities and related derivatives are marked to fair value. Value movements on derivatives, again net of related changes to amortisation of DAC and deferred tax, are recorded within the income statement. Fair value movements on debt securities, net of related changes to amortisation of DAC and deferred tax, are recorded within other comprehensive income. The estimated sensitivity of these items and policyholder liabilities to a 1 per cent and 2 per cent decrease and increase in interest rates at 31 December 2016 and 2015 is as follows: Decrease Increase Decrease Increase of 2% of 1% of 1% of 2% of 2% of 1% of 1% of 2%
Related effect on charge for deferred tax 1,015 488 (373) (701) 621 296 (220) (392)
iii Sensitivity to foreign exchange risk Consistent with the Group’s accounting policies, the profits of the Group’s US operations are translated at average exchange rates and shareholders’ equity at the closing rate for the reporting period. For 2016, the average and closing rates were US$1.35 (2015: $1.53) and US$1.24 (2015: US$1.47) to £1.00 sterling, respectively. A 10 per cent increase (weakening of the dollar) or decrease (strengthening of the dollar) in these rates would reduce or increase profit before tax attributable to shareholders, profit for the year and shareholders’ equity attributable to US insurance operations respectively, as follows: A 10% increase in US$:£ exchange rates
Profit before tax attributable to shareholders (48) (109) 59 133 Profit for the year (54) (87) 66 107 Shareholders’ equity attributable to US insurance operations (473) (378) 578 462
For term business, acquisition costs are deferred and amortised in line with expected premiums. For annuity and interest-sensitive life business, acquisition costs are deferred and amortised in line with expected gross profits on the relevant contracts. For interest-sensitive business, the key assumption is the expected long-term spread between the earned rate and the rate credited to policyholders, which is based on an annual spread analysis. In addition, expected gross profits depend on mortality assumptions, assumed unit costs and terminations other than deaths (including the related charges), all of which are based on a combination of actual experience of Jackson, industry experience and future expectations. A detailed analysis of actual experience is measured by internally developed expense, mortality and persistency studies.
Jackson is sensitive to lapse risk and other types of policyholder behaviour, such as the take-up of its GMWB product features. Jackson’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. In the absence of hedging, equity and interest rate movements can both cause a loss directly and cause an increased future sensitivity to policyholder behaviour. Jackson has an extensive derivative programme that seeks to manage the exposure to such altered equity markets and interest rates.
For variable annuity business, the key assumption is the expected long-term level of separate account returns, which, for 2016, was 7.4 per cent (2015: 7.4 per cent). The impact of using this return is reflected in two principal ways, namely: — Through the projected expected gross profits that are used to determine the amortisation of deferred acquisition costs. This is applied through the use of a mean reversion technique which is described in more detail in note A3.1 above; and
The investment assets of PAC with-profits funds are subject to market risk. Changes in their carrying value, net of related changes to asset-share liabilities of with-profits contracts, affect the level of unallocated surplus of the fund. Therefore, the level of unallocated surplus is particularly sensitive to the level of investment returns on the portion of the assets that represents surplus. However, as unallocated surplus is accounted for as a liability under IFRS, movements in its value do not affect shareholders’ profit and equity.
In addition, the level of profit is affected by change in the level of reinsurance cover. A decrease in assumed mortality rates of 1 per cent would decrease pre-tax profit by approximately £67 million (2015: £67 million).
A decrease in credit default assumptions of five basis points would increase pre-tax profit by £200 million (2015: £176 million). A decrease in renewal expenses (excluding asset management expenses) of 5 per cent would increase pre-tax profit by £41 million (2015: £35 million). The effect on profit would be approximately symmetrical for changes in assumptions that are directionally opposite to those explained above. The net effect on profit after tax and shareholders’ equity from all the changes in assumptions as described above would be an increase of approximately £144 million (2015: £115 million).
Carrying value of debt securities and derivatives 12,353 5,508 (4,527) (8,313) 10,862 4,812 (3,935) (7,219)
Net sensitivity of profit after tax and shareholders’ equity 1,934 865 (740) (1,393) 1,722 731 (589) (1,090)
Net sensitivity of profit after tax and shareholders’ equity (260) (130) (261) (130)
ii Sensitivities to other financial risks for asset management operations The principal sensitivities to other financial risk of asset management operations are credit risk on the bridging loan portfolio of the Prudential Capital operation and the indirect effect of changes to market values of funds under management. Due to the nature of the asset management operations there is limited direct sensitivity to movements in interest rates. Total debt securities held at 31 December 2016 by asset management operations were £2,359 million (2015: £2,204 million), the majority of which are held by the Prudential Capital operation. Debt securities held by Prudential Capital are in general variable rate bonds and so market value is limited in sensitivity to interest rate movements and consequently, any change in interest rates would not have a material impact on profit or shareholders’ equity. The Group’s asset management operations do not hold significant investments in property or equities.
The deferred tax asset at 31 December 2016 and 2015 arises in the following parts of the Group: Asia insurance operations 98 66 US insurance operations 3,861 2,448 UK insurance operations 146 132 Other operations 210 173
Of the unrecognised trading losses, losses of £31 million will expire within the next seven years, £1 million will expire within 20 years and the rest have no expiry date.
The current tax liability increased to £649 million (2015: £325 million) due to positive market movements in the UK insurance operations.
The Group also operates two smaller UK defined benefit schemes in respect of Scottish Amicable (SASPS) and M&G (M&GGPS). In addition, there are two small defined benefit schemes in Taiwan which have negligible deficits.
Under the IAS 19, ‘Employee Benefits’ valuation basis, the Group applies the principles of IFRIC 14, ‘IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’, whereby a surplus is only recognised to the extent that the Company is able to access the surplus either through an unconditional right of refund to the surplus or through reduced future contributions relating to ongoing service, which have been substantively enacted or contractually agreed. Further, the IFRS financial position recorded, reflects the higher of any underlying IAS 19 deficit and any obligation for committed deficit funding where applicable.
Consolidation adjustment against policyholder liabilities for investment in Prudential insurance policies note (iii) – – (134) – (134) – – (77) – (77)
IAS 19 pension asset (liability) on the Group statement of financial position note (iv) 159 (237) (50) (1) (129) 169 (82) (2) (1) 84
Notes (i) For PSPS, the Group does not have an unconditional right of refund to any surplus of the scheme. The PSPS pension asset represents the present value of the economic benefit
(impact) of the Company from the difference between future ongoing contributions to the scheme and estimated accrued cost of service. No deficit or other funding is required for PSPS. Deficit funding, where applicable, is apportioned in the ratio of 70/30 between the PAC with-profits fund and shareholder-backed operations following detailed considerations in 2005 of the sourcing of previous contributions. Employer contributions for ongoing service of current employees are apportioned in the ratio relevant to current activity.
