Utilising our capabilities, footprints and scale we design innovative products that align with customer needs
Equally, we continue to attract the best talent from across the industry, as shown in Anne Richards’ forthcoming arrival as the new Chief Executive of M&G. I would like to take this opportunity to thank Michael McLintock for his 19 years of exceptional service and to wish him well for his retirement from the Group.
Alongside these activities, we also carry out wide-ranging and highly impactful corporate responsibility programmes. We have continued to build on our work in this area. In partnership with charities and non-governmental organisations we have sought to make a real difference to lives in the markets where we operate. These programmes mean a great deal to the many thousands of staff who volunteer for them – something I have seen first-hand.
Chief Financial Officer’s report on our 2015 performance page 36 £4,007m IFRS operating profit increase on 2014
In the UK, our life business is proving adept at navigating the significant changes brought about by pension reforms and is successfully extending its product offering to meet evolving consumer needs. In asset management, M&G is currently experiencing headwinds but benefits from its scale and the diversity of its asset base. Our well regarded brands, investment performance track record and strong market positioning are key attributes that support our execution in this market.
Our businesses and their performance – UK – Asset management page 32
ne ed s, a ttr ac t n ew m onies and retain ex ist ing asse ts
There is a healthy competitive environment with a good mix of domestic, regional and international companies operating in the markets. However, barriers to entry remain high in terms of the availability of new licences, the need for significant capital investment and the challenges in building distribution scale and quality.
Resilient distribution platform — Leading insurer with scale in agency and bank distribution
— Successfully managed sales of variable annuities with guarantees in line with risk appetite
Providing solutions to retirement challenges The US is the world’s largest retirement savings market with total assets in the annuity sector of over US$2.6 trillion2. Each year, approximately four million baby boomers reach retirement age.
Prudential UK & Europe is a well established provider of retirement income and investment solutions with a focus on helping customers achieve their long-term investment goals.
Broad distribution Our diversified distribution model, focused on both third-party financial advisers and the individual customer through a direct non-advised channel and our own financial planning arm Prudential Financial Planning, has been central to the increase in retail business written in 2015. Distribution through financial advisers continues to be
Equities: Our fund managers have the freedom to develop their own investment approaches. Their main strength lies in stock selection, focusing on fundamental company analysis. M&G’s size and standing enables our fund managers to develop an effective dialogue with the management teams of the companies in which they invest.
— US total operating profit at £1,702 million increased by 9 per cent (18 per cent on an actual exchange rate basis), driven by higher fee income from growth in Jackson’s separate account asset base.
The total costs we have incurred in writing new business and administering the in-force life business also increased but at a more modest rate than total income, highlighting the advantages of increased scale as we build our business, while maintaining control of costs.
Total asset management (including MMF) 28 12,526 (100) 12,481 (100) 162,692 167,180 (3)
Post-tax operating profit Long-term business: Long-term business operating profit2 4,992 4,163 20 4,285 16
on EEV of the difference between the actual investment returns achieved and those assumed in arriving at the reported operating profit.
The movement in the Group Solvency II capital surplus in 2015 was driven by: — Operating experience of £2.4 billion: generated by in-force business and new business written in 2015 and included £0.4 billion of benefit from the specific management 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
At 31 December 2015 our Insurance Groups Directive surplus is estimated at £5.5 billion14, equivalent to a solvency cover of 2.5 times.
The financial strength of the Prudential Assurance Company Limited is rated AA by Standard & Poor’s, Aa3 by Moody’s and AA by Fitch.
Net increase in shareholders’ funds 1,144 2,161 3,198 4,316 Shareholders’ funds at beginning of the year 11,811 9,650 29,161 24,856 Effect of domestication of Hong Kong branch – – – (11)
2 Following the disposal of the Group’s 25 per cent interest in PruHealth and PruProtect in November 2014, the 2014 comparative results of UK insurance operations have been adjusted to exclude results of those businesses.
The Group aims to help customers achieve their long-term financial goals by providing and promoting a range of products and services that meet customer needs, are easy to understand and deliver real value. We recognise that we are implicitly committing to customers that we will maintain a healthy company, and are there to meet our long-term commitments to them.
Operational risk Regulatory and legislative compliance Third-party management IT and information (including cyber security) Business continuity
Our persistency assumptions similarly reflect recent experience for each relevant line of business, and future expectations. Persistency risk is mitigated by appropriate training and sales processes and managed locally post-sale through regular experience monitoring and the identification of common characteristics of poor persistency business. Where appropriate, allowance is also made for the relationship – either assumed or historically observed – between persistency and investment returns, and for the resulting additional risk. Modelling this ‘dynamic’ policyholder behaviour is particularly important when assessing the likely take-up rate of options embedded within product features.
