Performance and dividend We have delivered another broad‑based operating and financial performance, driven by all of our business units and in particular by our growing Asia businesses.
We are committed to ensuring that Prudential’s people represent the communities we serve and we therefore take a strategic approach to diversity and inclusion at every level of our business. While this is an ongoing journey, we firmly believe diversity both adds strength and ensures a wide range of perspectives. We aim to encourage an inclusive working environment where we develop our talent, reward great performance and recognise our differences in order to continue to deliver outstanding results for our customers, shareholders and communities. As part of our commitment to diversity, Prudential has signed the HM Treasury Women in Finance Charter, which aims to increase the number of women working in senior management in financial services companies, and we have set a gender diversity target of 30 per cent females in senior management by the end of 2021.
The United States is the world’s largest retirement market, with approximately 40 million Americans reaching retirement age over the next decade alone, and these consumers have a need for investment options through which they can grow their savings while at the same time protecting their income. This is creating demand for our variable annuity products, which are designed to help this cohort of Americans avoid running out of money and provide them with a reliable cushion against volatile markets. In the US, over US$15 trillion is invested in adviser‑distributed financial assets net of existing annuities, while penetration of variable annuity sales into the retirement market remains low, demonstrating the scale of the opportunity for us.
11 Embedded value reporting provides investors with a measure of the future profit streams of the Group. The EEV basis results have been prepared in accordance with EEV principles discussed in note 1 of EEV basis results. A reconciliation between IFRS and the EEV shareholder funds is included in note II(k) of the Additional unaudited financial information.
UK and Europe ‘Savings gap’ and ageing population in need of returns/
1 Represents M&G Prudential asset management external funds under management and internal funds included on the M&G Prudential long‑term insurance business balance sheet.
From this position of strength, we are now leveraging our expertise further to deliver greater value from our agency and bank channels, broaden our product offering and drive efficiencies in our operational platforms. We are also being increasingly innovative in the ways we add value for our customers, often harnessing digital technology.
10 Weighted premium income comprises gross earned premiums at 100 per cent of renewal premiums, 100 per cent of first year premiums and 10 per cent of single premiums.
14 FUM reported based on the country where the funds are managed.
19 First year premiums. 20 PRUcustomer Friends are employed by Prudential
To overcome these challenges, Americans need and demand retirement strategies that offer them the opportunity to grow and protect the value of their existing assets, as well as the ability to provide guaranteed income that will last throughout their extended lifetimes. Jackson continues to respond to this demand with product innovation and distribution strategies that meet the needs of a growing retirement population, while generating shareholder value.
Jackson’s distribution strength also sets us apart from our competitors. Our wholesaling force is the largest7 in the variable annuity industry and is instrumental in supporting the independent advisers who help the growing pool of American retirees develop effective retirement strategies. Our wholesalers provide extensive training to thousands of advisers about the range of our products and the investment strategies that are available to support their clients. Based on the latest available data, Jackson is the most productive variable annuity wholesale distribution force in the US7.
through a monthly savings plan. I found the idea of investing with other people in different companies fascinating. I still do, in fact. I wasn’t saving up for anything specific, but I wanted to put my money to work for the future – either for a big purchase, like a home, or just for more financial security.
Roll out of new scalable, simplified investment platform through Aladdin implementation
Life EEV new business profit and APE new business sales (APE sales)
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The high quality and recurring nature of our operating capital generation and our disciplined approach to managing balance sheet risk has resulted in an increase in the Group’s shareholders’ Solvency II capital surplus which is estimated at £13.3 billion6,7, at 31 December 2017 (equivalent to a solvency ratio of 202 per cent), compared with £12.5 billion (201 per cent) at 31 December 2016. In 2017 we generated £3.6 billion of operating capital. This was offset by dividends to shareholders, net repayment of subordinated debt, adverse foreign currency effects and the £0.6 billion reduction in statutory deferred tax assets following US tax reform.
The sale of the UK annuity portfolio and the transfer of Prudential plc’s Hong Kong subsidiaries to Asia are expected to complete by the end of 2019. Assuming that these actions had both been completed as at 31 December 2017, the Group’s embedded value of £44.7 billion is estimated to reduce by approximately £300 million, reflecting the loss of future profits on the portion of annuity liabilities being sold.