(ii) The deficit of SASPS has been allocated 40 per cent to the PAC with-profits fund and 60 per cent to the shareholders’ fund as at 31 December 2016 and 2015. (iii) The underlying position on an economic basis reflects the assets (including investments in Prudential insurance policies that are offset against liabilities to policyholders on the
Group consolidation) and the liabilities of the schemes. (iv) At 31 December 2016, the PSPS pension asset of £159 million (2015: £169 million) and the other schemes’ pension liabilities of £288 million (2015: £85 million) are included within
Valuation actuary, all Fellows of the Institute and Faculty of Actuaries
No deficit or other funding required. Ongoing contributions for active members are at the minimum level required under the scheme rules (approximately £6 million per annum excluding expenses)
Rate of increase in salaries Nil Rate of inflation: Retail Prices Index (RPI) 3.5 Consumer Prices Index (CPI) 2.8
Mortality assumptions: The tables used for PSPS pensions in payment at 5 April 2014 were: Base post-retirement mortality For current male (female) pensioners 113 per cent (108 per cent) of the mortality rates of the 2000 series mortality tables (PNMA00/ PNFA00), published by the Continuous Mortality Investigation Bureau (CMI).
For male (female) non-pensioners 107 per cent (92 per cent) of the 2000 series rates (PNMA00/PNFA00).
(a) Background and summary economic and IAS 19 financial positions continued
Corporate governance The Group’s UK pension schemes are regulated by ‘The Pension Regulator’ in accordance with the Pension Act 1995. Trustees have been appointed for each pension scheme and they have the ultimate responsibility to ensure that the scheme is managed in accordance with the Trust Deed & Rules.
All of the three Group’s UK defined benefit pension schemes (the PSPS, SASPS and M&GGPS) are final salary schemes, which are closed to new entrants.
The Trustee of each scheme sets the general investment policy and specifies any restrictions on types of investment and the degrees of divergence permitted from the benchmark, but delegates the responsibility for selection and realisation of specific investments to the Investment Managers. The Trustee consults the Principal Employer (eg The Prudential Assurance Company for PSPS), on the investment principles, but the ultimate responsibility for the investment of the assets of the scheme lies with the Trustee.
Retail Prices Index (RPI) 3.2 3.0 Consumer Prices Index (CPI) 2.2 2.0
† The rate of inflation reflects the long-term assumption for the UK RPI or CPI depending on the tranche of the schemes.
(c) Estimated pension scheme surpluses and deficits This section illustrates the financial position of the Group’s defined benefit pension schemes on an economic basis and the IAS 19 basis.
Shareholders’ share: Gross of tax surplus (deficit) 303 (13) (181) 29 138
* 93 per cent of the bonds are investment graded (2015: 93 per cent). † 98 per cent of the total value of the scheme assets are derived from quoted prices in an active market (2015: 98 per cent). None of the scheme assets included shares in Prudential plc or property occupied by the Prudential Group. The IAS 19 basis plan assets at 31 December 2016 of £8,872 million (2015: £7,617 million) is different from the economic basis plan assets of £9,006 million (2015: £7,819 million) as shown above due to the exclusion of investment in Prudential insurance policies, which are eliminated on consolidation of £134 million (2015: £202 million) comprising £134 million for the M&G scheme (2015: £77 million) and nil for PSPS (2015: £125 million).
Benefit payments (350) 350 – – – Employers’ contributions note (iii) 45 45 45 45 Employees’ contributions 2 (2) – – – Actuarial gains and losses note (iv) 1,203 (1,645) (442) 274 (168) (13) (181) Transfer into investment in
Negative past service cost 48 48 48 48 Net interest on net defined benefit
Benefit payments (301) 301 – – – Employers’ contributions note (iii) 56 56 56 56 Employees’ contributions 2 (2) – – – Actuarial gains and losses note (iv) (278) 393 115 (64) 51 6 57 Transfer out of investment in
Discount rate 2.6% 3.8% Decrease by 0.2% Increase in scheme liabilities by: Other schemes 5.3% 5.0%
Discount rate 2.6% 3.8% Increase by 0.2% Decrease in scheme liabilities by: Other schemes 5.0% 4.6%
The Company purchased the following number of shares in respect of employee incentive plans. The shares purchased each month are as follows: Number of shares 2016 Share price
The Group has consolidated a number of authorised investment funds where it is deemed to control these funds under IFRS. Some of these funds hold shares in Prudential plc. The total number of shares held by these funds at 31 December 2016 was 6.0 million (2015: 6.1 million) and the cost of acquiring these shares of £61 million (2015: £54 million) is included in the cost of own shares. The market value of these shares as at 31 December 2016 was £97 million (2015: £94 million). During 2016, these funds made net disposals of 77,423 Prudential shares (2015: net disposals of 1,402,697) for a net increase of £7.9 million to book cost (2015: net increase of £13 million).
All share transactions were made on an exchange other than the Stock Exchange of Hong Kong. Other than set out above the Group did not purchase, sell or redeem any Prudential plc listed securities during 2016 or 2015.
Provision in respect of defined benefit pension schemes: C9 288 85 Other provisions (see below) 659 519
(iii) Meeting of capital management objectives The Group solvency capital requirement has been met during 2016.
As well as holding sufficient capital to meet Solvency II requirements at Group level, the Group also closely manages the cash it holds within its central holding companies so that it can: a) Maintain flexibility, fund new opportunities and absorb shock events b) Fund dividends c) Cover central costs and debt payments
The Group manages its assets, liabilities and capital locally, in accordance with local regulatory requirements and reflecting the different types of liabilities in each business. As a result of the diversity of products offered by Prudential and the different regulatory regimes under which it operates, the Group employs differing methods of asset/liability and capital management, depending on the business concerned.
Total available capital resources of life assurance businesses on local regulatory bases 7,922 5,177
The capital requirements of material territories are: Hong Kong The capital requirement varies by underlying risk and duration of liabilities, but is generally determined as 4 per cent of mathematical reserves plus 0.3 per cent of the capital at risk. Mathematical reserves are based on a best estimate basis with prudent margins for adverse deviations, discounted at a valuation interest rate based on a blend between the risk-adjusted portfolio yield and reinvestment rate.
Malaysia A risk-based capital framework applies in Malaysia. The local regulator has set a Supervisory Target Capital Level of 130 per cent below which supervisory actions of increasing intensity will be taken. Each insurer is also required to set its own Individual Target Capital Level to reflect its own risk profile and this is expected to be higher than the Supervisory Target Capital Level.
Adjustments to regulatory basis Deferred acquisition costs, distribution rights and goodwill of non-participating business not recognised for regulatory reporting (8,303) (6,148) Jackson surplus notes 202 169 Investment and policyholder liabilities valuation differences between IFRS and regulatory basis for Jackson 6,657 4,927 Other adjustments 535 364
The regulatory framework for Jackson is governed by the requirements of the US NAIC approved Risk-Based Capital standards. Under these requirements life insurance companies report using a formula-based capital standard which includes components calculated by applying factors to various asset, premium and reserve items and a separate model-based component for market risk associated primarily with variable annuity products.
Under the equivalence provisions of Solvency II, Jackson is incorporated into the Group’s Solvency II position at a level equal to available capital in excess of 250 per cent of the US local risk-based capital requirement.
Arising on acquisitions of subsidiaries* – – – 52 84 136
At 31 December * Arising on an acquisition made for venture fund purposes by the PAC with-profits fund.
The 2016 income statement includes rental income from investment properties of £781 million (2015: £769 million) and direct operating expenses including repairs and maintenance arising from these properties of £67 million (2015: £42 million).
Investment properties of £6,020 million (2015: £5,468 million) are held under finance leases. The present value of minimum lease payments under these leases is £49 million (2015: £78 million) and 76 per cent (2015: 77 per cent) of lease payments are due in over five years.