The use of ‘brainstorming’ sessions at various levels of the organisation is used as a central pillar of the emerging risk identification process to identify, develop and challenge potential emerging risks. Input is also taken from external speakers, forums and databases.
This purpose, and this long-term approach, is reinforced by our Group-wide corporate responsibility strategy. Through our corporate responsibility programmes around the world we help to build stronger and more sustainable communities, and in the process provide benefits to our customers, our colleagues and the environment.
While in Asia savings represent 44 per cent of GDP, compared with 18 per cent in the US and 13 per cent in the UK, 60 per cent of assets in Asia are held in cash, compared with 31 per cent in the US and 26 per cent in the UK. These figures illustrate the shortfall in both protection and savings opportunities in the region, and our products and services are designed to help make up that shortfall.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 59 network of investors working together to promote responsible investment practices.
We maintain an inclusive culture that is sensitive to the needs of all employees. In particular, our Group-wide Diversity and Inclusion policy acts to ensure that each of our businesses takes appropriate measures to prevent discrimination in the workplace, and provides equality of opportunity both for our employees and for candidates that wish to join our Group regardless of their sex, race, age, ethnic origin, marital status, pregnancy and maternity, caring responsibilities, civil partnership status, any gender re-assignment, sexual orientation, religion or belief, disability
The drive to continually improve customer service quality has, once again, been reflected in Prudential UK & Europe’s continued success in the Financial Adviser Service Awards, which are voted on by financial advisers. In 2015, Prudential secured the Company of the Year Award for the first time, while retaining its coveted Five Star ratings in the Life and Pensions and Investments categories for the fifth consecutive year.
Across our businesses our commitment to diversity and inclusion is supported by initiatives such as reviews of pay and performance management consistency, providing training to managerial and non-managerial staff, supporting flexible working arrangements, and engaging with recruitment firms to mitigate unconscious bias and diversify the pool of potential candidates. In Prudential Corporation Asia, since 2009 a Financial Literacy for Women programme has shared tips and training on financial planning and management with more than 19,000 female entrepreneurs. Our North American business is involved in the Women of Color STEM Conference, which recognises outstanding women in the science, technology, engineering and mathematics fields; and M&G has introduced the Women in Fund Management Roundtable, an internal network of senior women investors to support a shift in the gender balance within investment functions. Many of our businesses also run apprenticeship schemes.
The diversity of our markets means that our programmes vary from region to region, but a shared focus for our community investment is education and life skills. These activities include financial education, support to improve social mobility and employee volunteering.
The programme offers the opportunity to increase the charitable involvement of Jackson while also developing professional leadership skills for employees, which not only provide valuable contributions to the boards they serve on but also benefit their careers and personal lives. At the conclusion of each Jackson Board Corps class, Jackson’s CSR team helps pair each employee with a charitable organisation in line with their area of interest.
Following a detailed review of the Group’s approach to reporting emissions resulting from investments, investment data has been restated. Due to the changing size and nature of the investment portfolio, absolute and normalised comparisons between years are not comparative. Net lettable area is reported for all properties held within the reporting period. In line with best practice, environmental data is collected for properties at acquisition and at date of divestment, therefore comparisons for absolute change and normalised change are not directly comparative. For more information on sustainability progress, please refer to the annual M&G Real Estate Responsible Property Investment report for further details, including like-for-like comparisons.
Supply chain management It is our policy to work in partnership with third parties whose values and standards are aligned with our Group Code of Business Conduct.
Relevant skills and experience Mike joined Jackson National Life Insurance Company (Jackson), the North American unit of Prudential, in 1995, and became Chief Operating Officer and Vice-Chairman in 2003. In 2011, he was appointed President and Chief Executive Officer of Jackson, and joined the Board of Prudential.
John is Chief Executive of Prudential UK & Europe, a position he has held since January 2016.
Relevant skills and experience David began his career at PwC, where he worked in a variety of roles in the United Kingdom, Switzerland and Hong Kong. He was the Global Leader of PwC’s insurance practice, a Partner in PwC’s UK firm and worked as the Lead Audit Partner for multinational insurance companies until his retirement on 30 June 2015. David has also been responsible for PwC’s insurance and investment management assurance practice in London and the firm’s Scottish assurance division.
Other appointments Kai is a member of the Board of the Casino Regulatory Authority of Singapore, a non-executive director of PSA International Pte. Limited and a director and Chairman of Clifford Capital Pte. Limited. Kai was appointed as a director of Credit Suisse Group AG in April 2013 and became a member of the Singapore Capital Markets Committee of the Monetary Authority of Singapore in January 2014. Kai is also Chairman of Prudential Corporation Asia Limited, a subsidiary of the Company.