Group Risk Framework The Group Risk Framework has been developed to monitor and manage the risks to our business and is owned by the Board. The aggregate Group exposure to our key risk drivers is monitored and managed by the Group Risk function which is responsible for reviewing, assessing and reporting on the Group’s risk exposure and solvency position from the Group economic, regulatory and ratings perspectives.
We have no appetite for material losses (direct or indirect) suffered as a result of failing to develop, implement or monitor appropriate controls to manage operational risks. Similarly, we have no appetite for liquidity risk, ie for any business to have insufficient resources to cover its outgoing cash flows, or for the Group as a whole to not meet cash flow requirements from its debt obligations under any plausible scenario.
The two measures used at the Group level are Solvency II capital requirements and internal economic capital (ECap) requirements. In addition, capital requirements are monitored on local statutory bases.
Risk identification Group‑wide risk identification takes place throughout the year and includes processes such as our Own Risk and Solvency Assessment (ORSA) and the horizon‑scanning performed as part of our emerging risk management process.
The risk profile is a key output from the risk identification and risk measurement processes, and is used as a basis for setting Group‑wide limits, management information, assessment of solvency needs, and determining appropriate stress and scenario testing. The risk identification processes support the creation of our annual set of key risks, which are then given enhanced management and reporting focus.
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Risks from our investments Market risk The main drivers of market risk in the Group are: — Investment risk (including equity and property risk); — Interest rate risk; and
Given our global business, we earn our profits and have assets and liabilities in various currencies. The translation of those into our reporting currency exposes us to movements in foreign exchange rates.
Jackson is exposed to interest rate risk in its fixed, fixed index and variable annuity books. Movements in interest rates can impact on the cost of guarantees in these products; in particular the cost of guarantees to us may increase when interest rates fall. We monitor the level of sales of variable annuity products with guaranteed living benefits actively, and together with the risk limits we have in place this helps us to ensure that we are comfortable with the interest rate and market risks we incur as a result. The Jackson hedging programme includes hybrid derivatives to provide some protection from a combined fall in interest rates and equity markets since Jackson is exposed to the combination of these market movements.
The exposures held by the shareholder‑ backed business and with‑profits funds in sovereign debt securities at 31 December 2017 are given in note C3.2(f) of the Group’s IFRS financial statements.
These activities are fundamental in maintaining an effective system of internal control, and as such outputs from these also inform core RCA, incident capture and scenario analysis processes and reporting on operational risk. Furthermore, they also ensure that operational risk considerations are embedded in key business decision‑ making, including material business approvals and in setting and challenging the Group’s strategy.
Alongside the benefits we provide through our core business activities, we also play a wider role in fostering sustainable development through our corporate responsibility programmes around the world.
Environment Managing the climate‑related risks facing our business is crucial to creating long‑term value for our customers, shareholders and the communities of which we are a part. As an occupier of approximately 400 properties worldwide, we recognise the importance of our own internal environmental targets and decarbonisation goals in reducing our direct footprint. As a life insurer, asset owner and manager, we also recognise the positive role we can play in financing the transition to a low‑carbon economy and in managing associated risks.
Customers — Customer Commitments Policy, covering our five key commitments to our customers and how we assess, manage and report on these: 1 Treat customers fairly, openly and honestly; 2 Provide and promote a range of products and services that meet customer needs, are easy to understand and that deliver real value; 3 Maintain the confidentiality of our customer information (except where the law requires disclosure); 4 Provide and promote high standards of customer service and monitor these standards rigorously; and 5 Ensure that our complaints processes provide an effective and fair means of arbitration between the Group’s businesses and customers.
Due diligence on ESG-related policies A key component of the Group Governance Manual is the Group Risk Framework, which requires all Business Units to establish processes for identifying, evaluating and managing risks, including those relating to ESG issues. This includes conducting due diligence on related policy requirements. Compliance guidance is also provided by the policy owners to clarify Business Unit scope and minimum evidencing standards required to demonstrate compliance.
In 2017, Jackson launched two new fee‑based variable annuity products: Perspective Advisory II (PAII), the next evolution of Perspective Advisory, and Private Wealth Shield (PWS), designed to serve clients within the trust market.