The total minimum future rentals to be received on non-cancellable sub-leases for the Group’s investment properties held under finance leases at 31 December 2016 are £2,238 million (2015: £2,888 million).
On 10 November 2016, the Group announced that it had reached an agreement to sell 100 per cent of its life insurance subsidiary in Korea, PCA Life Insurance Co., Ltd. (‘PCA Life Korea’), to Mirae Asset Life Insurance Co., Ltd. (‘Mirae’), for KRW170 billion (equivalent to £114 million at 31 December 2016 closing exchange rate). The transaction is subject to regulatory approval.
The Korea life business has been classified as held for sale in these consolidated financial statements in accordance with IFRS 5, ‘Non-current assets held for sale and discontinued operations’. Consistent with its classification as held for sale, the IFRS carrying value of the Korea life business and its related goodwill has been set to £105 million at 31 December 2016, representing the proceeds, net of £9 million of related expenses. This has resulted in a charge for ‘Remeasurement of Korea Life business classified as held for sale’ of £(238) million in the income statement.
To facilitate comparisons of businesses retained by the Group, the supplementary analysis of profit shown in note B1.1 shows separately the results of the Korea life business for both 2016 and 2015. For 2016 the result for the year, including short-term fluctuations in investment returns, together with the adjustment to the carrying value have given rise to an aggregate loss of £(227) million (2015: £56 million profit). This comprises: 2016 £m AER
Assets Investments including cash and cash equivalents1 3,722 Other assets including goodwill2 379
(£14 million of software and £2 million of property, plant and equipment) and an additional remeasurement of £207 million to adjust the carrying value of the business to fair value less costs to sell.
Unclaimed Property Provision Jackson had previously received regulatory enquiries on an industry-wide matter regarding claims settlement practices and compliance with unclaimed property laws. During 2015, Jackson reached agreements to settle issues related to these enquiries. At 31 December 2016, Jackson has accrued £13 million (2015: £16 million) to cover any such liability.
Support for with-profits sub-funds by shareholders’ funds PAC is liable to meet its obligations to with-profits policyholders even if the assets of the with-profits sub-funds are insufficient to do so. The assets, represented by the unallocated surplus of with-profits funds, in excess of amounts expected to be paid for future terminal bonuses and related shareholder transfers (‘the excess assets’) in the with-profits sub-funds could be materially depleted over time by, for example, a significant or sustained equity market downturn, costs of significant fundamental strategic change or a material increase in the pension mis-selling provision. In the unlikely circumstance that the depletion of the excess assets within the long-term fund was such that the Group’s ability to satisfy policyholders’ reasonable expectations was adversely affected, it might become necessary to restrict the annual distribution to shareholders or to contribute shareholders’ funds to the with-profits sub-funds to provide financial support.
Intra-group capital support arrangements Prudential and PAC have put in place intra-group arrangements to formalise circumstances in which capital support would be made available by Prudential. While Prudential considers it unlikely that such support will be required, the arrangements are intended to provide additional comfort to PAC and its policyholders.
Future minimum lease payments for non-cancellable operating leases fall due during the following periods: Not later than 1 year 107 98 Later than 1 year and not later than 5 years 209 231 Later than 5 years 96 116
In addition, the Group has provided, from time to time, certain guarantees and commitments to third parties including funding the purchase or development of land and buildings and other related matters. The contractual obligations to purchase or develop investment properties at 31 December 2016 were £458 million (2015: £409 million).
At 31 December 2016, UK insurance operations had unfunded commitments of £2,269 million (2015: £2,034 million) to private equity and infrastructure funds. These commitments were entered into in the normal course of business and no material adverse impact on the operations is expected to arise.
(a) Dividend restrictions and minimum capital requirements Certain Group subsidiaries and joint ventures are subject to restrictions on the amount of funds they may transfer in the form of cash dividends or otherwise to the parent company.
For the Group’s joint ventures that are accounted for by using the equity method, the net of tax results of these operations are included in the Group’s profit before tax.
During the period, following its listing and consequent amendments to the shareholder agreement, the Group ceased to exercise joint control over the insurance business in India, therefore the investment has been re-classified as an associate, and continues to be accounted for using the equity method.
Shareholder-backed business 161 185 PAC with-profits fund (prior to offsetting effect in movement in unallocated surplus) 21 53
Share of profits from joint ventures and associates, net of related tax 130 – 53 14 – – 41 238 – 238
The definitions of a subsidiary undertaking, joint venture and associate in accordance with the Companies Act 2006 are different from the definition under IFRS. As a result, the related undertakings included within the list below may not be the same as the undertakings consolidated in the Group IFRS financial statements. The Group’s consolidation policy is described in note A3.1(b).
Direct subsidiary undertakings of the parent company, Prudential plc (shares held directly or via nominees):
M&G Group Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
Prudential Corporation Asia Limited Ordinary shares 100.00% 13/F, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong
Prudential Financial Services Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
Other subsidiaries, joint ventures, associates and significant holdings of the Group – no shares held directly by the parent company, Prudential plc or its nominees: Name of entity Classes of shares held Proportion
BOCI - Prudential Trustee Limited Ordinary shares 36.00% 12th Floor and 25th Floor, Citicorp Centre, 18 Whitfield Road, Causeway Bay, Wan Chai, Hong Kong
Brooke Holdings (UK) Ltd (In liquidation) Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
Calera Capital Partners IV - A AIV I, LP Limited partnership interest 32.87% Corporation Trust Centre, 1209 Orange St, Wilmington, DE 19801, USA
Calvin F1 GP Limited Ordinary shares 100.00% 50 Lothian Road, Festival Square, Edinburgh EH3 9WJ, UKCalvin F2 GP Limited Ordinary shares 100.00%
Canada Property (Trustee) No 1 Limited Ordinary shares 100.00% Lime Grove House, Green Street, St Helier, Jersey JE1 2ST
Canada Property Holdings Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
Carraway Guildford Investments Unit Trust Units 100.00% 13 Castle Street, St Helier, Jersey JE4 5UT