From September 1993, she worked at various investment banks leading teams of analysts specialising in property-casualty insurance before joining Morgan Stanley, where she became a Managing Director in 2001 heading the Global Insurance Equity Research team.
Vice-Chairman of Merrill Lynch Europe, Chairman of the Pensions Commission and as a nonexecutive director of Standard Chartered Bank. Lord Turner was Chairman of the UK’s Financial Services Authority (FSA), a member of the international Financial Stability Board and a non-executive director of the Bank of England between 2008 and 2013.
The Senior Independent Director leads the Non-executive Directors in conducting the Chairman’s annual evaluation.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 79
The Chairman is responsible for ensuring that induction programmes are provided for all new directors. These are tailored to reflect the experience of each director and their position as either Executive or Non-executive Directors.
The Senior Independent Director and other Non-executive Directors are available to meet with major shareholders on request.
A full programme of engagement with shareholders, potential investors and analysts, in the UK and overseas, is led each year by the Director of Strategy and Capital Market Relations. In addition, a conference for investors and analysts has been held on a regular basis since 2010, with in-depth business presentations and opportunities for attendees to meet with members of the Board and senior management through the course of the event. Most recently, the Group held a conference for investors in January 2016. The Group Chief Executive, Chief Financial Officer and investor relations team also attend major financial services conferences to present to, and meet with, the
— Takes and manages risk exposures in accordance with the risk appetite, mandate and limits set by the Board; — Identifies and reports the risks that the Group is exposed to, and those that are emerging; — Promptly escalates any limit breaches or any violations of risk-management policies, mandates or instructions; — Identifies and promptly escalates significant emerging risk issues; and
Egon Zehnder were again appointed as the search consultant to review the external market and, where required, to provide support in the assessment of internal candidates.
Mr Wells was selected for the role of Group Chief Executive. Mr Wells has served on the Board since January 2011 as President and Chief Executive of Jackson. He has extensive experience of life insurance, retirement services and asset management, having worked in the sector for 29 years, with 20 of those years spent in senior and strategic positions at Jackson.
In relation to the Group’s Solvency II disclosures, the Committee considered management’s planned approach to disclosures in advance of formal implementation of Solvency II at 1 January 2016 in conjunction with the Group Risk Committee. It considered detailed papers in advance of the December announcement of internal model approval by the PRA and the Investor Day presentation in January 2016. It also reviewed the methodology for the basis of calculation and the disclosures within the supplementary information included in the full-year results announcement and Annual Report and Accounts. The Committee concluded the disclosure was reasonable.
To assess the effectiveness of the auditor, the Committee reviewed the audit approach and strategy and received an internal report on their performance. They also considered findings contained in a report issued following inspection of KPMG’s audit by the Financial Reporting Council’s Audit Quality Review team.
Number of meetings in 2015: Six In addition two joint meetings were held with the Audit Committee.
Risk appetite The Committee considered the Group’s risk appetite including conducting a benchmarking exercise undertaken against comparator businesses considered relevant in terms of size, complexity, geography and business lines. Having reviewed the report and taking account of the Group’s business environment, the Committee concluded that the current risk metrics continued to be appropriate. The Committee considered the effect of the introduction of Solvency II, and recommended alterations to the Group’s risk appetite to the Board, reflecting the introduction of the new capital metric.
In accordance with the requirements of the guidance issued by the Financial Reporting Council in September 2014 ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting’, after making sufficient enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue their operations for a period of at least 12 months from the date that the financial statements are approved. In support of this expectation, the Company’s business activities, together with the factors likely to affect its future development, successful performance and position in the current economic climate are set out in pages 4 to 35. The risks facing the Group’s capital and liquidity positions and their sensitivities are referred to in the Strategic report on pages 45 to 54. Specifically, the Group’s borrowings are detailed in note C6 on pages 241 and 242; the market risk and liquidity analysis associated with the Group’s assets and liabilities can be found in note C3.5(a) on pages 213 to 215; policyholder liability maturity profile by business units in notes C4.1(b), (c) and (d) on pages 222, 224 and 225 respectively; cash flow details in the consolidated statement of cash flows; and provisions and contingencies in notes C12 and D2. The Directors therefore consider it appropriate to continue to adopt the going concern basis of accounting in preparing the financial statements for the year ended 31 December 2015.
This more detailed disclosure complements the retrospective reporting of the three-year IFRS operating profit targets applied to awards made under the PLTIP. The performance period for 2013 PLTIP awards ended on 31 December 2015 and the Group IFRS operating profit target (and the result achieved) for this period is disclosed in the annual report on remuneration.