In the US, the Jackson Charitable Foundation has introduced Cha‑Ching nationally in a partnership with Discovery Education and Junior Achievement USA. The Jackson Charitable Foundation has integrated Cha‑Ching videos and lessons into Junior Achievement’s third grade classroom programme, which is funded by the Foundation for six years and is expected to reach approximately 2.7 million students over that time, in 15,000 classrooms annually throughout the country. The partnership with Discovery Education is aimed toward supporting educators and includes free classroom activities and teacher guides to use Cha‑Ching in their classrooms and will reach more than 1 million students across the country.
Supporting young people with employability and financial skills M&G Prudential is a partner member of the KickStart Money primary financial education programme. The programme aims to reach 20,000 primary school children and focuses on saving, budgeting, careers, borrowing and consumer and public finance.
alue (EEV ) basis results 07 A dditional inform ation charities benefited from riders’ fundraising, up from 740 in 2016. Prudential has sponsored the event since inception in 2013 and, as part of our renewal of the sponsorship in 2016, we decided to refocus support to concentrate on charity and community engagement. The PruGoals programme helps young people to achieve their goals regardless of social or economic background by providing aspirational challenges culminating in taking on the Prudential RideLondon‑Surrey 46. In 2017 this programme supported 300 disadvantaged young people to take part in the Prudential RideLondon‑Surrey 46.
The clear benefits to both the young people and to the business mean Prudential is committed to continuing the apprenticeship programme but with an increased focus on social inclusion. Twenty two apprentices joined Prudential in 2017 on the apprenticeship programme, which targets GCSE and A‑level school leavers, and in 2018 12 trainees will join the traineeship programme, which is aimed at recruiting young people aged 16 to 24 not in employment, education or training.
Whole company1 full time equivalent Includes the Chairman, all directors, GEC members and senior managers 24,711 = 11,777 12,864 23 47
Employee engagement We want to foster an environment in which employees can derive meaning and empowerment from their work and feel that they are making an active contribution to the organisation. We drive employee engagement through an array of initiatives, including colleague appreciation programmes, wellbeing programmes, networking opportunities with peers and senior leaders across functions, employee focus groups, and volunteering activities with charitable causes such as Prudential UK’s partnerships with numerous schools. Each of our businesses manage their own activities including employee engagement surveys, regular employee open‑forums with senior management, and away days to discuss business performance and internal management. The success of our engagement efforts has again been recognised externally by winning prestigious awards. For example, in 2017 M&G Investments was ranked number one Asset Manager in both the HITC Best Places to work and the RateMyPlacement Top 100 employers surveys.
Prudential plc – greenhouse gas emissions statement We have compiled our global GHG emissions in accordance with the Companies Act 2006 (Strategic and Directors’ Reports) Regulations 2013. GHG emissions are broken down into three scopes; we have included full reporting for Scope 1 and 2, and select Scope 3 reporting as best practice.
* Note that when reporting Group totals, the market‑based emission are used.
Consistency with financial statements: The reporting period does not correspond with the Directors’ Report period (01 January 2017 to 31 December 2017) as it was brought forward by three months to improve the availability of invoice data and reduce reliance on estimated data.
Executive of Prudential Capital, Group Chief Risk Officer, Group Investment Director and Chief Executive of Prudential UK & Europe.
Relevant skills and experience Nic started his career at PricewaterhouseCoopers (PwC). Before joining Prudential, he worked at Aviva, where he held a number of senior finance roles, including Norwich Union Life finance director and board member, Aviva group financial control director, Aviva group financial management and reporting director and CGNU group financial reporting director.
Relevant skills and experience David was the Global Leader of PricewaterhouseCoopers (PwC) insurance practice, a partner in PwC’s UK firm, and worked as the lead audit partner for multi‑national insurance companies until his retirement in 2015. David has also been responsible for PwC’s insurance and investment management assurance practice in London and the firm’s Scottish assurance division.
Corporate governance codes – statement of compliance The Company has dual primary listings in London (premium listing) and Hong Kong and has therefore adopted a governance structure based on the UK and Hong Kong Corporate Governance Codes.
Our governance framework The Group has established a governance framework for the business which is designed to promote appropriate behaviours across the Group.
The evaluation included interviews with all Board members and the Group General Counsel and Company Secretary, and attendance and observation by Dr Tracy Long at a number of Board and Committee meetings. Supporting materials to enhance the assessment team’s understanding of how the Board and its Committees operate were provided.
— After six years, Non‑executive Directors may be appointed for a further year, up to a maximum of three years in total. Reappointment is subject to rigorous review as well as re‑election by shareholders.
