Total IFRS basis shareholders’ equity 9 12,955 11,811 Additional EEV basis retained profit 9 19,404 17,350
Total EEV basis shareholders’ equity (excluding non-controlling interests) 9 32,359 29,161 * Including liabilities in respect of insurance products classified as investment contracts under IFRS 4.
The EEV basis results have been prepared in accordance with the EEV Principles issued by the European Insurance CFO Forum in May 2004, subsequently supplemented by Additional Guidance on EEV Disclosure issued in October 2005. The impact of Solvency II is not reflected in these results in line with the guidance issued by the CFO Forum in October 2015 (see note 15 for further details). 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 operating results for UK operations to show separately the contribution from the sold PruHealth and PruProtect businesses and the presentation of Prudential Capital as a separate segment, the 2014 results have been derived from the EEV basis results supplement to the Company’s statutory accounts for 2014.
Analysed as profit (loss) from: * In order to show the UK long-term business on a comparable basis, the 2014 comparative results exclude the contribution from the sold PruHealth and PruProtect businesses, which is shown separately.
Profit for the year attributable to shareholders 3,951 4,343 4,455 (9)% (11)%
) basis results 7 A dditional inform ation 4 Operating profit from business in force
Unwind of discount and other expected returns 648 382 410 1,440 Effect of changes in operating assumptions 52 86 – 138 Experience variances and other items 38 366 66 470
Notes on the EEV basis results continued 4 Operating profit from business in force continued
Notes (a) The increase in unwind of discount and other expected returns of £101 million from £648 million for 2014 to £749 million for 2015 comprises an effect
(d) The 2014 credit of £47 million for other assumption changes reflected a number of offsetting items, including modelling improvements and those arising from asset allocation changes in Hong Kong.
Unwind of discount and other expected returns note (a) 472 382 Effect of changes in operating assumptions: Persistency note (b) 139 55
Experience variances and other items: Spread experience variance note (c) 149 192 Amortisation of interest-related realised gains and losses note (d) 70 56 Other note (e) 193 118
(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 year when the bonds would have otherwise matured to better reflect the long-term returns included in operating profits.
of £66 million reflecting the underlying growth in the in-force book and a £12 million effect of the 20 basis points increase in gilt yields. (b) The £55 million credit in 2015 for the change in UK corporate tax rates reflects the beneficial effect of applying lower corporation tax rates (note 14) to future life
(d) During 2015, we extended our longevity reinsurance programme to cover an additional £6.4 billion of annuity liabilities at a net cost of £(134) million. Of this total, some £4.8 billion was transacted in the second half of 2015 at a net cost of £(88) million.
) basis results 7 A dditional inform ation 5 Short-term fluctuations in investment returns
Asia operations note (ii) (206) 439 US operations note (iii) (753) (166) UK insurance operations note (iv) (194) 583 Other operations note (v) (55) (93)
Note For 2015, the charge of £(144) million in Hong Kong, £(53) million in Indonesia and £(104) million in Singapore principally arise from unrealised losses on bonds backing surplus assets driven by increases in long-term interest rates (as shown in note 14(i)) and from the effect of falls in equity markets in the region. The credit of £44 million in Taiwan arises from unrealised gains on bonds following the decrease in long-term interest rates.
current reporting period; and – related hedging activity arising from realised and unrealised gains and losses on equity-related hedges and interest rate options, and other items.
Notes (a) Short-term fluctuations in investment returns for shareholder-backed annuity business comprise: – (losses) gains on surplus assets compared to the expected long-term rate of return reflecting (increases) reductions 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 and other short-term fluctuations in investment returns. (b) The £(106) million fluctuation in 2015 for with-profits, unit-linked and other business represents the impact of achieving a 3.1 per cent pre-tax return on the
(v) Other operations Short-term fluctuations in investment returns for other operations of £(55) million (2014: £(93) million) include unrealised value movements on investments held outside our main life operations.
Asia operations note (ii) (148) (269) US operations note (iii) 109 (77) UK insurance operations note (iv) 96 (23)
(ii) Asia operations The effect of changes in economic assumptions for Asia operations comprises: Hong Kong 100 (121)
Note The negative 2015 effect in Malaysia, Indonesia and Singapore reflects the impact of valuing future health and protection profits at higher discount rates, driven by the increase in long-term interest rates in these countries (see note 14(i)). The negative effect in Taiwan is driven by a decrease in fund earned rates reflecting the decline in long-term interest rates and changes to the asset portfolio mix. The positive impact in Hong Kong is driven by the effect of higher assumed future fund earned rates for participating business.
mainly from the increase (2014: reduction) in the risk discount rates as shown in note 14(iii). (b) The credit of £152 million in 2015 reflects the net effect of changes in fund earned rates and risk discount rates (as shown in note 14 (iii)), driven by the 20 basis
Holding company net borrowings 2,394 353 2,747 2,389 579 2,968 Core structural borrowings – Prudential Capital 275 – 275 275 – 275 Core structural borrowings – Jackson 169 55 224 160 42 202
Note In June 2015, the Company issued core structural borrowings of £600 million 5.00 per cent subordinated notes due in 2055. The proceeds, net of discount adjustment and costs, were £590 million.
Notes on the EEV basis results continued 8 Analysis of movement in free surplus
For EEV covered business, free surplus is the excess of the regulatory basis net assets for EEV reporting purposes (net worth) over the capital required to support the covered business. Where appropriate, adjustments are made to the net worth so that backing assets are included at fair value rather than cost so as to comply with the EEV Principles. Free surplus for asset management operations and the UK general insurance commission is taken to be IFRS basis post-tax earnings and shareholders’ equity.
(i) Underlying free surplus generated The 2014 comparative results are shown below on both actual exchange rates (AER) and constant exchange rates (CER) bases. The 2014 CER comparative results are translated at 2015 average exchange rates.
Asia operations Underlying free surplus generated from in-force life business 985 860 851 15% 16% Investment in new business notes (ii)(a), (ii)(g) (413) (346) (352) (19)% (17)%
Underlying free surplus generated from in-force life business 878 637 637 38% 38% Investment in new business note (ii)(a) (65) (65) (65) – –
Underlying free surplus generated from in-force life business 3,289 2,688 2,772 22% 19% Investment in new business notes (ii)(a), (ii)(g) (745) (598) (618) (25)% (21)%
Disposal of Japan life business note (h) 23 – 23 – Gain on sale of PruHealth and PruProtect – – – 130 Other non-operating items note (c) (407) (53) (460) (266)
Net cash flows to parent company note (d) (1,271) (354) (1,625) (1,482) Exchange movements, timing differences and other items note (e) 560 159 719 130
† On 1 January 2014, the Hong Kong branch of PAC was transferred to separate subsidiaries established in Hong Kong. The 2014 EEV basis results included opening adjustments arising from the transfer of capital that was previously held within the UK business in respect of the Hong Kong branch operations and additional capital requirements arising from the newly established subsidiaries with an overall effect of £(35) million.
(ii) Movement in free surplus continued Notes (a) Free surplus invested in new business represents amounts set aside for required capital and acquisition costs. (b) Free surplus for asset management operations and the UK general insurance commission is taken to be IFRS basis post-tax earnings and shareholders’ equity. (c) Non-operating items are principally short-term fluctuations in investment returns and the effect of changes in economic assumptions for long-term
business operations. (d) Net cash flows to parent company for long-term business operations reflect the flows as included in the holding company cash flow at transaction rates. (e) Exchange movements, timing differences and other items represent: Long-term business
(g) Investment in new business includes the annual amortisation charge of amounts incurred to secure exclusive distribution rights through our bancassurance partners at a rate that reflects the pattern in which the future economic benefits are expected to be consumed by reference to new business levels. Included within the overall free surplus balance of our Asia life entities is £287 million representing unamortised amounts incurred to secure exclusive distribution rights through bancassurance partners. These amounts exclude £971 million of Asia distribution rights intangibles that are financed by loan arrangements from central companies, the costs of which are allocated to the Asia life segment as the amortisation cost is incurred.