Central Square Leeds Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
Limited partnership interest 76.75% 2711 Centerville Road, Ste 400, Wilmington, DE 19808, USA
CEP IV-A Chicago AIV Limited Partnership Limited partnership interest 31.92% 615 S Dupont Hwy, Dover, DE 19901, USA
CEP IV-A Davenport AIV Limited Partnership Limited partnership interest 31.92% 615 S Dupont Hwy, Dover, DE 19901, USA
CF Prudential North American QIS Fund Ordinary shares 97.90% 135 Bishopsgate, London EC2M 3UR, UK
CF Prudential Pacific Markets Trust Fund Ordinary shares 97.91% Laurence Pountney Hill, London EC4R 0HH, UK
Ownership interest 49.00% Level 9, HSBC Building, Shanghai IFC, 8 Century Avenue, Pudong, Shanghai, China
Limited Partnership Interest 31.89% 22 St. Clair Avenue East, Suite 1700, Toronto, ON M4T 2S3 Canada
Cribbs Causeway JV Limited Ordinary shares 50.00% 40 Broadway, London SW1H 0BU, UK
Eastspring Asset Management Korea Co. Ltd. Ordinary shares 100.00% 15th Floor, Shinhan Investment Tower, 70 Yoidae-ro, Youngdungpo-gu, Seoul 07325, Korea Eastspring China Dragon Fund Ordinary shares 29.13%
Eastspring Investments (Luxembourg) S.A. Ordinary shares 100.00% 26, Boulevard Royal, L-2449 Luxembourg
Eastspring Investments China Equity Fund Ordinary shares 40.42% 26, Boulevard Royal, L-2449 Luxembourg
Eastspring Investments Incorporated Ordinary shares 100.00% 874 Walker Road, Suite C, Dover, DE 19904, USA
Eastspring Investments India Equity Fund Ordinary shares 80.28% 26, Boulevard Royal, L-2449 Luxembourg
Eastspring Investments Limited Ordinary shares 100.00% Marunouchi Park Building, 6-1 Marunouchi 2-chome, Chiyoda-Ku, Tokyo, Japan
Eastspring Investments Limited (in liquidation) Ordinary shares 100.00% Level 6, Precinct Building 5, Unit 5, Dubai International Financial Centre, Dubai, United Arab Emirates
Eastspring Investments US Bond Fund Ordinary shares 65.36% 26, Boulevard Royal, L-2449 Luxembourg
Ordinary shares 99.84% 10 Marina Boulevard, #32-01, Marina Bay Financial Centre, Singapore 018983
Euro Salas Properties Limited Ordinary shares 100.00% 7 West George Street, Glasgow G2 1BA, UK
Fashion Square ECO LP Limited partnership interest 100.00% The Corporation Trust Company, Corporation Trust Centre, 1209 Orange St, Wilmington, DE 19801, USA
Furnival Insurance Company PCC Limited Ordinary shares 100.00% PO Box 34, St. Martin’s House, Le Bordage, St. Peter Port, GY1 4AU, Guernsey
GCI Holdings Corporation Ordinary shares 75.80% Prentice-Hall Corporation, 2711 Centerville Road, Suite 400, Wilmington, DE 19808, USA
Genny GP 1 LLP Limited partnership interest 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
Genny GP 2 Limited Ordinary shares 100.00% 50 Lothian Road, Festival Square, Edinburgh EH3 9WJ, UKGenny GP Limited Ordinary shares 100.00%
Greenpark (Reading) General Partner Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
Hermitage Management LLC Membership interest 100.00% 1 Corporate Way, Lansing, Michigan 48951, USA
Ordinary shares 49.00% 12th Floor, Narain Manzil, 23, Barakhamba Road, New Delhi 110001, India
ICICI Prudential Trust Limited Ordinary shares 49.00% 12th Floor, Narain Manzil, 23, Barakhamba Road, New Delhi 110001, India
Infracapital (Sense) SLP LP Partnership interest 100.00% 50 Lothian Road, Festival Square, Edinburgh EH3 9WJ, UKInfracapital (TLSB) GP Limited Ordinary shares 100.00%
Infracapital F2 GP1 Limited Ordinary shares 100.00% 50 Lothian Road, Festival Square, Edinburgh EH3 9WJ, UK
Infracapital F2 GP2 Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
Infracapital Sisu GP Limited Ordinary shares 100.00% 50 Lothian Road, Festival Square, Edinburgh EH3 9WJ, UKInfracapital SLP II GP LLP Limited partnership interest 100.00%
Ordinary shares 100.00% 100 West 10th Street Wilmington, DE 19801, USA
Investment Centers of America, Inc Ordinary shares 100.00% 314 East Thayer Avenue, Bismarck, ND 58501, USA
Jackson Charitable Foundation Non-stock basis 100.00% 1 Corporate Way, Lansing, Michigan 48951, USA
Lion Credit Opportunity Fund Ordinary shares 32.26% 3rd Floor, Kilmore House, Park Lane, Dublin 1, D01 YE64, Ireland
LIPP S.à r.l. (in liquidation) Ordinary shares 100.00% 5 Rue Guillaume Kroll, L-1882, Luxembourg
M&G (Guernsey) Limited Ordinary shares 100.00% Dorey Court, Admiral Park, St. Peter Port, Guernsey GY1 2HT
M&G Asia Property Fund A Class Shares 40.35% 34-38, Avenue de la Liberté, L-1930 Luxembourg
M&G Corporate bond Fund Ordinary shares 24.40% Laurence Pountney Hill, London EC4R 0HH, UK
M&G European Property Fund SICAV-FIS Ordinary shares 68.06% 34-38, Avenue de la Liberté, L-1930 Luxembourg
M&G General Partner Inc. Ordinary shares 100.00% Walker House, 87 Mary Street, Grand Cayman, KY1 9002, Cayman Islands
M&G Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
M&G Real Estate (Luxembourg) S.A. Ordinary shares 100.00% 34-38, Avenue de la Liberté, L-1930 Luxembourg
Ordinary shares 100.00% 10 Marina Boulevard, #31-03 Marina Bay Financial Centre Tower 2, Singapore 018983
M&G Real Estate Debt Fund LP Limited partnership interest 29.15% Ground Floor, Dorey Court, Admiral Park, St Peter Port, Guernsey, GY1 2HT
M&G RED GP Limited Ordinary shares 100.00% Dorey Court, Admiral Park, St Peter Port, Guernsey GY1 2HT
M&G RED II GP Limited Ordinary shares 100.00% Third Floor, La Plaiderie Chambers, La Plaiderie, St Peter Port Guernsey GY1 1WG
M&G RED II SLP GP Limited Ordinary shares 100.00% 50 Lothian Road, Festival Square, Edinburgh EH3 9WJ, UKM&G RED III Employee Feeder GP Limited Ordinary shares 100.00%
M&G UK Property Fund Class C units 99.79% 34-38, Avenue de la Liberté, L-1930 Luxembourg
M&G UK Property GP Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
NAPI REIT, Inc Ordinary shares 100.00% The Corporation Trust Incorporated, 300 E Lombard Street, Baltimore, MD 21202, USA
North Sathorn Holdings Company Limited Ordinary shares 100.00% 3 Rajanakarn Building, 20th Floor, South Sathorn Road, Yannawa Subdistrict, Sathorn District, Bangkok, Thailand
Old Hickory Fund I, LLC Ordinary shares 100.00% Eschenheimer Anlage 1, 60316 Frankfurt am Main, Germany
Old Kingsway, LP Limited Partnership Interest 100.00% Corporation Service Company, 2711 Centreville Road, Suite 400, Wilmington, DE 19808, USA
Pacus (UK) Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
PCA IP Services Limited Ordinary shares 100.00% 13/F, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong
PCA Life Insurance Co., Ltd. Ordinary shares 100.00% 21/F, PCA Life Tower, 302, Teheran-Ro, Gangnam-gu, Seoul, Korea
PGDS (UK One) Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
PGF Management Company (Ireland) Limited Ordinary shares 100.00% 25-28 North Wall Quay, Dublin 1, Ireland
PPM America Capital Partners VI, LLC Limited partnership interest 100.00% 874 Walker Road, Suite C, Dover, DE 19904, USA
PPM America Private Equity Fund VI LP Limited partnership interest 100.00% 874 Walker Road, Suite C, Dover, DE 19904, USA
PPM America, Inc. Ordinary shares 100.00% 774 Walker Road, Suite C, Dover, DE 19904, USA
PPM Capital (Holdings) Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
PPM Finance, Inc Ordinary shares 100.00% 774 Walker Road, Suite C, Dover, DE 19904, USA
PPM Managers GP Limited Ordinary shares 100.00% 50 Lothian Road, Festival Square, Edinburgh EH3 9WJ, UK