— In accordance with US regulatory requirements, Prudential affirms annually that all members of the Audit Committee are independent within the meaning of the Sarbanes‑Oxley legislation.
The retirement of Ann Godbehere, in May 2017, at the end of nine years of service as a Non‑executive Director, and Penny James stepping down as an Executive Director and Group Chief Risk Officer in September 2017, have impacted the Board’s gender diversity. The Committee has therefore committed to focus particularly on strengthening gender diversity, alongside diversity of skills, in its succession planning in 2018.
As the Committee Chair, I also have the responsibility for ensuring the Committee runs effectively and makes the most of its meeting time. I encourage open debate and contributions from all Committee members.
The principal Board Committees are the Nomination & Governance, Audit, Risk and Remuneration Committees. These Committees form a key element of the Group governance framework, providing effective independent oversight of the Group’s activities by the Non-executive Directors.
Each Committee Chair provides an update to the Board of each Committee meeting, supported by a short written summary of the Committee business considered.
The development and renewal of these plans was led by the Group HR Director, supported by Egon Zehnder in the case of the Group Chief Executive plan and by Talent Intelligence for the other Executive Director roles and GEC members. In 2017, Talent Intelligence prepared long‑lists and short‑lists with a focus on gender and ethnic diversity requirements.
In each case, the Committee was well prepared and responsive, considering candidate profiles and skills and conducting interviews.
Subsidiaries including succession planning arrangements for non‑executive directors, evaluating the performance of the Material Subsidiary boards, chairs and directors, reviewing Material Subsidiary governance arrangements, including principles for attendance at committee meetings, and the terms of reference for the Material Subsidiary boards and chairs.
Business unit audit committees The Committee is supported by the work carried out by the audit committees at the level of individual business units, in particular those established by our Material Subsidiaries, which provide oversight of the respective business units. The Committee annually reviews the effectiveness of these committees in meeting their defined terms of reference.
Throughout the year the Committee received regular updates on matters raised through the programme and on actions taken to address them. The Committee also reviewed the arrangements for the monitoring and reporting of whistleblowing activities to ensure they continue to comply with regulatory requirements and governance best practice. The procedures were refreshed during the year and the Chair communicated the enhanced protocols to the chairs of each of the Material Subsidiary audit committees. The Committee and the Chair also spent time privately with the Group Resilience Director to ensure cases were being appropriately followed up.
The Committee will remain focused on monitoring the Group’s principal risks, including those posed by regulatory developments and macroeconomic conditions, in the context of the Group’s operations as a whole and the environment in which we operate.
As Chair of the Committee, I have responsibility for ensuring the Committee operates effectively. To ensure we do so and provide constructive challenge to management, I encourage open debate and contributions from all Committee members. An annual review of our effectiveness was carried out as part of the Board evaluation, described in more detail on page 94. The Committee was found to be functioning effectively.
In October 2017, the Committee considered the results of a Group‑wide survey on Risk Culture which provided high‑level industry and peer benchmarking.
Remuneration The role of the Committee with respect to the provision of advice to the Remuneration Committee on risk management considerations in respect of remuneration was formalised during the year.
Rewarding 2017 performance Prudential’s executive remuneration arrangements reward the achievement of Group, business and personal targets, provided that this performance is delivered within the Company’s risk framework and appetites, and that the conduct expectations of Prudential, our regulators and other stakeholders are met.
Implementation in 2018 The Committee intends to continue to operate within the current Directors’ remuneration policy during 2018. In determining remuneration packages for 2018, the Remuneration Committee was mindful of the need for restraint in base salary increases. All Executive Directors received a salary increase of 2 per cent. The 2018 salary increase budgets for other employees across the Group’s business units were between 2.5 per cent and 10 per cent. No changes have been made to executives’ maximum opportunities under either the annual incentive or the long‑term incentive plans, as we believe remuneration packages provide an appropriate balance between performance over the short and the long term.
Approaching target level EEV new business profit accounted for 15 per cent of Group financial bonus targets
Financial/functional and personal objectives set with reference to business plans approved by the Board
For business unit CEOs, awards vest based on TSR, business unit IFRS operating profit and balanced scorecard measures
Current Executive Directors have the option to: — Receive payments into a defined contribution scheme; and/or
Executive Directors are entitled to receive pension contributions or a cash supplement (or combination of the two) up to a total of 25 per cent of base salary.