AIP awards for all Executive Directors are subject to the achievement of financial 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 President and CEO, JNL currently participates in the Jackson Senior Management Bonus Pool as well as in the AIP.
The Chief Executive, M&G has a bonus opportunity of the lower of six times salary or 0.75 per cent of M&G’s IFRS profit. 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.
Director – this was pro-rated for the portion of the year for which she was an Executive Director. 4 Michael McLintock’s annual bonus opportunity in 2015 was the lower of 0.75 per cent of M&G’s IFRS profit and six times annual salary. M&G’s IFRS profit in 2015 was £473.2 million. 5 Barry Stowe was Chief Executive, PCA until 31 May 2015 and was appointed Chairman & CEO, NABU on 1 June 2015. The maximum opportunity shown represents his annual opportunity in his current role – this was pro-rated for the portion of the year he was in this role and he also receives a pro-rated AIP in respect of the portion of the year he was Chief Executive, PCA. In addition to the AIP, he receives 10 per cent share of the Jackson Senior Management Bonus Pool pro-rated for the period he was in his current role. This is determined by the financial performance of Jackson.
Malus and clawback policy During the year the Committee adopted a clawback policy that applies to Executive Directors and members of the GEC. A summary of both this policy and the malus policy is set out below.
Mike Wells Mike Wells did not qualify for matching contributions when he was Chairman & Chief Executive, Jackson, as he was not in that role for the qualifying period during 2015.
Long-term incentives awarded in 2015 2015 share-based long-term incentive awards The table below shows the awards made to Executive Directors in 2015 under share-based long-term incentive plans and the performance conditions attached to these awards: Executive Role
The resulting fees paid to Non-executive Directors are: £000s 2015 fees 2014 fees benefits*
Barry Stowe and Mike Wells changed Board roles during the year. As both these changes resulted in those Executive Directors relocating to enable them to assume their roles, relocation support in line with the approved Directors’ remuneration policy was provided. Details of this support are included in the notes to the 2015 Single Figure table.
Deferred 2013 annual incentive award 2014 30,996 758 31,754 31 Dec 16 1,317
Section C: Balance sheet notes C1 Analysis of Group position by segment and business type 179 C1.1 Group statement of financial position – analysis by segment 184 C1.2 Group statement of financial position – analysis by business type C2 Analysis of segment position by business type 186 C2.1 Asia insurance operations 187 C2.2 US insurance operations 189 C2.3 UK insurance operations 191 C2.4 Asset management operations C3 Assets and liabilities – classification and measurement 192 C3.1 Group assets and liabilities – classification 196 C3.2 Group assets and liabilities – measurement 204 C3.3 Debt securities 211 C3.4 Loans portfolio 213 C3.5 Financial instruments – additional information 213 C3.5(a) Market risk 215 C3.5(b) Derivatives and hedging 216 C3.5(c) Derecognition, collateral and offsetting 217 C3.5(d) Impairment of financial assets
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. For these entities, the following circumstances may indicate, in substance, the Group has power over an entity: — The entity is managed by the Group’s asset manager and the Group holds a significant investment in the entity; and — Where the entity is managed by an asset manager outside the Group, Prudential has existing rights that gives it the ability to direct the current activities of 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.
For those entities managed by the Group’s asset managers, it is generally presumed that the Group is exposed to, or has rights to, variable returns from an entity and has ability to use its power to affect its own returns where the Group’s holding is greater than 50 per cent and is deemed to have no significant influence over an entity for holdings less than 20 per cent. For holdings between 20 per cent and 50 per cent, the Group performs an assessment of power and associated control over an entity on a case-by-case basis. For these entities, the following circumstances may indicate that the Group controls an entity: — The Group has power over the relevant activities of the entity; and — The exposure, or rights, to variable returns (including administrative and performance fees earned by the Group’s asset manager) from the entity is higher than the Group’s interest.
As at 31 December 2015, 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.
A3.1 Accounting policies and use of estimates and judgements continued d Measurement of policyholder liabilities and unallocated surplus of with-profits funds The measurement basis of policyholder liabilities is dependent upon the classification of the contracts under IFRS 4 described in note A3.1(c) above.
vii 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.
ix Financial liabilities designated at fair value through profit or loss Consistent with the Group’s risk management and investment strategy and the nature of the products concerned, the Group has designated under IAS 39 classification certain financial liabilities at fair value through profit or loss as these instruments are managed and their performance evaluated on a fair value basis. These instruments include liabilities related to consolidated collateralised debt obligations and net assets attributable to unit holders of consolidated unit trusts and similar funds.