Mark to market value movements on Jackson assets backing surplus and required capital – (76) – (76) – (76)
Net increase in shareholders’ equity 1,331 1,108 1,214 3,653 (455) 3,198 Shareholders’ equity at beginning of year 12,312 8,379 8,433 29,124 37 29,161
Balance at beginning of year: Statutory IFRS basis shareholders’ equity: Total IFRS basis shareholders’ equity 3,315 4,067 3,785 11,167 644 11,811 Additional retained profit (loss) on an EEV
transfers. Investments in operations reflect increases in share capital. The amounts included in note 8 for these items are as per the holding company cash flow at transaction rates. The difference primarily relates to intra-group loans, timing differences arising on statutory transfers and other non-cash items.
(iii) Other movements include the effect of a classification change of £702 million from Other operations to UK insurance operations in order to align with Solvency II segmental reporting, which has no overall effect on the Group’s EEV. Other movements also includes a credit of £25 million (2014: a charge of £(11) million) for the shareholders’ share of actuarial and other gains and losses on the defined benefit pension schemes.
(iv) The additional retained loss on an EEV basis for Other operations primarily represents the mark to market value adjustment for holding company net borrowings of a charge of £(353) million (2014: £(579) million), as shown in note 7.
Notes on the EEV basis results continued 10 Reconciliation of movement in net worth and value of in-force for long-term business
Group Shareholders’ equity at beginning of year 4,193 4,556 8,749 20,375 29,124 New business contribution note (ii) (745) 493 (252) 2,869 2,617 Existing business – transfer to net worth 2,611 (355) 2,256 (2,256) – Expected return on existing business note 4 119 129 248 1,461 1,709 Changes in operating assumptions and experience
Profit from long-term business 2,160 91 2,251 1,606 3,857 Exchange movements on foreign operations and net
Operating profit based on longer-term investment returns 572 155 727 1,594 2,321 Disposal of Japan life business 23 (48) (25) 25 – Other non-operating items 61 (6) 55 (409) (354)
Profit from long-term business 656 101 757 1,210 1,967 Exchange movements on foreign operations and net
Intra-group dividends and investment in operations (472) – (472) – (472)
Shareholders’ equity at end of year 1,503 1,386 2,889 10,754 13,643
Profit from long-term business 618 (3) 615 538 1,153 Exchange movements on foreign operations and net
Operating profit based on longer-term investment returns 813 41 854 (19) 835
(ii) New business contribution per £1 million of free surplus invested: Asia operations
Post-tax new business contribution per £1 million of free surplus invested 3.6 3.0 4.9 3.5 3.4 3.7 4.0 3.5 * In order to show the UK long-term business on a comparable basis, the 2014 comparatives exclude the contribution from the sold PruHealth and PruProtect businesses.
(iii) The value of in-force business comprises the value of future margins from current in-force business less the cost of holding required capital as shown below: Asia operations
Value of in-force business before deduction of cost of capital and time value of guarantees 11,280 7,355 5,817 24,452 10,168 5,914 5,756 21,838
Net value of in-force business 10,754 6,114 5,563 22,431 9,638 5,253 5,484 20,375
Notes on the EEV basis results continued 11 Expected transfer of value of in-force business to free surplus
Note ‘Other items’ represent amounts incorporated into VIF where there is no definitive timeframe for when the payments will be made or receipts received. In particular, other items include the deduction of the value of the shareholders’ interest in the estate, the value of which is derived by increasing final bonus rates so as to exhaust the estate over the lifetime of the in-force with-profits business. This is an assumption to give an appropriate valuation. To be conservative, this item is excluded from the expected free surplus generation profile below.
Expected period of conversion of future post-tax distributable earnings and required capital flows to free surplus 2015 total as shown above 1-5 years 6-10 years 11-15 years 16-20 years 21-40 years 40+ years
US operations 8,740 4,361 2,752 1,129 383 115 – UK insurance operations 5,689 2,097 1,498 962 576 544 12
) basis results 7 A dditional inform ation 12 Sensitivity of results to alternative assumptions
(a) Sensitivity analysis – economic assumptions The tables below show the sensitivity of the embedded value as at 31 December and the new business contribution after the effect of required capital for 2015 and 2014 to: — 1 per cent increase in the discount rates; — 1 per cent increase and decrease in interest rates, including all consequential changes (assumed investment returns for all asset classes, market values of fixed interest assets, risk discount rates); — 1 per cent rise in equity and property yields; — 10 per cent fall in market value of equity and property assets (embedded value only); — The statutory minimum capital level (by contrast to EEV basis required capital), (for embedded value only); — 5 basis point increase in UK long-term expected defaults; and — 10 basis point increase in the liquidity premium for UK annuities.
Interest rates – 1% decrease 132 (93) 426 465 211 16 452 679 Equity/property yields – 1% rise 506 514 271 1,291 435 365 282 1,082 Equity/property market values – 10% fall (246) (411) (373) (1,030) (221) (129) (380) (730) Statutory minimum capital 148 162 4 314 129 139 4 272 Long-term expected defaults – 5 bps increase – – (141) (141) – – (139) (139)
Change representing effect on: * In order to show the UK long-term business on a comparable basis, the 2014 comparatives exclude the contribution from the sold PruHealth and PruProtect businesses.
The value of future new business is excluded from the embedded value. Notwithstanding the basis of presentation of results (as explained in note 13(b)(iii)) no smoothing of market or account balance values, unrealised gains or investment return is applied in determining the embedded value or profit. Separately, the analysis of profit is delineated between operating profit based on longer-term investment returns and other constituent items (as explained in note 13(b)(i)).
(i) Covered business The EEV results for the Group are prepared for ‘covered business’, as defined by the EEV Principles. Covered business represents the Group’s long-term insurance business, including the Group’s investments in joint venture insurance operations, for which the value of new and in-force contracts is attributable to shareholders. The post-tax EEV basis results for the Group’s covered business are then combined with the post-tax IFRS basis results of the Group’s other operations. Under the EEV Principles, the results for covered business incorporate the projected margins of attaching internal asset management, as described in note 13(a)(vii).
For UK immediate annuity business and single premium Universal Life products in Asia, primarily in Singapore, the new business contribution is determined by applying economic assumptions reflecting point-of-sale market conditions. This is consistent with how the business is priced as crediting rates are linked to yields on specific assets and the yield is locked in when the assets are purchased at the point of sale of the policy. For other business within the Group, end-of-year economic assumptions are used.
There are also various non-participating long-term products with guarantees. The principal guarantees are those for whole-of-life contracts with floor levels of policyholder benefits that accrue at rates set at inception and do not vary subsequently with market conditions.
US operations (Jackson) The principal financial options and guarantees in Jackson are associated with the fixed annuity and variable annuity (VA) lines of business.
Jackson also issues fixed index annuities that enable policyholders to obtain a portion of an equity-linked return while providing a guaranteed minimum return. The guaranteed minimum returns are of a similar nature to those described above for fixed annuities.
The Group’s main exposure to guaranteed annuity options in the UK is through the non-covered business of SAIF. A provision on the Pillar I Peak 2 basis of £412 million was held in SAIF at 31 December 2015 (31 December 2014: £549 million) to honour the guarantees. As described in note 13(a)(i), the assets and liabilities are wholly attributable to the policyholders of the fund. Therefore the movement in the provision has no direct impact on shareholders.
Time value The value of financial options and guarantees comprises two parts. One is given by a deterministic valuation on best estimate assumptions (the intrinsic value). The other part arises from the variability of economic outcomes in the future (the time value). Where appropriate, a full stochastic valuation has been undertaken to determine the time value of the financial options and guarantees.