The Committee has the authority to apply a malus adjustment to all, or a portion of, an outstanding deferred award in specific circumstances. From 2015, the Committee also has the power to recover all, or a portion of, amounts already paid in specific circumstances and within a defined timeframe (clawback).
No PLTIP vesting. Vesting of 62.5% of award under PLTIP (midway between threshold and maximum).
Non‑executive Directors are not eligible to participate in annual bonus plans or long‑term incentive plans.
— Launched our first open‑ended infrastructure fund of global listed infrastructure companies, the M&G ESG Global High Yield Fund and six further M&G funds on the new SICAV platform.
Under the Group TSR measure, 25 per cent of the award vests for TSR at the median of the peer group, increasing to full vesting for performance within the upper quartile. Following a comprehensive review of the peer group, supported by the Remuneration Committee’s independent adviser and the Group’s Investor Relations team, three companies (Aflac, Munich Re and Swiss Re) were removed for the 2017 awards because their products and geographic footprints are insufficiently similar to those of the Group.
* Benefits include the cost of providing the use of a car and driver, medical insurance and security arrangements. † Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded figures. Total remuneration is calculated using the methodology prescribed by Schedule 8 of the Companies Act. The Chairman and Non‑executive Directors are not entitled to participate in annual bonus plans or long‑term incentive plans.
Notes 1 Alistair Johnston stepped down from the Board on 19 May 2016.
Directors were introduced with effect from January 2013 and increased again in 2017. Executive Directors have five years from this date (or date of joining or role change, if later) to reach the enhanced guideline. The guideline for Non‑executive Directors was introduced on 1 July 2011. Non‑executive Directors have three years from their date of joining to reach the guideline. Where applicable, all Directors are in compliance with the share ownership guideline.
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Details of changes to the Board of Directors during the year are set out in the Corporate governance report.
Tony Wilkey Tony Wilkey stepped down from the Board on 17 July 2017. His remuneration arrangements were in line with the approved Directors’ remuneration policy, and disclosed in stock exchange announcements, and the remuneration he received in respect of his services as an Executive Director is set out in the 2017 ‘single figure’ table.
The Committee also exercised its discretion in accordance with the approved Directors’ remuneration policy and determined that Tony should be allowed to retain his unvested PCA LTIP and PLTIP awards granted in 2014, 2015, 2016 and 2017. These awards will vest in accordance with the original timetable, subject to the original performance conditions, remain subject to malus and clawback provisions, and will be pro‑rated for service.
As set out in the section ‘Remuneration in respect of performance in 2017’ the performance conditions attached to Tony’s 2015 PLTIP awards were partially met and 89.3 per cent of these awards will be released in 2018 and the performance conditions attached to Tony’s 2014 PCA Performance LTIP awards were met in full and 100 per cent of these awards will be released in 2018. The details of all Tony’s LTIP releases are set out below.
Deferred 2013 annual incentive award 2014 108,578 108,578 – 31 Dec 16 03 Apr 17 1,317 1,653
Deferred 2015 annual incentive award 2016 107,112 2,778 109,890 31 Dec 18 1,279
The table below provides information about shares purchased under the SIP together with matching shares (awarded on a 1:4 basis) and dividend shares.
Note 1 Following Nic Nicandrou’s appointment as Chief Executive of Prudential Corporation Asia on 17 July 2017, he is no longer eligible to participate in the SIP. However, while his shares remain in the SIP Trust he will receive any dividends payable on these shares.
Shareholders’ share of actuarial gains and losses on defined benefit pension schemes, net of related tax – – (93) – – (93) – (93)
Interest paid (9) (9) Equity capital: Issues of ordinary share capital 21 13 Dividends paid (1,159) (1,267)
Other than the additional disclosure of the changes in structural borrowings during the year in the statement of cash flows, these pronouncements have no effect on these financial statements.
If the market for a financial investment of the Group is not active, the fair value is determined by using valuation techniques. The Group establishes fair value for these financial investments by using quotations from independent third parties, such as brokers or pricing services, or by using internally developed pricing models. Priority is given to publicly available prices from independent sources when available, but overall the source of pricing and/or the valuation technique is chosen with the objective of arriving at a fair value measurement which reflects the price at which an orderly transaction would take place between market participants on the measurement date. The valuation techniques include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option‑adjusted spread models and, if applicable, enterprise valuation and may include a number of assumptions relating to variables such as credit risk and interest rates. Changes in assumptions relating to these variables could positively or negatively impact the reported fair value of these financial investments. Details of the financial investments classified as ‘level 3’ to which valuation techniques are applied, and the sensitivity of profit before tax to a change in these items’ valuation, are presented in note C3.1(d).