l Segments Under IFRS 8 ‘Operating Segments’, the Group determines and presents operating segments based on the information that is internally provided to the Group Executive Committee which is the Group’s chief operating decision maker. The operating segments identified by the Group reflect the Group’s organisational structure, which is by both geography (Asia, US and UK) and by product line (insurance operations and asset management). 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. Asset management comprises both internal and third-party asset management services, inclusive of portfolio and mutual fund management, where the Group acts as an adviser, and broker-dealer activities. The nature of the products and the managing of the business differ from the risks inherent in the insurance operations segments, and the regulatory environment of the asset management industry differs from that of the insurance operations segments.
u Intangible assets Intangible assets acquired on the purchase of a subsidiary or portfolio of contracts are measured at fair value on acquisition. Deferred acquisition costs are accounted for as described in notes A3.1(d) and A3.1(f) above. Other intangible assets, such as distribution rights and software, are valued initially at the price paid to acquire them and are subsequently carried at cost less amortisation and any accumulated impairment losses. Distribution rights relate to fees paid under bancassurance partnership arrangements for bank distribution of products for the term of the contract. Amounts for distribution rights are amortised on a basis to reflect the pattern in which the future economic benefits are expected to be consumed by reference to new business production levels. The same principles apply to determining the amortisation method for other intangible assets unless the pattern cannot be determined reliably, in which case a straight-line method is applied. Amortisation of intangible assets is charged to the ‘acquisition costs and other expenditure’ line in the consolidated income statement.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 153 y Foreign exchange The Group’s consolidated financial statements are presented in pounds sterling, the Group’s presentation currency. Accordingly, the results and financial position of foreign subsidiaries must be translated into the presentation currency of the Group from their functional currencies, ie the currency of the primary economic environment in which the entity operates. All assets and liabilities of foreign subsidiaries are converted at year end exchange rates while all income and expenses are converted at average exchange rates where this is a reasonable approximation of the rates prevailing on transaction dates. The impact of these currency translations is recorded as a separate component in the statement of comprehensive income.
Accounting pronouncements not yet endorsed by the EU Amendments to IAS 1 Disclosure Initiative In December 2014, the IASB published ‘Disclosure Initiative (Amendments to IAS 1)’. The amendments aim at clarifying, rather than significantly changing, IAS 1 to address perceived impediments to preparers exercising their judgement in presenting their financial reports. The amendments are effective for annual periods beginning on or after 1 January 2016 and clarify materiality requirements, aggregation of specific line items in the financial statements and ordering of the notes. We have reviewed the amendments and do not envisage any significant change.
commission receivable net of expenses for Prudential-branded general insurance products as part of this arrangement, which terminates at the end of 2016. (ii) Corporate expenditure as shown above is for Group Head Office and Asia Regional Head Office.
Earned premiums, net of reinsurance 10,882 15,389 5,762 – – – – 32,033 – 32,033
The share-based payments charge comprises £10.4 million (2014: £11.0 million), which is determined in accordance with IFRS 2, ‘Share-based Payment’ (see note B3.2) and £5.1 million (2014: £5.2 million) of deferred share awards.
) basis results 7 A dditional inform ation www.prudential.co.uk Annual Report 2015 Prudential plc 175
Effects of non-recurring tax reconciliation items: Adjustments to tax charge in relation to prior years 5 (65) (7) – (67) Movements in provisions for open tax matters (6) – – (5) (11) Impact of changes in local statutory tax rates (5) – (16) (1) (22)
Operating profit based on longer-term investment returns 1,050 1,431 753 (48) 3,186
† In order to show the UK insurance business on a comparable basis, the full year 2014 comparatives exclude the contribution from the sold PruHealth and PruProtect businesses from the UK insurance operations and show it in the column for Other operations.
Short-term fluctuations in investment returns on shareholder-backed business B1.2 (574) 299 (275) (10.8)p (10.8)p
Deferred acquisition costs and other intangible assets C5.2(b) 42 – 8 50 – – – 50
Investments of long-term business and other operations: Investments in joint ventures and associates accounted for using the equity method 434 – 475 125 – – 1,034 1,017
Liabilities held for sale D1 – – – – – – – 770
Equity and liabilities Equity Shareholders’ equity note (vii) – 4,154 4,154 4,067
annuities). Included in the PAC with-profits fund is £10.8 billion (2014: £11.7 billion) of non-profits annuities liabilities. The WPSF’s profits are apportioned 90 per cent to its policyholders and 10 per cent to shareholders as surplus for distribution is determined via the annual actuarial valuation. For the purposes of this table and subsequent explanation, references to the WPSF also include, for convenience, the amounts attaching to the Defined Charges Participating Sub-fund which comprises 4 per cent of the total assets of the WPSF and includes the with-profits annuity business transferred to Prudential from the Equitable Life Assurance Society on 1 December 2007 (with assets of approximately £1.7 billion). Profits to shareholders on this with-profits annuity business emerge on a ‘charges less expenses’ basis and policyholders are entitled to 100 per cent of the investment earnings.