The economic assumptions used for the stochastic calculations are consistent with those used for the deterministic calculations. Assumptions specific to the stochastic calculations reflect local market conditions and are based on a combination of actual market data, historic market data and an assessment of long-term economic conditions. Common principles have been adopted across the Group for the stochastic asset models, for example, separate modelling of individual asset classes but with an allowance for correlation between the various asset classes. Details of the key characteristics of each model are given in notes 14(iv), (v) and (vi).
— UK insurance operations: the capital requirements are set to an amount at least equal to the higher of Solvency I Pillar I and Pillar II requirements for shareholder-backed business of UK insurance operations as a whole.
(viii) Allowance for risk and risk discount rates Overview Under the EEV Principles, discount rates used to determine the present value of future cash flows are set by reference to risk-free rates plus a risk margin. The risk margin should reflect any non-diversifiable risk associated with the emergence of distributable earnings that is not allowed for elsewhere in the valuation. Prudential has selected a granular approach to better reflect differences in market risk inherent in each product group. The risk discount rate so derived does not reflect an overall Group market beta but instead reflects the expected volatility associated with the cash flows for each product category in the embedded value model.
The beta of a portfolio or product measures its relative market risk. The risk discount rates reflect the market risk inherent in each product group and hence the volatility of product cash flows. These are determined by considering how the profits from each product are affected by changes in expected returns on various asset classes. By converting this into a relative rate of return, it is possible to derive a product-specific beta.
The practical application of the allowance for credit risk varies depending upon the type of business as described below: Asia operations For Asia operations, the allowance for credit risk incorporated in the projected rates of return and the market risk allowance are sufficient. Accordingly no additional allowance for credit risk is required.
The risk discount rate incorporates an additional allowance for credit risk premium and short-term downgrades and defaults as shown in note 14(ii). In determining this allowance a number of factors have been considered. These factors, in particular, include: — How much of the credit spread on debt securities represents an increased credit risk not reflected in the RMR long-term default assumptions, and how much is liquidity premium (which is the premium required by investors to compensate for the risk of longerterm investments which cannot be easily converted into cash, and converted at the fair market value). In assessing this effect, consideration has been given to a number of approaches to estimating the liquidity premium by considering recent statistical data; and
UK operations (1) Shareholder-backed annuity business For Prudential’s UK shareholder-backed annuity business, Prudential has used a market consistent embedded value (MCEV) approach to derive an implied risk discount rate which is then applied to the projected best estimate cash flows.
In the annuity MCEV calculations, as the assets are generally held to maturity to match long duration liabilities, the future cash flows are discounted using the swap yield curve plus an allowance for liquidity premium based on Prudential’s assessment of the expected return on the assets backing the annuity liabilities after allowing for: — Expected long-term defaults, derived as a percentage of historical default experience based on Moody’s data for the period 1970 to 2009, and the definition of the credit rating assigned to each asset held is the second highest credit rating published by Moody’s, Standard & Poor’s and Fitch; — A credit risk premium, derived as the excess over the expected long-term defaults, of the 95th percentile of historical cumulative defaults based on Moody’s data for the period 1970 to 2009, and subject to a minimum margin over expected long-term defaults of 50 per cent; — An allowance for a 1-notch downgrade of the asset portfolio subject to credit risk; and — An allowance for short-term downgrades and defaults.
For the purposes of presentation in the EEV results, the results on this basis are reconfigured. Under this approach the projected earned rate of return on the debt securities held is determined after allowing for expected long-term defaults and, where necessary, an additional allowance for an element of short-term downgrades and defaults to bring the allowance in the earned rate up to best estimate levels. The allowances for credit risk premium, 1-notch downgrade and the remaining element of short-term downgrade and default allowances are incorporated into the risk margin included in the discount rate, shown in note 14(iii).
A base level allowance of 50 basis points is applied to cover the non-diversifiable non-market risks associated with the Group’s businesses. For the Group’s US business and UK business other than shareholder-backed annuity, no additional allowance is necessary. For UK shareholder-backed annuity business a further allowance of 50 basis points is used to reflect the longevity risk which is of particular relevance. For the Group’s Asia operations in China, Indonesia, the Philippines, Taiwan, Thailand and Vietnam, additional allowances are applied for emerging market risk ranging from 100 to 250 basis points.
(x) Taxation In determining the post-tax profit for the year for covered business, the overall tax rate includes the impact of tax effects determined on a local regulatory basis. Tax payments and receipts included in the projected cash flows to determine the value of in-force business are calculated using rates that have been announced and substantively enacted by the end of the reporting year.
(xi) Inter-company arrangements The EEV results for covered business incorporate annuities established in the PAC non-profit sub-fund from vesting pension policies in SAIF (which is not covered business). The EEV results also incorporate the effect of the reinsurance arrangement of non-profit immediate pension annuity liabilities of SAIF to PRIL. In addition, the free surplus and value of in-force business are calculated after taking account of the impact of contingent loan arrangements between Group companies (movements in the contingent loan liability are reflected via the projected cash flows in the value of in-force, and the related funding is reflected in free surplus).
(b) Accounting presentation (i) Analysis of post-tax profit To the extent applicable, the presentation of the EEV post-tax profit for the year is consistent in the classification between operating and non-operating results with the basis that the Group applies for the analysis of IFRS basis results. Operating results reflect underlying results including longer-term investment returns (which are determined as described in note 13(b)(ii) below) and incorporate the following: — New business contribution, as defined in note 13(a)(ii); — Unwind of discount on the value of in-force business and other expected returns, as described in note 13(b)(iii); — The impact of routine changes of estimates relating to non-economic assumptions, as described in note 13(b)(iv); and — Non-economic experience variances, as described in note 13(b)(v).
In addition, non-operating profit includes: — The effect on free surplus generated from the disposal of the Japan life business in 2015; — The gain on sale of the PruHealth and PruProtect businesses in 2014; and — The costs associated with the domestication of the Hong Kong branch which became effective on 1 January 2014.
(ii) Investment returns included in operating profit For the investment element of the assets covering the net worth of long-term insurance business, investment returns are recognised in operating results at the expected long-term rate of return. These expected returns are calculated by reference to the asset mix of the portfolio. For the purpose of calculating the longer-term investment return to be included in the operating result of the PAC with-profits fund of UK operations, where assets backing the liabilities and unallocated surplus are subject to market volatility, asset values at the beginning of the reporting period are adjusted to remove the effects of short-term market movements as explained in note 13(b)(iii) below.
(iii) Unwind of discount and other expected returns The unwind of discount and other expected returns is determined by reference to: — The value of in-force business at the beginning of the year (adjusted for the effect of current period economic and operating assumption changes); and
In applying this general approach, the unwind of discount included in operating profit for the with-profits business of UK insurance operations is determined by reference to the opening value of in-force, as adjusted for the effects of short-term investment volatility due to market movements (ie smoothed). In the summary statement of financial position and for total profit reporting, asset values and investment returns are not smoothed. At 31 December 2015 the shareholders’ interest in the smoothed surplus assets used for this purpose only, were £58 million lower (31 December 2014: £194 million lower) than the surplus assets carried in the statement of financial position.
(iv) Effect of changes in operating assumptions Operating profit includes the effect of changes to non-economic assumptions on the value of in-force at the end of the year. For presentational purposes, the effect of change is delineated to show the effect on the opening value of in-force as operating assumption changes, with the experience variance subsequently being determined by reference to the end-of-year assumptions (see note 13(b)(v) below).
(v) Operating experience variances Operating profit includes the effect of experience variances on non-economic assumptions, such as persistency, mortality and morbidity, expenses and other factors, which are calculated with reference to the end-of-year assumptions.
(vi) Effect of changes in economic assumptions Movements in the value of in-force business at the beginning of the year caused by changes in economic assumptions, net of the related change in the time value of cost of options and guarantees, are recorded in non-operating results.