A3.2 New accounting pronouncements not yet effective The following standards, interpretations and amendments have been issued but are not yet effective in 2017, including those which have not yet been adopted in the EU. This is not intended to be a complete list as only those standards, interpretations and amendments that could have an impact upon the Group’s financial statements are discussed.
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Notes (i) General insurance commission represents the commission receivable net of expenses for Prudential‑branded general insurance products in connection with the arrangement to transfer the UK general insurance business to Churchill in 2002. (ii) Corporate expenditure as shown above is primarily for Group Head Office and Asia Regional Head Office. (iii) Restructuring costs are incurred primarily in UK and Europe and Asia and represent business transformation and integration costs. (iv) Amortisation of acquisition accounting adjustments principally relate to the REALIC business of Jackson which was acquired in 2012. (v) For definitions of AER and CER refer to note A1. The difference between ‘Profit for the year attributable to shareholders’ in the prior year on an AER basis and a CER basis is £61 million, arising from the retranslation of the prior year results of the Group’s foreign subsidiaries into GBP using the exchange rates applied to the equivalent current year results. (vi) UK and Europe asset management operating profit based on longer‑term investment returns: Asset management fee income 1,027 900 Other income 7 23 Staff costs (400) (332) Other costs (202) (212)
Comparative segmental information for prior periods has been presented on a basis consistent with the current year.
— Amortisation of acquisition accounting adjustments arising on the purchase of business. This comprises principally the charge for the adjustments arising on the purchase of REALIC in 2012; and
(iv) Business where policyholder liabilities are sensitive to market conditions Under IFRS, the degree to which the carrying values of liabilities to policyholders are sensitive to current market conditions varies between territories depending upon the nature of the ‘grandfathered’ measurement basis. In general, in those instances where the liabilities are particularly sensitive to routine changes in market conditions, the accounting basis is such that the impact of market movements on the assets and liabilities is broadly equivalent in the income statement, and operating profit based on longer‑term investments returns is not distorted. In these circumstances, there is no need for the movement in the liability to be bifurcated between the elements that relate to longer‑term market conditions and short‑term effects.
Gain on disposal of other businessesD1 – 162 – 162 – 162
Loss attaching to the held for sale Korea life * The 2016 comparative results have been re‑presented from those previously published following the reassessment of the Group’s operating segments as described in note B1.3.
Profit before tax attributable to shareholders 1,852 176 – 2,028 1,184
The Company operates the RSP for certain employees. Awards under this plan are discretionary, and the vesting of awards may be subject to performance conditions. All awards are made in Prudential shares or ADRs.
Eligible employees outside the UK are invited to participate in arrangements similar to the Company’s HMRC‑ approved UK SIP, which allows the purchase of Prudential plc shares. Staff based in Ireland are eligible to participate in the Share Participation Plan. Staff based in Asia are eligible to participate in the Prudential Corporation Asia All Employee Share Purchase Plan.
The reconciliation of the expected to actual tax charge attributable to shareholders is provided in (b) below. The tax charge attributable to policyholders of £674 million above is equal to the profit before tax attributable to policyholders of £674 million. This is the result of accounting for policyholder income after the deduction of expenses and movement on unallocated surpluses and on an after tax basis.
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Impact of US tax reform – 445 – – 445 13.5% Adjustments in relation to business
The more significant reconciling items are explained below: Income not taxable or taxable at concessionary rates £26 million of the £64 million reconciling item in Asia operations is due to non‑taxable gains on domestic securities in Taiwan (no equivalent amount in 2016) with the balance principally relating to income taxable at rates lower than the expected rates in Malaysia and Singapore.
Write‑down of Korea life business 58 – – – 58 2.5%
Total actual tax charge (credit) 256 (66) 275 (111) 354 15.6%
Analysed into: Tax on operating profit based on longer‑term investment returns 271 467 244 (88) 894
Amortisation of acquisition accounting adjustments (76) 25 – (51) (2.0)p (2.0)p
Equity securities and portfolio holdings in unit trusts 218,083 4,937 371 223,391
Core structural borrowings of shareholder‑financed operations note (ii) – (7,023) – (7,023) (6,280) Operational borrowings attributable to shareholder‑financed
* The impairment charges/reversals relate to loans held by the UK with‑profits fund and mortgage loans held by Jackson.