PPM Ventures (Asia) Limited (in liquidation) Ordinary shares 100.00% Gloucester Tower, 15 Queens Road, Central, Hong Kong
PPMC First Nominees Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
Property Partners (Two Rivers) Limited Ordinary shares 50.00% Bow Bells House, 1 Bread Street, London EC4M 9HH, UK
Pru Life Insurance Corporation of U.K. Ordinary shares 100.00% 9/F, Uptown Place Tower 1, 1 East 11th Drive, Uptown Bonifacio, 1634 Taguig City, Metro Manila, Philippines
Prudential Annuities Limited Ordinary shares 100.00% Mazars LLP, 45 Church Street, Birmingham B3 2RT, UK
Prudential Assurance Malaysia Berhad Ordinary shares 51.00% Level 3, Menara Prudential, No. 10 Jalan Sultan Ismail, 50250 Kuala Lumpur, Malaysia
Prudential Assurance Uganda Limited Ordinary shares 100.00% Kampala Road, Kampala, Uganda
Prudential BSN Takaful Berhad Ordinary shares 49.00% Level 8A, Menara Prudential, No. 10 Jalan Sultan Ismail, 50250 Kuala Lumpur, Malaysia
Prudential Capital (Singapore) Pte. Limited Ordinary shares 100.00% 10, Marina Boulevard, #32-01, Marina Bay Financial Centre, Singapore 018983
Prudential Capital plc Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
Class A and Class B Shares 100.00% Level 7,10-14 Smith Street, Parramatta, Australia, NSW 2124
Prudential Credit Opportunities 1 S.A.R.L. Ordinary shares 100.00% 1, Rue Hildegard von Bingen, L-1282 Luxembourg
Prudential Distribution Limited Ordinary shares 100.00% Craigforth, Stirling FK9 4UE, UK
Prudential Dublin Investments Limited Ordinary shares 100.00% IFSC, North Wall Quay, Dublin 1, Ireland
Prudential Dynamic 0-30 Portfolio Ordinary shares 29.95% 17 Rochester Row, London SW1P 1QT, UK
Prudential Equity Release Mortgages Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
Prudential Financial Planning Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
Prudential Group Pensions Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
Prudential Holdings Limited Ordinary shares 100.00% Craigforth, Stirling FK9 4UE, UK
Prudential Hong Kong Limited Ordinary shares 100.00% 59/F, One Island East, 18 Westlands Road, Quarry Bay, Hong Kong
Prudential International Staff Pensions Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
Ordinary shares 100.00% Unit A, 6th Floor, Vientiane Plaza Hotel Office Building, Sailom Road, Hatsady Neua Village, Chanthabouly District, Vientiane Capital, Lao, PDR
Prudential Life Insurance Ghana Limited Ordinary shares 100.00% 35 North Street, Accra, Ghana
Prudential Mauritius Holdings Limited Ordinary shares 100.00% Suite 450, 4th Floor, Barkly Wharf East, Le Caudan Waterfront Port Louis, Mauritius
Prudential Polska sp. z.o.o Ordinary shares 100.00% 02-670 Warszawa, Pulawska 182, Poland
Prudential Singapore Holdings Pte. Limited Ordinary shares 100.00% 30 Cecil Street, #30-01 Prudential Tower, Singapore 049712
Prudential Vietnam Assurance Private Limited Ownership interest 100.00% 25/F, Saigon Trade Centre, 37 Ton Duc Thang Street, District 1, Ho Chi Minh City, VietnamPrudential Vietnam Finance Company Limited Ownership interest 100.00%
Limited partnership interest 34.42% Laurence Pountney Hill, London EC4R 0HH, UK
PT. Eastspring Investments Indonesia Ordinary shares 99.95% 23rd Floor, Prudential Tower, JL. Jend. Sudirman Kav.79, Jakarta 12910, Indonesia
PT. Prudential Life Assurance Class A ordinary shares 94.62% Prudential Tower, JI. Jend. Sudirman Kav 79, Jakarta 12910, Indonesia
PVFC Financial Limited Ordinary shares 100.00% 13/F, One International Finance Centre, 1 Harbour View Street, Central, Hong Kong
PVM Partnerships Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
Rhodium Investment Fund Ordinary shares 100.00% 10, Marina Boulevard, #32-01, Marina Bay Financial Centre, Singapore 018983
Sealand (No 1) Limited Ordinary shares 100.00% Lime Grove House, Green Street, St Helier, Jersey, JE1 2STSealand (No 2) Limited Ordinary shares 100.00%
SII Investments, Inc. Ordinary shares 100.00% 2401 South Memorial Drive, Appleton, WI 54915, USA
Squire Reassurance Company II, LLC Capital stock 100.00% 40600 Ann Arbor Road, East Suite 201, Plymouth, MI 48170, USA
Squire Reassurance Company LLC Membership interest 100.00% 1 Corporate Way, Lansing, Michigan 48951, USA
Suite 1005, 10th Floor Wisma Hamzah-Kwong Hing, No. 1 Leboh Ampang, 50100 Kuala Lumpur, Malaysia
Staple Nominees Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
The Car Auction Unit Trust Ordinary shares 50.00% Dorey Court, Admiral Park, St Peter Port GY1 3BG, Guernsey
The First British Fixed Trust Company Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
Three Snowhill Birmingham Sarl Ordinary shares 100.00% 5 Rue Guillaume Kroll, L-1882, Luxembourg
VFL International Life Company SPC, Ltd Ordinary shares 100.00% 171 Elgin Avenue, Grand Cayman, Cayman Islands
Open-ended investment companies and unit trusts The Group invests in OEICs and UTs, which invest mainly in equities, bonds, cash and cash equivalents, and properties. The Group’s percentage ownership in these entities can fluctuate on a daily basis according to the participation of the Group and other investors in them.
— Where the entity is managed by an asset manager outside the Group, an assessment is made of whether the Group has existing rights that gives it the ability to direct the current activities of the entity and therefore control the entity. In assessing the Group’s ability to direct an entity, the Group considers its ability relative to other investors. The Group has a limited number of OEICs and UTs where it considers it has such ability.
Where the Group does not control these entities (as it is deemed to be acting as an agent) and they do not meet the definition of associates, they are carried at fair value through profit or loss within financial investments in the consolidated statement of financial position.
Where the Group’s asset manager sets up OEICs and UTs as part of asset management operations, the Group’s interest is limited to the administration fees charged to manage the assets of such entities. With no participation in these entities, the Group does not retain risks associated with OEICs and UTs. For these open-ended investment companies and unit trusts, the Group is not deemed to control the entities but to be acting as an agent.
Jackson’s separate account assets These are investment vehicles that invest contract holders’ premiums in equity, fixed income, bonds and money market mutual funds. The contract holder retains the underlying returns and the ownership risks related to the underlying investments. The shareholder’s economic interest in separate accounts is limited to the administrative fees charged. The separate accounts are set up as separate regulated entities governed by a Board of Governors or trustees for which the majority of the members are independent of Jackson or any affiliated entity. The independent members are responsible for any decision making that impacts contract holders’ interest and govern the operational activities of the entities’ advisers, including asset managers. Accordingly, the Group does not control these vehicles. These investments are carried at fair value through profit or loss within financial investments in the consolidated statement of financial position.