Non-variable annuity: Risk discount rate 3.9 3.9 Additional allowance for credit risk included in risk discount rate note 13 (a)(viii) 1.0 1.0
US 10-year treasury bond rate at end of year 2.3 2.2 Pre-tax expected long-term nominal rate of return for US equities 6.3 6.2 Expected long-term rate of inflation 2.8 2.8 Equity risk premium 4.0 4.0 S&P equity return volatility note (v) 18.0 18.0 * Including the proportion of variable annuity business invested in the general account and fixed index annuity business, the assumed spread margin grades up linearly by 25 basis points to a long-term assumption over five years.
Pre-tax expected long-term nominal rate of return for shareholder-backed annuity business: note
Pre-tax expected long-term nominal rates of investment return: UK equities 6.4 6.2 Overseas equities 6.3 to 9.4 6.2 to 9.0 15-year gilt rate 2.4 2.2 Corporate bonds 4.1 3.8
Expected long-term rate of inflation 3.1 3.0 Equity risk premium 4.0 4.0 * The 2014 risk discount rates exclude the sold PruHealth and PruProtect businesses.
Note For shareholder-backed annuity business, the movements in the pre-tax long-term nominal rates of return and risk discount rates for new and in-force businesses reflect the effect of changes in asset yields (based on average yields for new business).
(iv) Asia operations — The stochastic cost of guarantees is primarily of significance for the Hong Kong, Korea, Malaysia, Singapore and Taiwan operations. — The principal asset classes are government and corporate bonds. — The asset return models are similar to the models as described for UK insurance operations below. — The volatility of equity returns ranges from 18 per cent to 35 per cent, and the volatility of government bond yields ranges from 0.9 per cent to 2.3 per cent for both years.
(v) US operations (Jackson) — Interest rates and equity returns are projected using a log-normal generator reflecting historical market data. — Corporate bond returns are based on treasury yields plus a spread that reflects current market conditions. — The volatility of equity returns ranges from 18 per cent to 27 per cent, and the standard deviation of interest rates ranges from 2.2 per cent to 2.5 per cent for both years.
Assumptions required in the calculation of the value of options and guarantees, for example relating to volatilities and correlations, or dynamic algorithms linking liabilities to assets, have been set equal to the best estimates and, wherever material and practical, reflect any dynamic relationships between the assumptions and the stochastic variables.
— Expenditure of the Asia regional head office that is not allocated to the covered business or asset management operations which is charged as incurred. These costs are primarily for corporate related activities and are included within corporate expenditure.
Individual annuities 565 1,065 – – 57 106 565 1,065 Bonds 3,327 2,934 – – 333 294 3,328 2,937 Corporate pensions 175 92 135 138 152 147 600 592 Individual pensions 1,185 508 32 22 150 72 1,295 595 Income drawdown 1,024 352 – – 102 35 1,024 352 Other products 679 20 12 6 80 9 749 54
Total retail note (iv) 6,955 4,971 179 166 874 663 7,561 5,595 Wholesale 1,508 1,710 – – 151 171 1,508 1,710
profits for shareholders. The amounts shown are not, and not intended to be, reflective of premium income recorded in the IFRS income statement. (ii) New business in China is included at Prudential’s 50 per cent interest in the China life operation. (iii) New business in India is included at Prudential’s 26 per cent interest in the India life operation. (iv) The 2014 UK and Europe insurance operations comparatives have been adjusted to exclude the contribution from the sold PruHealth and PruProtect
businesses (APE sales of £23 million and PVNBP of £166 million), following the disposal of our 25 per cent interest in the businesses in November 2014.
The directors have chosen to prepare supplementary information in accordance with the EEV Principles issued in May 2004 by the European CFO Forum as supplemented by the Additional Guidance on EEV Disclosures issued in October 2005 and the Additional Guidance on the impact of Solvency II issued in October 2015.
In our opinion, the EEV basis supplementary information of the Company for the year ended 31 December 2015 has been properly prepared, in all material respects, in accordance with the European Embedded Value Principles issued in May 2004 by the European CFO Forum as supplemented by the Additional Guidance on European Embedded Value Disclosures issued in October 2005 and the Additional Guidance on the impact of Solvency II issued in October 2015 (together ‘the EEV Principles’) using the methodology and assumptions set out in the Notes on the EEV basis results.
) basis results 7 A dditional inform ation 7 332 Index to the additional unaudited financial information 358 Risk factors 364 Glossary 368 Shareholder information 371 How to contact us
I. IFRS profit and loss information 333 a Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term investment returns by driver 338 b Asia operations – analysis of IFRS operating profit by territory 339 c Analysis of asset management operating profit based on longer-term investment returns 340 d Contribution to UK Life financial metrics from specific management actions undertaken to position the balance sheet more effectively under the new Solvency II regime
(VIF) and required capital to free surplus 350 f Foreign currency source of key metrics 351 g Option schemes 353 h Selected historical financial information of Prudential 355 i Effect of Solvency II on EEV basis results on 1 January 2016
— DAC adjustments comprise DAC amortisation for the year, excluding amounts related to short-term fluctuations in investment returns, net of costs deferred in respect of new business.
Margin on revenues 1,732 – 179 1,911 Expenses: DAC adjustments note (vi) 124 218 (2) 340
Margin on revenues 1,732 1,545 1,532 Expenses: DAC adjustments note (vi) 124 92 92
— Insurance margin increased by 17 per cent at constant exchange rates to £783 million in 2015, predominantly reflecting the continued growth of the in-force book, which contains a relatively high proportion of risk-based products.
— Administration expenses increased by 14 per cent at constant exchange rates to £701 million in 2015 as the business continues to expand. At constant exchange rates, the administration expense ratio has increased from 253 basis points in 2014 to 258 basis points in 2015, the result of changes to product and country mix.
— Fee income increased by 11 per cent at constant exchange rates (AER 19 per cent) to £1,672 million in 2015, primarily due to higher average separate account balances reflecting positive net cash flows from variable annuity business. Fee income margin has remained broadly in line with the prior year at 192 basis points (2014 CER: 194 basis points and AER: 193 basis points).
— Insurance margin represents operating profits from insurance risks, including variable annuity guarantees and other sundry items. Insurance margin increased to £796 million in 2015 compared to £722 million in the previous year at constant exchange rates, primarily due to higher fee income from variable annuity guarantees following positive net flows in recent periods into variable annuity business with guarantees. REALIC contributed £215 million to this total (2014: £233 million at constant exchange rates).
— Acquisition costs, which are commissions and expenses incurred to acquire new business, including those that are not deferrable, decreased in absolute terms at constant exchange rates in line with trends observed in recent years. As a percentage of APE sales, acquisition costs have decreased to 54 per cent, compared to 57 per cent in 2014. This is due to the continued increase in producers selecting asset-based commissions which are treated as an administrative expense in this analysis, rather than front-end commissions.
Analysis of UK operating profit drivers: — Spread income reduced from £272 million in 2014 to £258 million in 2015, mainly due to lower annuity new business profit post the reforms brought about by Pension Freedoms.
— Fee income principally represents asset management fees from unit-linked business, including direct investment only business to group pension schemes, where liability flows are driven by a small number of large single mandate transactions and fee income mostly arises within our UK asset management business. Excluding these schemes, the fee margin on the remaining balances was 43 basis points (2014: 41 basis points).
— With-profits transfers increased from £255 million in 2014 to £269 million in 2015, due to an increase in terminal bonus rates. — Insurance margin increased to £180 million in 2015, reflecting the higher contribution from longevity reinsurance transactions undertaken during the first half of the year, positive experience in the year and the modest net effect of the annual review of assumptions.
translating prior year results using the current year foreign exchange rates. All CER profit figures have been translated at current year average rates. For Asia CER average liability calculations, the policyholder liabilities have been translated using current year opening and closing exchange rates. For the US CER average liability calculations, the policyholder liabilities have been translated at the current year month end closing exchange rates. See also note A1.