(iii) Other investments comprise: Derivative assets* 1,930 2,344 Partnerships in investment pools and other† 3,556 3,438 * After taking account of derivative liabilities of £2,125 million (2014: £1,381 million), which are also included in the statement of financial position, the overall derivative position was a net liability of £195 million (2014: net asset of £963 million).
Equity securities and portfolio holdings in unit trusts 144,862 – – 144,862 144,862
With-profits Equity securities and portfolio holdings in unit trusts 31,136 2,832 694 34,662
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 which 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 £104,464 million at 31 December 2015 (2014: £107,731 million), £10,331 million are valued internally (2014: £10,093 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.
Assets fair valued at or above book value Book value* 20,229 25,158
After 15 years to 20 years Over 20 years No stated maturity Total
Net (charge) credit for impairment net of reversals (35) 37 * The impairment (charges) reversals relate to loans held by the UK with-profits fund and mortgage loans held by Jackson.
(d) The rate of surrenders for shareholder-backed business (expressed as a percentage of opening liabilities) was 8.7 per cent in 2015, lower than the 10.1 per cent recorded in 2014 (based on opening liabilities).
(b) Net outflows improved from £4,510 million in 2014 to £3,662 million in 2015, due primarily to higher premium flows into our with-profits funds following increased sales into with-profits savings and retirement products. This has been offset by lower premiums into our annuity business following the introduction of pension freedoms and lower level of bulks. The levels of inflows/outflows for unit-linked business is driven by corporate pension schemes with transfers in or out from only a small number of schemes influencing the level of flows in the year.
Provision is made for the risks attaching to some SAIF unitised with-profits policies that have (Market Value Reduction) MVR-free dates and for those SAIF products which have a guaranteed minimum benefit on death or maturity of premiums accumulated at 4 per cent per annum.
New mortality projection models are released annually by the Continuous Mortality Investigation (CMI). The CMI 2014 model was used to produce the 2015 results and the CMI 2012 model was used to produce the 2014 results; both calibrated to reflect an appropriate view of future mortality improvements.
Borrowings in respect of short-term fixed income securities programmes note (ii) 1,705 2,004 Non-recourse borrowings of US operations – 19
Profit before tax attributable to shareholders 185 (339) (54) (137) Related deferred tax (where applicable) (34) 59 (5) 24
Carrying value of debt securities and derivatives 10,862 4,812 (3,935) (7,219) 11,559 5,063 (4,085) (7,457)
or property occupied by the Prudential Group. The IAS 19 basis plan assets at 31 December 2015 of £7,617 million (2014: £7,804 million) is different from the economic basis plan assets of £7,819 million (2014: £8,067 million) as shown above due to the exclusion of investment in Prudential insurance policies, which are eliminated on consolidation of £202 million (2014: £263 million) comprising £125 million for PSPS (2014: £131 million) and £77 million for the M&G scheme (2014: £132 million).
Discount rate 3.8% 3.5% Decrease by 0.2% Increase in scheme liabilities by: Other schemes 5.0% 5.2%
Shares issued under share-based schemes 4,675,008 – 7 7,398,214 – 13
c Basis of preparation, capital requirements and management Each of the Group’s long-term business operations is capitalised to a sufficiently strong level for its individual circumstances. Details by the Group’s major operations are shown below.
The available capital of Jackson shown above of £3,466 million (2014: £3,141 million) reflects US regulatory basis available capital as adjusted to exclude asset valuation reserves. The asset valuation reserve, which is reflected as available capital, is designed to provide for future credit-related losses on debt securities and losses on equity investments. Available capital includes a reduction for the effect of the interest maintenance reserve, which is designed by state regulators to defer recognition of non-credit related realised capital gains and losses and to recognise them ratably in the future.
iii UK insurance operations In the UK, up to 31 December 2015, insurers, regulated by PRA, had to hold capital resources equal at least to the Minimum Capital Requirement (MCR) under the Solvency I basis. In addition the rules required insurers to perform Individual Capital Assessments. Under these rules insurers assessed for themselves the amount of capital needed to back their business. If the PRA viewed the results of this assessment as insufficient, it might draw up its own Individual Capital Guidance for a firm, which could be superimposed as a requirement. These requirements were replaced by the Solvency II regime on 1 January 2016 which is discussed further in the Strategic Report.
For Jackson, capital retention is maintained at a level consistent with an appropriate rating by Standard & Poor’s. Currently Jackson is rated AA. Jackson can pay dividends on its capital stock only out of earned surplus unless prior regulatory approval is obtained. Furthermore, dividends which exceed the greater of statutory net gain from operations less net realised investments losses for the prior year or 10 per cent of Jackson’s prior year-end statutory surplus, excluding any increase arising from the application of permitted practices, require prior regulatory approval.