As at 31 December 2016, 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.
(b) Reinsurance The measurement of reinsurance assets is consistent with the measurement of the underlying direct insurance contracts. The treatment of any gains or losses arising on the purchase of reinsurance contracts is dependent on the underlying accounting basis of the entity concerned.
(c) Earned premiums, policy fees and claims paid Premiums for conventional with-profits policies and other protection type insurance policies are recognised as revenue when due. Premiums and annuity considerations for linked policies, unitised with-profits and other investment type policies are recognised as revenue when received or, in the case of unitised or unit-linked policies, when units are issued. These amounts exclude premium taxes and similar duties where Prudential collects and settles taxes borne by the customer.
For shareholder-backed UK annuity business the derivatives are held to contribute to the matching as far as practical, of asset returns and duration with those of liabilities to policyholders. The carrying value of these liabilities is sensitive to the return on the matching financial assets including derivatives held.
(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.
In cases where the Group takes possession of the collateral under its securities lending programme, the collateral, and corresponding obligation to return such collateral, are recognised in the consolidated statement of financial position.
The products of the insurance operations contain both significant and insignificant levels of insurance risk. The products are managed together and there is no distinction between these two categories other than for accounting purposes. This segment also includes the commission earned on general insurance business and investment subsidiaries held to support the Group’s insurance operations.
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 Company has established trusts to facilitate the delivery of Prudential plc shares under employee incentive plans and savingsrelated share option schemes. The cost to the Company of acquiring these treasury shares held in trusts is shown as a deduction from shareholders’ equity.
(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 expensed 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.
(q) Share capital Where there is no obligation to transfer assets, shares are classified as equity. The difference between the proceeds received on issue of the shares, net of share issue costs, and the nominal value of the shares issued, is credited to share premium. Where the Company purchases shares for the purposes of employee incentive plans, the consideration paid, net of issue costs, is deducted from retained earnings. Upon issue or sale any consideration received is credited to retained earnings net of related costs.
Fixed assets Shares in subsidiary undertakings 5 10,859 12,514 Current assets Debtors: Amounts owed by subsidiary undertakings 5,798 4,783 Other debtors 11 3
Amounts owed to subsidiary undertakings (773) (2,711) Tax payable (10) (20) Deferred tax liability 9 (9) (9) Accruals and deferred income (72) (56)
The financial statements of the parent company on pages 309 to 317 were approved by the Board of Directors on 13 March 2017 and signed on its behalf.
Total comprehensive income for the year Profit for the year – – 920 920 Actuarial gains recognised in respect of the defined benefit pension scheme – – 4 4
Total contributions by and distributions to owners – 7 (967) (960)
In these financial statements, the Company has applied the exemptions available under FRS 101 in respect of the following disclosures:
Shares in subsidiary undertakings Shares in subsidiary undertakings are shown at cost less impairment.
Notes on the parent company financial statements Continued 3 Significant accounting policies continued
Pensions The Company assumes a portion of the pension surplus or deficit of the Group’s main pension scheme, the Prudential Staff Pension Scheme (‘PSPS’). The Company applies the requirements of IAS 19 ‘Employee Benefits’ (as revised in 2011) for the accounting of its interest in the PSPS surplus or deficit. Further details are disclosed in note 7.
A pension surplus or deficit is recorded as the difference between the present value of the scheme liabilities and the fair value of the scheme assets. The Company’s share of pension surplus is recognised to the extent that the Company is able to recover a surplus either through reduced contributions in the future or through refunds from the scheme.
www.prudential.co.uk� Annual�Report�2016 Prudential plc 313 05 Financial statem ents 4 Reconciliation from the FRS 101 parent company results to the IFRS Group results
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 2016, 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 of the Group attributable to shareholders in accordance with IFRS 1,921 2,579
Net equity Shareholders’ equity of the Company in accordance with FRS 101 and IFRS 7,505 7,909 Share in the IFRS net equity of the Group* 7,161 5,046
The liquidation related to a central finance subsidiary in order to simplify the Group’s corporate structure. Other movements comprise £6 million in respect of share-based payments, reflecting the value of payments settled by the Company
Cross-currency swap 4 – 1 – Inflation-linked swap – 447 – 322
Underlying surplus in the Scheme 717 969 Effect of the application of IFRIC 14 for de-recognition of surplus (558) (800)
Surplus in the Scheme recognised by the Company† 48 51 * 96 per cent (2015: 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
Current service cost – (21) (21) – (21) Negative past service cost – 48 48 – 48
Actuarial gains (losses)note (ii) (248) 312 64 (64) – Contributions paid by the employer note (iii) 11 – 11 – 11 Contributions paid by the employee 1 (1) – – – Benefits paid (270) 270 – – –
Notes (i) The weighted average duration of the benefit obligations of the Scheme is 18 years (2015: 17 years). The following table provides an expected maturity analysis of the 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
Actuarial gains attributable to the Company before tax† 4 4 * The total return on Scheme assets in 2016 was a gain of £1,199 million (2015: loss of £8 million). † Actuarial gains attributable to the Company are net of the apportionment to the PAC with-profits fund and are related to the surplus recognised in the balance sheet of the
Company. In 2016, the gains included a credit of £87 million (2015: charge of £15 million) for the adjustment to the unrecognised portion of surplus. The gains after tax of £4 million (2015: £4 million) are recorded in other comprehensive income.
(iii) Employer contributions to be paid into the Scheme for the year ending 31 December 2017 are expected to amount to £11 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. (iv) The Floating Rate Notes matured in October 2016.
Under English company law, Prudential may pay dividends only if sufficient distributable reserves of the Company are available for the purpose and if the amount of its net assets is greater than the aggregate of its called up share capital and non-distributable reserves (such as the share premium account) and the payment of the dividend does not reduce the amount of its net assets to less than that aggregate.
other services were £0.1 million (2015: £0.2 million). e In certain instances, the Company has guaranteed that its subsidiaries will meet their obligations when they fall due for payment.
The second interim ordinary dividend for the year ended 31 December 2016, which was approved by the Board of Directors after 31 December 2016, is described in note B7 of the Group financial statements.
The Directors of Prudential plc, whose names and positions are set out on pages 77 to 81 confirm that to the best of their knowledge: — The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; — The strategic report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and
— The Annual Report and financial statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.
Independent auditor’s report to the members of Prudential plc 1 Our opinion on the financial statements is unmodified We have audited the financial statements of Prudential plc for the year ended 31 December 2016 set out on pages 161 to 317. In our opinion: — The financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2016 and of the Group’s profit for the year then ended; — The Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union; — The parent company financial statements have been properly prepared in accordance with UK Accounting Standards including FRS 101 Reduced Disclosure Framework; and
Our response We used our own actuarial specialists to assist us in performing our procedures in this area.
Key procedures included assessing the Group’s methodology for calculating the policyholder liabilities and their analysis of the movements in policyholder liabilities during the year, including consideration of whether the movements are in line with the assumptions adopted by the Group, our understanding of developments in the business and our expectation derived from market experience.
— Assessing assumptions for investment mix and projected investment returns by reference to company specific and industry data and for future growth rates by reference to market trends and market volatility.