(vi) The DAC adjustments contain a charge of £3 million in respect of joint ventures in 2015 (2014: AER credit of £11 million).
) basis results 7 A dditional inform ation c Analysis of asset management operating profit based on longer-term investment returns
Operating income (net of commission) note (i) 987 241 130 303 1,661
Notes (i) Operating income and expense includes the Group’s share of contribution from joint ventures (but excludes any contribution from associates).
In the income statement as shown in note B2 of the IFRS financial statements, these amounts are netted, tax deducted and shown as a single amount. (ii) M&G and Eastspring Investments can be further analysed as follows: M&G
I: IFRS profit and loss information continued d Contribution to UK Life financial metrics from specific management actions undertaken to position the balance sheet more effectively under the new Solvency II regime In the second half of 2015 and ahead of securing Solvency II internal model approval, a number of specific actions were taken by Prudential’s UK life business to position the balance sheet more efficiently under the new regime. These actions included extending the reinsurance of longevity risk to cover £8.7 billion of annuity liabilities (on a Pillar 1 basis) by the end of 2015 (end 2014: programme covered £2.3 billion of liabilities). It also included the repositioning of the fixed income asset portfolio, increasing to 95 per cent the proportion that would benefit from the matching adjustment under Solvency II. The effect of these actions on the UK’s long-term IFRS operating profit, underlying free surplus generation and EEV operating profit, is shown in the tables below.
Expected in-force and return on net worth 310 310 620 571
Impact of specific management actions ahead of Solvency II – 75 75 –
UK Life fund paid to the Group 200 193 Shareholder-backed business: Other UK paid to the Group 131 132
M&G remittances to the Group 302 285 PruCap remittances to the Group 55 57
Net remittances to the Group from business units 1,625 1,482 Net interest paid (290) (335) Tax received 145 198 Corporate activities (193) (193) Solvency II costs (16) (23)
Business area: Asia operations 54.0 49.0 US operations 134.6 123.6 UK operations 168.4 169.0
Notes (i) Prudential Group funds under management of £357.0 billion (2014: £341.6 billion) comprise: Total investments per the consolidated statement of financial position 352.0 337.4 Less: investments in joint ventures and associates accounted for using the equity method (1.0) (1.0) Investment properties which are held for sale or occupied by the Group (included in other IFRS captions) 0.4 0.3 Internally managed funds held in joint ventures 5.6 4.9
(ii) External funds shown above as at 31 December 2015 of £151.6 billion (2014: £154.3 billion) comprise £162.7 billion (2014: £167.2 billion) of funds managed by M&G and Eastspring Investments as shown in note (b) below less £11.1 billion (2014: £12.9 billion) that are classified within Prudential Group’s funds.
Note The £162.7 billion (2014: £167.2 billion) investment products comprise £156.7 billion (2014: £162.4 billion) plus Asia Money Market Funds of £6.0 billion (2014: £4.8 billion).
— Transitional measures which have the effect of preserving the Solvency II surplus for our UK business at the same level as under Solvency I, for business written before 1 January 2016.
Analysis of movement in capital position We previously reported our economic capital results at year end 2013 and year end 2014 before there was certainty in the final outcome of Solvency II and before we received internal model approval. The Solvency II results now reflect the output from our approved internal model under the final Solvency II rules. Allowing for this change in basis, the movement from the previously reported economic capital basis solvency surplus at 31 December 2014 to the Solvency II approved internal model surplus at 31 December 2015 is set out in the table below: Analysis of movement in Group surplus £bn
The movement in Group surplus over 2015 is driven by: — Operating experience of £2.4 billion: generated by in-force business and new business written in 2015, including £0.4 billion of benefit from the specific actions taken in the second half of the year to position the balance sheet more efficiently under the new Solvency II regime; — Non-operating experience of £0.6 billion: mainly arising from negative market experience during the year; and — Other capital movements: comprising an increase in capital from subordinated debt issuance, a gain from positive foreign currency translation effects and a reduction in surplus from payment of dividends.
In addition, the methodology and calibration changes arising from Solvency II relate to: — A £0.2 billion reduction in surplus due to an increase in the Solvency Capital Requirement from strengthening of internal model calibrations, mainly relating to longevity risk, operational risk, credit risk and correlations, and a corresponding increase in the risk margin, which is partially offset by UK transitionals; and
Economic capital position at 1 January 2015 17.9 8.2 9.7 218%
Estimated Solvency II position at 31 December 2015 20.1 10.4 9.7 193%
Reconciliation of IFRS equity to Group Solvency II Own Funds 31 December £bn
IFRS shareholders’ equity 13.0 Restate US insurance entities from IFRS onto local US statutory basis (1.5) Remove DAC, goodwill and intangibles (3.7) Add subordinated-debt 4.4 Impact of risk margin (net of transitionals) (2.5) Add value of shareholder-transfers 3.1 Liability valuation differences 8.6 Increase in value of net deferred tax liabilities (resulting from valuation differences above) (0.9) Other (0.4)
— A 100 basis points increase in credit spreads (with credit defaults of 10 times the expected level in Jackson) would reduce surplus by £1.2 billion and reduce the solvency ratio to 187 per cent.
On the same basis as above, the estimated UK Solvency II surplus at 31 December 2015 was £3.3 billion. This relates to shareholderbacked business including the shareholders’ share of future with-profits transfers, but excludes the shareholders’ share of the estate in line with Solvency II requirements.
While the surplus position of the UK with-profits funds remains strong on a Solvency II basis, it is ring-fenced from the shareholder balance sheet and is therefore excluded from both the Group and the UK shareholder Solvency II surplus results. The estimated UK with-profits funds Solvency II surplus at 31 December 2015 was £3.2 billion.
IFRS unallocated surplus of UK with-profits funds 10.5 Existing adjustments from IFRS to Solvency I in Capital Position Statement: Value of shareholder transfers (2.1) Other valuation differences (0.7)
UK shareholder sensitivity analysis At 31 December 2015, the estimated sensitivity of the UK shareholder Solvency II surplus to significant changes in market conditions is as follows: — An instantaneous 20 per cent fall in equity markets would reduce surplus by £0.4 billion; — A 40 per cent fall in equity markets would reduce surplus by £0.8 billion; — A 50 basis points reduction in interest rates (subject to a floor of zero and allowing for transitional recalculation) would reduce surplus by £0.7 billion; — A 100 basis points increase in interest rates (allowing for transitional recalculation) would increase surplus by £0.9 billion; — A 100 basis points increase in credit spreads would reduce surplus by £0.2 billion; and — 15 per cent of the UK annuity portfolio downgrading by one whole letter rating would reduce surplus by £0.5 billion.
d IGD capital position at 31 December 2015 Up to 31 December 2015, Prudential was subject to the capital adequacy requirements of the European Union Insurance Groups Directive as implemented by the Prudential Regulation Authority in the UK. The Insurance Groups Directive capital surplus represents the aggregated surplus capital (on a Prudential Regulation Authority consistent basis) of the Group’s regulated subsidiaries less the Group’s borrowings. No diversification benefit is recognised. We estimate that our Insurance Groups Directive capital surplus is £5.5 billion at 31 December 2015 (before taking into account 2015 second interim ordinary and special dividends), with available capital covering our capital requirements 2.5 times. This compares to a capital surplus of £4.7 billion at the end of 2014 (before taking into account the 2014 final dividend).
Offset by: — Final 2014 dividend of £0.7 billion and first interim 2015 dividend of £0.3 billion; and — External financing costs and other central costs, net of tax, of £0.6 billion.
) basis results 7 A dditional inform ation e Reconciliation of expected transfer of value of in-force business (VIF) and required capital to free surplus The tables below show how the value of in-force business (VIF) generated by the in-force long-term business and the associated required capital is modelled as emerging into free surplus over the next 40 years. Although a small amount (less than 3 per cent) of the Group’s embedded value emerges after this date, analysis of cash flows emerging in the years shown in the tables is considered most meaningful. The modelled cash flows use the same methodology underpinning the Group’s embedded value reporting and so are subject to the same assumptions and sensitivities used to prepare our 2015 results.