Guarantees and commitments Guarantee funds in both the UK and the US provide for payments to be made to policyholders on behalf of insolvent life insurance companies and are financed by payments assessed on solvent insurance companies based on location, volume and types of business. The estimated reserve for future guarantee fund assessments is not significant. The directors believe that the reserve is adequate for all anticipated payments for known insolvencies.
Matters affecting policyholders’ funds Guaranteed annuities The Group’s main exposure to guaranteed annuities in the UK is through SAIF (see above), and at 31 December 2015, a provision of £412 million was held (2014: £549 million). However, as SAIF is a separate sub-fund of the PAC long-term business fund, attributable to the policyholders, the movement in this provision has no impact on shareholders. In addition, PAC used to sell guaranteed annuity products in the UK and is therefore exposed to liabilities to honour guarantees on these products within the main with-profits fund for which, at 31 December 2015, a provision of £47 million was held (2014: £50 million).
Statement of changes in equity of the parent company £m Share capital Share premium
The Group audit team in the UK covered the UK Group head office operations. Component auditors performed the audit work in the remaining locations.
— Certain disclosures of directors’ remuneration specified by law are not made; or
— The part of the corporate governance statement on page 99 relating to the Company’s compliance with the 11 provisions of the 2014 UK Corporate Governance Code specified for our review.
Asia operations 2,422 1,978 US operations 1,815 1,534 UK operations* 1,261 1,140 Other income and expenditure (566) (531) Solvency II and restructuring costs (51) (36) Results of the sold PruHealth and PruProtect businesses – 11
Shareholders’ equity at end of year 33,010 (651) 32,359 29,357 (196) 29,161
Share capital 128 128 Share premium 1,915 1,908 IFRS basis shareholders’ reserves 10,912 9,775
Short-term fluctuations in investment returns 5 (1,208) 763 771 (258)% (257)% Effect of changes in economic assumptions 6 57 (369) (389) 115% 115% Other non-operating profit (loss) 221 (147) (147) 250% 250%
Asia operations note (ii) 2,237 12,331 1,162 52 9.4 US operations 1,556 15,555 694 45 4.5 UK insurance operations* 834 7,305 259 31 3.5 * 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.
(b) The 2015 credit of £63 million for mortality and morbidity assumptions mainly reflects the effect of lower projected mortality rates for traditional and linked business in Malaysia. The 2014 credit of £27 million reflected a number of offsetting items, including the effect of reduced projected mortality rates in Hong Kong.
(e) The positive mortality and morbidity experience variance in 2015 of £58 million (2014: £23 million) mainly reflects better than expected experience in Hong Kong and Indonesia.
Unwind of discount and other expected returns note (a) 488 410 Reduction in future UK corporate tax rate note (b) 55 –
profits from in-force business in the UK. (c) Other items of £2 million (2014: £66 million) comprise the following: Longevity reinsurance note (d) (134) (8) Impact of specific management actions in second half of 2015 ahead of Solvency II note (e) 75 – Other items note (f) 61 74
(b) This item reflects the net impact of: – changes in projected future fees and future benefit costs arising from the effect of market fluctuations on the growth in separate account asset values in the
The effects of changes in economic assumptions for in-force business included in the profit for the year arise as follows: (i) Group summary
* 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.
Shareholders’ equity at end of year 13,643 9,487 9,647 32,777 (418) 32,359
Profit from long-term business 886 (7) 879 (142) 737 Intra-group dividends (including statutory transfers) note (i) (436) – (436) 221 (215) Other movements note (v) 692 – 692 – 692
Overview The embedded value is the present value of the shareholders’ interest in the earnings distributable from assets allocated to covered business after sufficient allowance has been made for the aggregate risks in that business. The shareholders’ interest in the Group’s long-term business comprises: — The present value of future shareholder cash flows from in-force covered business (value of in-force business), less deductions for: – The cost of locked-in required capital; and – The time value of cost of options and guarantees; — Locked-in required capital; and — The shareholders’ net worth in excess of required capital (free surplus).
(2) With-profits fund non-profit annuity business For UK non-profit annuity business including that attributable to the PAC with-profits fund, the basis for determining the aggregate allowance for credit risk is consistent with that applied for UK shareholder-backed annuity business (as described above). The allowance for credit risk for this business is taken into account in determining the projected cash flows to the with-profits fund, which are in turn discounted at the risk discount rate applicable to all of the projected cash flows of the fund.