‡ Other loans held in UK with‑profits funds are commercial loans and comprise mainly syndicated loans. The majority of other loans in shareholder‑backed business in Asia are commercial loans held by the Malaysia operation and which are all investment graded by two local rating agencies.
Net asset value attributable to unit holders of consolidated unit trusts and similar funds 8,889 8,889 – – – – – – 8,889 2016 £m
— Some products, especially in the US, have guarantee features linked to equity indices. A mismatch between guaranteed product liabilities and the performance of the underlying assets exposes the Group to equity index risk. In order to mitigate this risk, the relevant business units purchase swaptions, equity options and futures to better match asset performance with liabilities under equity‑indexed products.
At 31 December 2017, the Group had entered into reverse repurchase transactions under which it purchased securities and had taken on the obligation to resell the securities. The fair value of the collateral held in respect of these transactions was £10,550 million (2016: £9,319 million).
Gross amount included in the consolidated statement of financial position note (i)
† Averages have been based on opening and closing balances and adjusted for acquisitions, disposals and corporate transactions in the year and exclude unallocated surplus of with‑profits funds.
Funding agreements feature either lump sum or periodic policyholder deposits. Interest is paid at a fixed or index‑linked rate. Funding agreements have a duration of between one and 30 years. In 2017 and 2016 there were no funding agreements terminable by the policyholder with less than 90 days notice.
Deferred acquisition costs and other intangible assets attributable to shareholder 10,866 10,755 Deferred acquisition costs and other intangible assets attributable to with‑profits funds 145 52
US insurance operations The DAC amount in respect of US insurance operations comprises amounts in respect of: Variable annuity business 8,208 7,844 Other business 278 696 Cumulative shadow DAC (for unrealised gains booked in other comprehensive income)* (289) (237)
Disposals and transfers – – – – – (3) (14) (17) Exchange differences and other movements – (3) (5) (8) 6 57 4 67
The most significant items that the IFRS shareholders’ profit or loss and shareholders’ equity for the Group’s life assurance business are sensitive to, are shown in the following tables. The distinction between direct and indirect exposure is not intended to indicate the relative size of the sensitivity.
The reduction in the US corporate income tax rate to 21 per cent from 1 January 2018 was substantively enacted on 22 December 2017. The remeasurement to 21 per cent reduced deferred tax assets subject to US taxation by £1,587 million and deferred tax liabilities by £1,368 million. The £219 million net reduction was reflected partly in the income statement (£445 million charge attributable to shareholders and £92 million benefit to policyholders) and partly through reserves in other comprehensive income (£134 million benefit).
The current tax liability of £537 million (2016: £649 million) includes £139 million (2016: £89 million) of provisions for uncertain tax matters. Further detail is provided in note B4.
Shares issued under share‑based schemes 6,113,872 – 21 8,606,615 1 12
(ii) US insurance operations The estimated capital position for Jackson with reconciliation to shareholders’ equity is shown below: IFRS shareholders' equity 5,013 5,204
(iii) UK and Europe insurance operations Insurance operations in the UK and Europe are subject to Solvency II capital requirements on an individual basis. The UK solvency capital requirement has been met during 2017.
The Group’s subsidiaries, joint ventures and associates in Asia may remit dividends to the Group, in general, provided the statutory insurance fund meets the capital adequacy standard required under local statutory regulations and has sufficient distributable reserves. For further details on local capital regulations in Asia please refer to note C12(b).