Undiscounted expected free surplus generation for years 2016 to 2055 3,858 2,011 765 6,634
II: Other information continued e Reconciliation of expected transfer of value of in-force business (VIF) and required capital to free surplus continued The undiscounted expected free surplus generation from all in-force business at 31 December 2015 shown below can be reconciled to the amount that was expected to be generated as at 31 December 2014 as follows: Group £m £m £m £m £m £m Other £m Total £m 2014 expected free surplus generation for years 2015 to 2054 2,513 2,336 2,228 2,141 2,179 2,079 33,666 47,142
Add: Expected free surplus to be generated in year 2055* – – – – – – 355 355
Add: Expected free surplus to be generated in year 2055* – – – – – – 315 315
Non-operating and other movements – (33) (39) (31) (35) (29) (827) (1,020)
Add: Expected free surplus to be generated in year 2055* – – – – – – – –
Total 2014 expected free surplus generation for years 2015 to 2054 506 514 501 503 494 482 9,035 12,035
Less: Amounts expected to be realised in the current year (506) – – – – – – (506)
New business – 28 28 29 29 33 618 765 Operating movements – (2) 13 15 9 4 Non-operating and other movements – (54) (32) (41) (29) (20) (327) (464)
2015 expected free surplus generation for years 2016 to 2055 – 486 510 506 503 499 9,366 11,870 * Excluding 2015 new business.
At 31 December 2015 the total free surplus expected to be generated over the next five years (2016 to 2020 inclusive), using the same assumptions and methodology as those underpinning our 2015 embedded value reporting was £12.2 billion, an increase of £1.2 billion from the £11.0 billion expected over the same period at the end of 2014.
This increase primarily reflects the new business written in 2015, which is expected to generate £1,556 million of free surplus over the next five years.
Transfer to free surplus in 2015 974 1,064 573 2,611 Expected return on free assets 30 42 47 119 Changes in operating assumptions and experience variances (19) 320 258 559
Total EEV for life operations 32,777 f Foreign currency source of key metrics The tables below show the Group’s key free surplus, IFRS and EEV, metrics analysis by contribution by currency group: Free surplus and IFRS 2015 results
Total Asia 57 50 44 UK sterling notes 3,4 12 13 32
The weighted average share price of Prudential plc for the year ended 31 December 2015 was £15.49 (2014: £13.75). Particulars of options granted to directors are included in the Directors’ remuneration report on page 101. The closing price of the shares immediately before the date on which the options were granted during the current period was £13.80. The following analyses show the movement in options for each of the option schemes for the year ended 31 December 2015.
The total number of securities available for issue under the scheme is 3,687,737 which represents 0.143 per cent of the issued share capital at 31 December 2015.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £15.44.
The total number of securities available for issue under the scheme is 941,149 which represents 0.037 per cent of the issued share capital at 31 December 2015.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the current period was £15.55.
Prudential International Assurance sharesave plan There are no securities available for issue under the scheme at 31 December 2015.
Date of grant Exercise price £ Beginning End Beginning of year Granted Exercised Cancelled Forfeited Lapsed End of year
Benefits and claims and movement in unallocated surplus of with-profits funds, net of reinsurance (29,656) (50,169) (43,154) (45,144) (28,706)
Share of profits from joint ventures and associates, net of related tax 238 303 147 135 76
Profit before tax (being tax attributable to shareholders’ and policyholders’ returns) note 1 3,321 3,154 2,082 3,117 1,859
II: Other information continued h Selected historical financial information of Prudential continued Supplementary EEV income statement data (post-tax)
Operating earnings per share (in pence) 191.2p 160.7p 165.0p 124.9p 116.0p
As of and for the year ended 31 December 2015 £m 2014 £m 2013 £m 2012 £m 2011 £m
Core structural borrowings of shareholder-financed operations 5,011 4,304 4,636 3,554 3,611
of short-term fluctuations in investment returns against long-term assumptions, gain on dilution of Group’s holdings, the costs arising from the domestication of the Hong Kong business, and profit (loss) attached to the sale of Japan life. Separately on the IFRS basis, operating profit also excludes amortisation of acquisition accounting adjustments. In addition, for EEV basis results, operating profit excludes the effect of changes in economic assumptions, the market value movement on core borrowings and in 2012, the gain arising on the acquisition of REALIC.
3 Funds under management comprise funds of the Group held in the statement of financial position and external funds that are managed by Prudential asset management operations.
) basis results 7 A dditional inform ation i Effect of Solvency II on EEV basis results on 1 January 2016 i Group summary 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 and profile of free surplus generation for these businesses will continue to be driven by local regulatory and target capital requirements. For the UK insurance operations Solvency II will impact the EEV results as it changes the local regulatory valuation of net worth and capital requirements, affecting the components of the EEV and the expected profile of free surplus generation. In line with guidance provided by the CFO Forum in October 2015, the impact of Solvency II on the UK EEV has not been included in the main supplementary reporting. An early estimate on the likely impact of Solvency II on the EEV net worth and value of in-force business, together with the impact on free surplus generation is provided in this section of the additional unaudited information.
Solvency II impact on net worth 3,108 Solvency II impact on net VIF (3,412)
ii Expected transfer of value of in-force business and required capital to free surplus The tables below show how the UK value of in-force business and the associated required capital is expected to emerge into free surplus over the next 40 years. A comparison is shown between the current Solvency I and Solvency II regimes. A small amount (less than 3 per cent) of the Group’s embedded value emerges after this date. The modelled cash flows use the methodology underpinning the Group’s embedded value reporting, updated under Solvency II.
II: Other information continued i Effect of Solvency II on EEV basis results on 1 January 2016 continued a Undiscounted expected generation from all in-force business at 31 December 2015 is as follows: Undiscounted expected generation 2015
) basis results 7 A dditional inform ation b The equivalent discounted amounts of the undiscounted totals shown above are as follows: Discounted expected generation 2015
Prudential’s businesses are inherently subject to market fluctuations and general economic conditions Prudential’s businesses are inherently subject to market fluctuations and general economic conditions. Uncertainty or negative trends in international economic and investment climates could adversely affect Prudential’s business and profitability. Since 2008 Prudential has operated against a challenging background of periods of significant volatility in global capital and equity markets, interest rates (which in some jurisdictions have become negative) and liquidity, and widespread economic uncertainty. For example, government interest rates remain at or near historic lows in the US, the UK and some Asian countries in which Prudential operates. These factors have, at times during this period, had a material adverse effect on Prudential’s business and profitability.
In the future, the adverse effects of such factors would be felt principally through the following items: — investment impairments and/or reduced investment returns, which could reduce Prudential’s capital and impair its ability to write significant volumes of new business, increase the potential adverse impact of product guarantees, or have a negative impact on its assets under management and profit; — higher credit defaults and wider credit and liquidity spreads resulting in realised and unrealised credit losses; — failure of counterparties who have transactions with Prudential (eg banks and reinsurers) to meet commitments that could give rise to a negative impact on Prudential’s financial position and on the accessibility or recoverability of amounts due or, for derivative transactions, adequate collateral not being in place; — estimates of the value of financial instruments being difficult because in certain illiquid or closed markets, determining the value at which financial instruments can be realised is highly subjective. Processes to ascertain such values require substantial elements of judgement, assumptions and estimates (which may change over time); and
Global financial markets are subject to uncertainty and volatility created by a variety of factors, including concerns over the energy and commodity sectors, sovereign debt, general slowing in world growth, the monetary policies in the US, the UK and other jurisdictions and potentially negative socio-political events. In addition, a possible withdrawal of the UK from the EU would have political, legal and economic ramifications for both the UK and the EU, although these are expected to be more pronounced on the UK.