Stochastic assumptions Details are given below of the key characteristics of the models used to determine the time value of the financial options and guarantees as referred to in note 13(a)(iv).
Total UK and Europe insurance operations note (iv) 8,463 6,681 179 166 1,025 834 9,069 7,305
Impact of specific management actions in second half of 2015 ahead of Solvency II 339 –
External funds under management 36.3 30.1 126.4 137.0 Internal funds under management 52.8 47.2 119.7 127.0
Methodology and calibration changes Changes to Own Funds (net of transitionals) and Solvency Capital Requirement calibration strengthening (0.2) Effect of partial derecognition of Asia Solvency II surplus (1.4)
Sensitivity analysis At 31 December 2015, the estimated sensitivity of the Group 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 £1.0 billion and reduce the solvency ratio to 186 per cent; — A 40 per cent fall in equity markets (comprising an instantaneous 20 per cent fall followed by a further 20 per cent fall over a four-week period) would reduce surplus by £1.8 billion and reduce the solvency ratio to 179 per cent; — A 50 basis points reduction in interest rates (subject to a floor of zero and allowing for transitional recalculation) would reduce surplus by £1.1 billion and reduce the solvency ratio to 179 per cent; — A 100 basis points increase in interest rates (allowing for transitional recalculation) would increase surplus by £1.1 billion and increase the solvency ratio to 210 per cent; and
The UK with-profits funds surplus has reduced from £3.7 billion at 30 June 2015 to £3.2 billion at 31 December 2015. This is principally due to an increase in the equity backing ratio of the Prudential Assurance Company with-profits sub-fund by 5 per cent, in order to utilise the strength of the fund in line with the Principles and Practices of Financial Management, and strong new business growth.
where the currencies are managed against a basket of currencies including the US dollar. 2 Includes long-term, asset management business and other businesses. 3 For operating profit and shareholders’ funds, UK sterling includes amounts in respect of central operations as well as UK insurance operations and M&G. 4 For shareholders’ funds, the US$ grouping includes US$ denominated core structural borrowings. Sterling operating profits include all interest payable as
The total number of securities available for issue under the scheme is 4,166,731 which represents 0.162 per cent of the issued share capital at 31 December 2015.
Profit before tax attributable to shareholders 3,148 2,614 1,635 2,747 1,866
Annual premium equivalent (APE) sales 5,607 4,627 4,423 4,195 3,681 EEV new business profit (NBP) (post-tax) 2,617 2,115 2,082 1,791 1,536 * Excluding the £23 million APE and £11 million NBP for the sold PruHealth and PruProtect businesses.
Total free surplus expected to emerge in the next 40 years 11,870 13,561 1,691 50,775 52,466 1,691
Prudential operates in a number of markets through joint ventures and other arrangements with third parties (including in China and India), involving certain risks that Prudential does not face with respect to its consolidated subsidiaries Prudential operates, and in certain markets is required by local regulation to operate, through joint ventures (including in China and India). For the Group’s joint venture operations, management control is exercised jointly with the venture participants. The level of control exercisable by the Group depends on the terms of the joint venture agreements, in particular, the allocation of control among, and continued co-operation between, the joint venture participants. Prudential may face financial, reputational and other exposure (including regulatory censure) in the event that any of its joint venture partners fails to meet its obligations under the joint venture, encounters financial difficulty or fails to comply with local or international regulation and standards such as those pertaining to the prevention of financial crime. In addition, a significant proportion of the Group’s product distribution is carried out through arrangements with third parties not controlled by Prudential and is dependent upon continuation of these relationships. A temporary or permanent disruption to these distribution arrangements, such as through significant deterioration in the reputation, financial position or other circumstances of the third party or material failure in controls (such as those pertaining to the prevention of financial crime) could adversely affect the results of operations of Prudential.
Rights and obligations The rights and obligations attaching to the Company’s shares are set out in full in the Articles of Association. There are currently no voting restrictions on the ordinary shares, all of which are fully paid, and each share carries one vote on a poll. If votes are cast on a show of hands, each shareholder present in person or by proxy, or in the case of a corporation, each of its duly authorised corporate representatives, has one vote except that if a proxy is appointed by more than one member, the proxy has one vote for and one vote against if instructed by one or more members to vote for the resolution and by one or more members to vote against the resolution.
Share dealing services The Company’s Registrars, Equiniti, offer a postal dealing facility for buying and selling Prudential plc ordinary shares; please see the Equiniti address or telephone 0371 384 2248. They also offer a telephone and internet dealing service, Shareview, which provides a simple and convenient way of selling Prudential plc shares. For telephone sales call 0345 603 7037 between 8.30am and 4.30pm, Monday to Friday, and for internet sales log on to www.shareview.co.uk/dealing