We utilised the results of KPMG benchmarking of assumptions and actuarial market practice to inform our challenge of management’s assumptions in both areas noted above.
Our response We used our own valuation specialists and pricing services to assist us in performing our procedures in this area. Our procedures included: — Assessing the availability of quoted prices in liquid markets; — Assessing whether the valuation process is appropriately designed and captures relevant valuation inputs; — Testing whether associated controls in respect of the valuation process are operating properly; — Performing our own independent price checks from our own pricing services using external quotes for liquid positions and, where available, for illiquid positions; — Assessing pricing model methodologies and assumptions against industry practice and valuation guidelines; — Evaluating the valuation assessment performed by the Group in order to identify any potential impairment in relation to loans; and
We also assessed whether the Group’s disclosures in relation to the valuation of investments are compliant with the relevant accounting requirements and appropriately presents the sensitivities in the valuations based on alternative outcomes.
Our response We used our own actuarial specialists to assist us in performing our audit procedures in this area, which included
— Evaluating the appropriateness of the Group’s deferral policy by comparing it against the requirements of relevant accounting standards; — Evaluating whether costs incurred are deferred in accordance with the Group’s deferral policy; and
www.prudential.co.uk� Annual�Report�2016 Prudential plc 321 05 Financial statem ents 3 Our application of materiality and an overview of the scope of our audit Materiality for the Group financial statements as a whole was set at £350 million (2015: £350 million) determined with reference to a benchmark of IFRS shareholders’ equity (of which it represents 2.4 per cent (2015: 2.7 per cent)). We consider IFRS shareholders’ equity to be the most appropriate benchmark as it represents the residual interest that can be ascribed to shareholders after policyholder assets and corresponding liabilities have been accounted for. We compared our materiality against other relevant benchmarks, such as total assets, total revenue and profit before tax to ensure the materiality selected was appropriate for our audit.
We report to the Group Audit Committee any corrected or uncorrected identified misstatements exceeding £18 million (2015: £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
The Group audit team in the UK covered the UK Group Head office operations. Component auditors performed the audit work in the remaining locations.
The Group audit team held a global planning conference with component auditors to identify audit risks and decide how each component team should address the identified audit risks. The Group audit team instructed component auditors as to the significant areas to be covered, including the relevant risks detailed above and the information to be reported back. The Group audit team approved the component materialities. These were set as £146 million for key reporting components in Asia, other than Eastspring Singapore which was set as £80 million, and £186 million for all other key reporting components (2015: £146 million - £186 million), having regard to the size and risk profile of the Group.
Prudential Capital. Video and telephone conference meetings were also held with these component auditors and certain others that were not physically visited. At these visits and 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 reviewed and any further work required by the Group audit team was then performed by the component auditor.
The Senior Statutory Auditor, in conjunction with other senior staff in the Group team, also regularly attended Business Unit audit committee meetings (at a regional level for Asia) and participated in meetings with local management to obtain additional understanding first hand of the key risks and audit issues at a component level which may affect the Group financial statements.
Based solely on the work required to be undertaken in the course of the audit of the financial statements and from reading the Strategic Report and the Directors’ Report: — We have not identified material misstatements in those reports; and
5 We have nothing to report on the disclosures of principal risks Based on the knowledge we acquired during our audit, we have nothing material to add or draw attention to in relation to: — The Directors’ viability statement on page 60, concerning the principal risks, their management, and, based on that, the Directors’ assessment and expectations of the Group’s continuing in operation over the three years to 2019; or
In particular, we are required to report to you if: — We have identified material inconsistencies between the knowledge we acquired during our audit and the Directors’ statement that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; or
Under the Companies Act 2006 we are required to report to you if, in our opinion: — Adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
— Certain disclosures of Directors’ remuneration specified by law are not made; or
Under the Listing Rules we are required to review: — The Directors’ statements, set out on pages 106 and 60, in relation to going concern and longer-term viability; and
— The part of the Corporate Governance Statement on page 106 relating to the company’s compliance with the eleven provisions of the 2014 UK Corporate Governance Code specified for our review.
7 Scope of report and responsibilities As explained more fully in the Directors’ Responsibilities Statement set out on page 318, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate This report is made solely to the Company’s members as a body and is subject to important explanations and disclaimers regarding our responsibilities, published on our website at www.kpmg.com/uk/ auditscopeukco2014a which are incorporated into this report as if set out in full and should be read to provide an understanding of the purpose of this report, the work we have undertaken and the basis of our opinions.
For and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants London
European Embedded Value (EEV) basis results 324 Index to EEV basis results
Excluding UK bulk annuities 4 3,088 2,492 UK bulk annuities – 117
Long-term business 5,688 4,951 Asset management and general insurance commission 508 506 Other results (699) (617)
Notes (i) EEV basis other income and expenditure represents the post-tax IFRS basis result 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) Solvency II and restructuring costs comprise the net-of-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.
(iii) The comparative results have been prepared using previously reported average exchange rates for the year. (iv) The EEV basis results have been prepared in accordance with the amended EEV Principles dated April 2016, prepared by the CFO Forum of major European insurers. The 2016 results for UK insurance operations have been prepared to reflect the Solvency II regime. The 2015 results for UK insurance operations were prepared reflecting the Solvency I basis being the regime applicable for the year. There is no change to the basis of preparation for Asia and US operations.
(v) Following Prudential’s withdrawal from the UK bulk annuity market, the 2015 comparative results for UK bulk annuities new business have been presented separately. (vi) The Group agreed in November 2016 to sell, subject to regulatory approval, its life business in Korea. Accordingly, the presentation of the 2015 comparative EEV basis results and related notes have been adjusted from those previously published for the reclassification of the result attributable to the held for sale Korea life business, as described in note 17. This approach has been adopted consistently throughout this supplementary information.
Profit for the year attributable to equity holders of the Company 4,516 3,951 * The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details). † The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflected the Solvency I basis being the regime applicable for the year.
Share capital 129 128 Share premium 1,927 1,915 IFRS basis shareholders’ reserves 12,610 10,912
Based on EEV basis shareholders’ equity of £38,968 million (2015: £32,359 million) (in pence)† 1,510p 1,258p Number of issued shares at year end (millions) 2,581 2,572
The supplementary information on pages 325 to 360 was approved by the Board of Directors on 13 March 2017.
The EEV basis results have been prepared in accordance with the EEV Principles dated April 2016, prepared by the European Insurance CFO Forum. There is no change to the EEV methodology. The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime, as discussed in note 2 below. The 2015 comparative results for UK insurance operations were prepared reflecting the Solvency I basis, being the regime applicable for the year. There is no change to the basis of preparation for Asia and the US operations. Where appropriate, the EEV basis results include the effects of adoption of EU-endorsed IFRS.
The directors are responsible for the preparation of the supplementary information in accordance with the EEV Principles. Except for the change in presentation of the results of the operating and non-operating results for Asia operations to show separately the contribution from the held for sale Korea life business (see note 17 for details), the 2015 results have been derived from the EEV basis results supplement to the Company’s statutory accounts for 2015.
2 Effect of Solvency II implementation on EEV basis results on 1 January 2016
The Solvency II framework is effective from 1 January 2016. For our operations in Asia and the US there is no impact on the EEV results since Solvency II does not act as the local constraint on the ability to distribute profits to the Group. The embedded value for these businesses will continue to be driven by local regulatory and target capital requirements. For the UK insurance operations, Solvency II has an impact on the EEV results as it changes the local regulatory valuation of net worth and capital requirements, affecting the components of the EEV.