Jackson hedges the guarantees on its variable annuity book on an economic basis (with consideration of the local regulatory position) and, thus, accepts variability in its accounting results in the short term in order to achieve the appropriate result on these bases. In particular, for Prudential’s Group IFRS reporting, the measurement of the Jackson variable annuity guarantees is typically less sensitive to market movements than for the corresponding hedging derivatives, which are held at market value. However, depending on the level of hedging conducted regarding a particular risk type, certain market movements can drive volatility in
In addition, if a sovereign default or other such events described above were to occur, other financial institutions may also suffer losses or experience solvency or other concerns, and Prudential might face additional risks relating to any debt of such financial institutions held in its investment portfolio. There is also risk that public perceptions about the stability and creditworthiness of financial institutions and the financial sector generally might be affected, as might counterparty relationships between financial institutions. If a sovereign were to default on its obligations, or adopt policies that devalue or otherwise alter the currencies in which its obligations are denominated this could have a material adverse effect on Prudential’s financial condition and results of operations.
Prudential conducts its businesses subject to regulation and associated regulatory risks, including the effects of changes in the laws, regulations, policies and interpretations and any accounting standards in the markets in which it operates Changes in government policy and legislation (including in relation to tax and capital controls), regulation or regulatory interpretation applying to companies in the financial services and insurance industries in any of the markets in which Prudential operates, which in some circumstances may be applied retrospectively, may adversely affect Prudential’s product range, distribution channels, competitiveness, profitability, capital requirements and, consequently, reported results and financing requirements. Also, regulators in jurisdictions in which Prudential operates may change the level of capital required to be held by individual businesses or could introduce possible changes in the regulatory framework for pension arrangements and policies, the regulation of selling practices and solvency requirements. In addition, there could be changes to the maximum level of nondomestic ownership by foreign companies in certain jurisdictions. Furthermore, as a result of interventions by governments in response to recent financial and global economic conditions, it is widely expected that there will continue to be a substantial increase in government regulation and supervision of the financial services industry, including the possibility of higher capital requirements, restrictions on certain types of transactions and enhanced supervisory powers.
The G-SII regime also introduces two types of capital requirements. The first, a Basic Capital Requirement (BCR), is designed to act as a minimum group capital requirement and the second, a Higher Loss Absorption (HLA) requirement reflects the drivers of the assessment of G-SII designation. The IAIS intends for these requirements to take effect from January 2019, but G-SIIs will be expected to privately report to their group-wide supervisors in the interim.
The IAIS is also developing ComFrame which is focused on the supervision of large and complex Internationally Active Insurance Groups (IAIGs). ComFrame will establish a set of common principles and standards designed to assist regulators in addressing risks that arise from insurance groups with operations in multiple jurisdictions. As part of this, work is under way to develop a global Insurance Capital Standard (ICS) that would apply to IAIGs. Once the development of the ICS has been concluded, it is intended to replace the BCR as the minimum group capital requirement for G-SIIs. Further consultations on the ICS are expected over the coming years, and a version of the ICS is expected to be adopted as part of ComFrame in late 2019.
The Group’s accounts are prepared in accordance with current International Financial Reporting Standards (IFRS) applicable to the insurance industry. The International Accounting Standards Board (IASB) introduced a framework that it described as Phase I, which permitted insurers to continue to use the statutory basis of accounting for insurance assets and liabilities that existed in their jurisdictions prior to January 2005. In July 2010, the IASB published its first Exposure Draft for its Phase II on insurance accounting, which would introduce significant changes to the statutory reporting of insurance entities that prepare accounts according to IFRS. A revised Exposure Draft was issued in June 2013. The IASB is currently redeliberating the Exposure Draft proposals in light of comments by the insurance industry and other respondents. The timing of the final proposals taking effect is uncertain but not expected to be before 2020.
Litigation, disputes and regulatory investigations may adversely affect Prudential’s profitability and financial condition Prudential is, and may be in the future, subject to legal actions, disputes and regulatory investigations in various contexts, including in the ordinary course of its insurance, investment management and other business operations. These legal actions, disputes and investigations may relate to aspects of Prudential’s businesses and operations that are specific to Prudential, or that are common to companies that operate in Prudential’s markets. Legal actions and disputes may arise under contracts, regulations (including tax) or from a course of conduct taken by Prudential, and may be class actions. Although Prudential believes that it has adequately provided in all material aspects for the costs of litigation and regulatory matters, no assurance can be provided that such provisions are sufficient. Given the large or indeterminate amounts of damages sometimes sought, other sanctions that might be applicable and the inherent
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 361 unpredictability of litigation and disputes, it is possible that an adverse outcome could, from time to time, have an adverse effect on Prudential’s reputation, results of operations or cash flows.
In Asia, the Group’s principal competitors in the region are international financial companies, including global life insurers such as Allianz, AXA, AIA and Manulife, and multinational asset managers such as J.P. Morgan Asset Management, Schroders, HSBC Global Asset Management and Franklin Templeton. In a number of markets, local companies have a very significant market presence.
Jackson’s competitors in the US include major stock and mutual insurance companies, mutual fund organisations, banks and other financial services companies such as AIG, AXA Financial Inc., Allianz, Prudential Financial, Lincoln National, MetLife and Aegon.
Prudential plc’s long-term senior debt is rated as A2 by Moody’s, A+ by Standard & Poor’s and A by Fitch. These ratings are all on a stable outlook.
Adverse experience in the operational risks inherent in Prudential’s business could disrupt its business functions and have a negative impact on its results of operations Operational risks are present in all of Prudential’s businesses, including the risk of direct or indirect loss resulting from inadequate or failed internal and external processes, systems and human error or from external events. Prudential’s business is dependent on processing a large number of transactions across numerous and diverse products, and is subject to a number of different legal and regulatory regimes. Further, because of the long-term nature of much of the Group’s business, accurate records have to be maintained for significant periods.
These factors, among others, result in significant reliance on and require significant investment in information technology (IT), compliance and other operational systems, personnel and processes. In addition, Prudential outsources several operations, including a significant part of its UK back office and customer facing functions as well as a number of IT functions, resulting in reliance upon the operational processing performance of its outsourcing partners.
Although Prudential’s IT, compliance and other operational systems and processes incorporate controls designed to manage and mitigate the operational risks associated with its activities, there can be no assurance that such controls will always be effective. Due to human error among other reasons, operational incidents do happen periodically and no system or process can entirely prevent them although there have not been any material such events to date. Prudential’s legacy and other IT systems and processes, as with operational systems and processes generally, may be susceptible to failure or breaches.
Attempts by third parties to disrupt Prudential’s IT systems could result in loss of trust from Prudential’s customers, reputational damage and financial loss Being part of the financial services sector, Prudential and its business partners are increasingly exposed to the risk that third parties may attempt to disrupt the
Risk factors continued availability, confidentiality and integrity of its IT systems, which could result in disruption to the key operations, make it difficult to recover critical services, damage assets and compromise data (both corporate or customer). This could result in loss of trust from Prudential’s customers, reputational damage and financial loss. The cyber-security threat continues to evolve globally in sophistication and potential significance. As a result of Prudential’s increasing market profile, the growing interest by customers to interact with their insurance provider and asset manager through the internet and social media, improved brand awareness and the classification of Prudential as a G-SII, there is an increased likelihood of Prudential being considered a target by cyber criminals. Prudential has not identified a failure or breach which has had a material impact in relation to its legacy and other IT systems and processes to date. However, it has been, and likely will continue to be, subject to computer viruses, attempts at unauthorised access and cyber-security attacks such as ‘denial of service’ attacks (which, for example, can cause temporary disruption to websites and IT networks), phishing and disruptive software campaigns.
Adverse experience relative to the assumptions used in pricing products and reporting business results could significantly affect Prudential’s results of operations In common with other life insurers, the profitability of the Group’s businesses depends on a mix of factors including mortality and morbidity levels and trends, policy surrenders and take-up rates on guarantee features of products, investment performance and impairments, unit cost of administration and new business acquisition expenses.
Prudential needs to make assumptions about a number of factors in determining the pricing of its products, for setting reserves, and for reporting its capital levels and the results of its long-term business operations. For example, the assumption that Prudential makes about future expected levels of mortality is particularly relevant for its UK annuity business, where payments are guaranteed for at least as long as the policyholder is alive. Prudential conducts rigorous research into longevity risk, using industry data as well as its own substantial annuitant experience. As part of its pension annuity pricing and reserving policy, Prudential’s UK business assumes that current rates of mortality continuously improve over time at levels based on adjusted data and informed by models from the Continuous Mortality Investigation (CMI) as published by the Institute and Faculty of Actuaries. Assumptions about future expected levels of mortality are also of relevance to the Guaranteed Minimum Withdrawal Benefit (GMWB) of Jackson’s variable annuity business. If mortality improvement rates significantly exceed the improvement assumed, Prudential’s results of operations could be adversely affected.
A further factor is the assumption that Prudential makes about future expected levels of the rates of early termination of products by its customers (known as persistency). This is particularly relevant to its lines of business other than its UK annuity business, especially Jackson’s portfolio of traditional and variable annuities. Prudential’s persistency assumptions reflect recent past experience for each relevant line of business. Any expected change in future persistency is also reflected in the assumption. If actual levels of future persistency are significantly different from assumed, the Group’s results of operations could be adversely affected. Furthermore, Jackson’s variable annuity products are sensitive to other types of policyholder behaviour, such as the take-up of its GMWB product features.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 363 shareholder (in its capacity as such) against Prudential and/or its directors and/or its professional service providers. It also applies to legal proceedings between Prudential and its directors and/or Prudential and Prudential’s professional service providers that arise in connection with legal proceedings between the shareholder and such professional service provider. This provision could make it difficult for US and other non-UK shareholders to enforce their shareholder rights.
Asset backed security A security whose value and income payments are derived from and collateralised (or ‘backed’) by a specified pool of underlying assets. The pool of assets is typically a group of small and illiquid assets that are unable to be sold individually.
CER Constant Exchange Rates – Prudential plc reports its results at both actual exchange rates (AER) to reflect actual results and also constant exchange rates (CER) so as to eliminate the impact from exchange translation. CER results are calculated by translating prior period results using current period foreign currency exchange rates, ie, current period average rates for the income statements and current period closing rate for the balance sheet.
Fixed annuities Fixed annuity contracts written in the US which allow for tax-deferred accumulation of funds, are used for asset accumulation in retirement planning and for providing income in retirement and offer flexible pay-out options. The contract holder pays the insurer a premium, which is credited to the contract holders’ account. Periodically, interest is credited to the contract holders’ account and administrative charges are deducted, as appropriate.
Fixed indexed annuities These are similar to fixed annuities in that the contract holder pays the insurer a premium, which is credited to the contract holder’s account and, periodically, interest is credited to the contract holder’s account and administrative charges are deducted, as appropriate. An annual minimum interest rate may be guaranteed, although
Time value of options and guarantees The value of financial options and guarantees comprises two parts, the intrinsic value and the time value. The intrinsic value is given by a deterministic valuation on best estimate assumptions. The time value is the additional value arising from the variability of economic outcomes in the future.
The Group maintains a corporate website containing a wide range of information relevant for private and institutional investors, including the Group’s financial calendar: www.prudential.co.uk
Details of the 2015 Annual General Meeting, including the major items discussed at the meeting and the results of the voting, can be found on the Company’s website.
Company constitution Prudential is governed by the Companies Act 2006, other applicable legislation and regulations, and provisions in its Articles of Association. Any change to the Articles of Association must be approved by special resolution of the shareholders. There were no changes to the constitutional documents during 2015. The Memorandum and Articles of Association are available on the Company’s website.
Issued share capital The issued share capital as at 31 December 2015 consisted of ordinary shares of 5 pence each, all fully paid up and listed on the London Stock Exchange and the Hong Kong Stock Exchange. Further information can be found in note C10 on page 261.
As at 8 March 2016, Trustees held 0.45 per cent of the issued share capital under the various plans in operation.
Restrictions on transfer In accordance with English company law, shares may be transferred by an instrument of transfer or through an electronic system (currently CREST) and transfer is not restricted except that the Directors may, in certain circumstances, refuse to register transfers of shares but only if such refusal does not prevent dealings in the shares from taking place on an open and proper basis. If the Directors make use of that power, they must send the transferee notice of the refusal within two months.
Major shareholders The following notifications have been disclosed under the FCA’s Disclosure and Transparency Rules in respect of notifiable interests exceeding 3 per cent in the voting rights of the issued share capital.
On 5 February 2016, the Capital Group Companies, Inc. notified that their holding had increased to 10.135 per cent of the issued share capital.
Details of shares issued during 2014 and 2015 are given in note C10 on page 261.
For enquiries about shareholdings, including dividends and lost share certificates, please contact the Company’s registrars: Register By post By telephone
Singapore registers Shareholders who have shares standing to the credit of their securities accounts with The Central Depository (PTE) Limited (CDP) in Singapore may refer queries to the CDP at 9 North Buona Vista Drive, #01-19/20, The Metropolis, Singapore 138588. Enquiries regarding shares held in Depository Agent Sub-accounts should be directed to your Depository Agent or broker.
Dividend mandates Shareholders may have their dividends paid directly to their bank or building society account. If you wish to take advantage of this facility, please call Equiniti and request a Cash Dividend Mandate form. Alternatively, shareholders may download the form from www.prudential.co.uk/prudential-plc/ investors/shareholder_services/forms
Income tax: changes to dividend taxation The UK government has announced that from 6 April 2016 the Dividend Tax Credit will be replaced by a new tax-free Dividend Allowance for shareholders subject to UK income tax. This will be in the form of a 0 per cent tax rate on the first £5,000 of dividend income per year. UK residents will pay tax on any dividends received over the £5,000 allowance at the following rates: — 7.5 per cent on dividend income within the basic rate (20 per cent) band; — 32.5 per cent on dividend income within the higher rate (40 per cent) band; and
— 38.1 per cent on dividend income within the additional rate (45 per cent) band.
Electronic communications Shareholders are encouraged to elect to receive shareholder documents electronically by registering with Shareview at www.shareview.co.uk This will save on printing and distribution costs, and create environmental benefits. Shareholders who have registered will be sent an email notification whenever shareholder documents are available on the Company’s website and a link will be provided to that information. When registering, shareholders will need their shareholder reference number which can be found on their share certificate or proxy form. The option to receive shareholder documents electronically is not available to shareholders holding shares through The CDP. Please contact Equiniti if you require any assistance or further information.
ShareGift Shareholders who have only a small number of shares, the value of which makes them uneconomic to sell, may wish to consider donating them to ShareGift (Registered Charity 1052686). The relevant share transfer form may be downloaded from our website www.prudential.co.uk/prudential-plc/ investors/shareholder_services/forms or from Equiniti. Further information about ShareGift may be obtained on +44 (0)20 7930 3737 or from www.ShareGift.org
Barry Stowe Chairman & Chief Executive Officer of North America Business Unit
Successive generations have looked to Prudential to safeguard their financial security – from industrial workers and their families in Victorian Britain to around 24 million insurance customers worldwide today. Our financial strength, heritage, prudence and focus on our customers’ long‑term needs ensure that people continue to turn to our trusted brands to help them plan for today and tomorrow.
Prudential is established as Prudential Mutual Assurance Investment and Loan Association in Hatton Garden, London, offering loans and life assurance to professional people.
Prudential acquires M&G, pioneer of unit trusts in the UK and a leading provider of investment products.
Prudential acquires businesses in Ghana and Kenya, marking its entry into the fast-growing African life insurance industry.