The impact of Solvency II on EEV shareholders’ equity on 1 January 2016 is shown below: Total EEV basis shareholders’ equity £m
(b) The net value of in-force business (VIF) is correspondingly impacted as follows: – the release of prudent regulatory margins and recognition of a portion of future with-profits business shareholders’ transfers within net worth lead to a corresponding reduction in the VIF; – the run-off of the risk margin, net of transitional measures, is now captured in VIF; and – the cost of capital deducted from the gross VIF increases as a result of the higher Solvency II capital requirements. The overall impact of these changes was to reduce the value of in-force by £(3,233) million. (c) At 1 January 2016 the effect of these changes was a net reduction in EEV shareholders’ equity of £(473) million.
The 2015 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases. The 2015 CER comparative results are translated at 2016 average exchange rates.
Group total excluding UK bulk annuities 4 6,320 5,315 5,844 19% 8%
* The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details). † The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year. ‡ Following Prudential’s withdrawal from the UK bulk annuity market, the 2015 comparative results for UK bulk annuities new business have been presented separately.
Notes on the EEV basis results Continued 4 Analysis of new business contribution
‡ Following Prudential’s withdrawal from the UK bulk annuity market, the 2015 comparative results for UK bulk annuities new business have been presented separately.
Note The increase in new business contribution of £596 million from £2,492 million for 2015 (excluding the contributions from UK bulk annuities) to £3,088 million for 2016 comprises an increase on a CER basis of £314 million and an increase of £282 million for foreign exchange effects. The increase of £314 million on a CER basis comprises a contribution of £226 million for higher retail sales volumes in 2016, a £17 million effect of movement in long-term interest rates, generated by the active basis of setting economic assumptions (analysed as Asia £14 million, US £13 million and UK £(10) million), and a £71 million impact of pricing, product and other actions.
Total Asia operations 2,030 1,482 1,660 * The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details).
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Unwind of discount and other expected returns 725 472 488 1,685 Effect of changes in operating assumptions 12 115 55 182 Experience variances and other items 61 412 2 475 * The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details). † The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflected the Solvency I basis being the regime applicable for the year.
Note The movement in operating profit from business in force of £258 million from £2,342 million for 2015 to £2,600 million for 2016 comprises: £m
Movement in unwind of discount and other expected returns: Effects of changes in: Growth in opening value 126 Interest rates (28) Foreign exchange 141 Implementation of Solvency II on 1 January 2016 (30)
Total Asia operations 1,044 798 * The 2015 comparative results have been adjusted from those previously published for the reclassification of the results attributable to the held for sale Korea life business (see note 17 for details).
(c) The 2016 credit of £53 million for other assumption changes reflects a number of offsetting items, including modelling improvements and those arising from asset allocation changes in a number of territories.
(b) The 2016 credit of £170 million comprises assumption updates for mortality, persistency and expense, together with an increase in the assumed level of tax relief reflecting recent experience.
(d) The amortisation of interest-related gains and losses reflects the fact that when bonds that are neither impaired nor deteriorating are sold and reinvested there will be a consequent change in the investment yield. The realised gain or loss is amortised into the result over the period when the bonds would have otherwise matured to better reflect the long-term returns included in operating profits.
(e) Other experience variances of £221 million in 2016 (2015: £193 million) include the effects of positive persistency experience and other variances.
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Unwind of discount and other expected returns note (a) 445 488 Reduction in future UK corporate tax rate note (b) 25 55 Other note (c) (95) 2
Notes (a) The decrease in unwind of discount and expected returns of £(43) million from 2015 of £488 million to £445 million for 2016 comprises a positive £25 million effect for the underlying growth in the in-force book, more than offset by a £(38) million effect driven by the 70 basis points decrease in the 15-year gilt yield during the year and a negative £(30) million representing the net effect of adopting the Solvency II regime.
(c) Other items comprise the following: Longevity reinsurance (90) (134) Impact of specific management actions to improve solvency position note (d) 110 75 Provision for cost of undertaking past non-advised annuity sales review and potential redress note (e) (145) – Other items note (f) 30 61
(e) In response to the findings of the FCA’s Thematic Review of Annuities Sales Practices, the UK business will review all internally vesting annuities sold without advice after 1 July 2008. Reflecting this, the UK 2016 result includes a provision of £145 million (post-tax) for the estimated cost of the review and any appropriate customer redress, but excludes any potential for insurance recoveries.
Asia operations note (ii) (100) (213) US operations note (iii) (1,102) (753) UK insurance operations note (iv) 869 (194) Other operations note (v) (174) (55)
Note For 2016, the charge of £(100) million mainly reflects the impact of interest rate movements on bonds and other investment returns, with losses due to increased long-term interest rates in Hong Kong, partly offset by gains in Singapore (as shown in note 15(i)).
Notes on the EEV basis results Continued 6 Short-term fluctuations in investment returns continued
(iv) UK insurance operations The short-term fluctuations in investment returns for UK insurance operations comprise: 2016 £m 2015*£m
* The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflected the Solvency I basis being the regime applicable for the year.
Notes (a) Short-term fluctuations in investment returns for shareholder-backed annuity business comprise: – gains (losses) on surplus assets compared to the expected long-term rate of return reflecting reductions (increases) in corporate bond and gilt yields; – the difference between actual and expected default experience; and – the effect of mismatching for assets and liabilities of different durations.
(b) The £438 million fluctuations in 2016 for with-profits and other business represent the impact of achieving a 13.6 per cent pre-tax return on the with-profits fund (including unallocated surplus) compared to the assumed rate of return of 5.0 per cent (2015: total return of 3.1 per cent compared to assumed rate of 5.4 per cent), together with the effect of a partial hedge of future shareholder transfers expected to emerge from the UK’s with-profits sub-fund entered into to protect future shareholder with-profit transfers from movements in the UK equity market.
(v) Other operations Short-term fluctuations in investment returns for other operations of negative £(174) million (2015: negative £(55) million) include unrealised value movements on investments held outside of the main life operations.
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(ii) Asia operations The effect of changes in economic assumptions for Asia operations comprises: 2016 £m 2015*£m
Note The positive effect for 2016 of £70 million largely arises from the movements in long-term interest rates (see note 15(i)). Non-operating profits arise from higher interest rates and hence fund earned rates in Hong Kong, together with the beneficial impact of valuing future health and protection profits at lower discount rates in Indonesia. Losses arise from a fall in interest rates in Singapore and a higher discount rate in Malaysia.
Notes on the EEV basis results Continued 8 Net core structural borrowings of shareholder-financed operations
Holding company (including central finance subsidiaries) cash and short-term investments (2,626) – (2,626) (2,173) – (2,173)
Loss attaching to the held for sale Korea life business note 17 (395) – – (395) – (15) (410) Other non-operating (loss) profit (30) (1,057) 694 (393) (38) (140) (571)
Intra-group dividends and investment in operations note (ii) (594) (388) (281) (1,263) (462) 1,725 – External dividends – – – – (1,267) (1,267) Mark to market value movements on Jackson assets backing surplus and required capital – (11) – (11) – – (11)