CF Prudential Pacific Markets Trust Fund OS 97.96% Laurence Pountney Hill, London, EC4R 0HH, UK
Cribbs Causeway JV Limited OS 50.00% 40 Broadway, London, SW1H 0BU, UK
Eastspring Al‑Wara’ Investments Berhad OS 100.00% 16th Floor, Wisma Sime Darby, Jalan Raja Laut, 50350 Kuala Lumpur, Malaysia
Hermitage Management, LLC OS 100.00% 1 Corporate Way, Lansing, MI 48951, USA
Innisfree M&G PPP LP LPI 62.22% Boundary House, 91‑93 Charterhouse Street, London, EC1M 6HR, UK
INVEST Financial Corporation Insurance Agency Inc, of Illinois OS 100.00% 208 South LaSalle Street, Chicago, IL 60604, USA
Jefferies Capital Partners V, LP LPI 21.92% 1209 Orange Street, Wilmington, DE 19801, USA
Livicos Limited OS 100.00% Montague House, Adelaide Road, Dublin 2, D02 K039, Ireland
M&G Alternatives Investment Management Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
M&G Global Leaders Fund OS 24.91% Laurence Pountney Hill, London, EC4R 0HH, UK
M&G Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
M&G Real Estate UKEV (GP) LLP LPI 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
M&G UK Companies Financing Fund II LP LPI 48.32% Laurence Pountney Hill, London, EC4R 0HH, UK
PGDS (US One), LLC OS 100.00% 1209 Orange Street, Wilmington, DE 19801, USA
PPM CLO 2018‑1 Ltd. PS 100.00% Queensgate House, South Church Street, George Town, Grand Cayman KY1‑1102, Cayman Islands
Prudential Portfolio Managers Limited OS 100.00% Laurence Pountney Hill, London, EC4R 0HH, UK
c/o Mazars LLP, 90 St. Vincent Street, Glasgow, G2 5UB, UK
Reksa Dana Syariah Eastspring Syariah Equity Islamic Asia Pacific USD OS 99.90%
Sealand (No 1) Limited OS 100.00% Lime Grove House, Green Street, St Helier, Jersey, JE1 2ST
— Loans and receivables – except for those designated as at fair value through profit or loss or available‑for‑sale, these instruments comprise non‑quoted investments that have fixed or determinable payments. These instruments include loans collateralised by mortgages, deposits, loans to policyholders and other unsecured loans and receivables. These investments are initially recognised at fair value plus transaction costs. Subsequently, these instruments are carried at amortised cost using the effective interest method.
(h) Investment properties Investments in leasehold and freehold properties not for occupation by the Group, including properties under development for future use as investment properties, are carried at fair value, with changes in fair value included in the income statement. Properties are valued annually either by the Group’s qualified surveyors or by taking into consideration the advice of professional external valuers using the Royal Institution of Chartered Surveyors valuation standards. Each property is externally valued at least once every three years.
The reduction in the UK corporation tax rate to 17 per cent from 1 April 2020 was substantively enacted on 6 September 2016 and did not have a material impact on the financial statements for the year ended 31 December 2017.
www.prudential.co.uk Annual Report 2017 Prudential plc 315 01 G roup overview 02 Strategic report 03 G
In our opinion: — The financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2017 and of the Group’s profit for the year then ended; — The Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union; — The parent company financial statements have been properly prepared in accordance with UK Accounting Standards including FRS 101 Reduced Disclosure Framework; and
Model evaluation — Assessing the reserving models by considering the accuracy of the cash flow projections including by reference to product features. We have also assessed the impact of modelling and assumption changes by inspecting pre‑ and post‑change model runs and comparing the outcomes of the changes to our expectations.
Our procedures included: Methodology choice We assessed the appropriateness of the pricing methodologies with reference to relevant accounting standards and the Group’s own valuation guidelines as well as industry practice.
For harder to value positions: Control operation We tested the design, implementation and operating effectiveness of key controls over the valuation process, including the Group’s review and approval of the estimates and assumptions used for the valuation including key authorisation and data input controls.
We critically evaluated the valuation assessment and resulting conclusions in order to determine the appropriateness of the valuations recorded. This included an evaluation of the valuation assessment with reference to the Group’s valuation guidelines and industry practice.
Our result We found the valuation of investments to be acceptable (2016: acceptable).
Total net assets attributable to equity holders of the Company 9 44,698 38,968
* Annualised return on embedded value is based on EEV post‑tax operating profit after non‑controlling interests, as a percentage of opening EEV basis shareholders’ equity.
Movement in effect of changes in operating assumptions, experience variances and other items (including foreign exchange of £45 million) 375
(c) Other items comprise the following: Longevity reinsurance (6) (90) Impact of specific management actions to improve solvency position 127 110 Provision for cost of undertaking past non‑advised annuity sales review and potential redress note (d) (187) (145)
www.prudential.co.uk Annual Report 2017 Prudential plc 335 01 G roup overview 02 Strategic report 03 G
(iii) US The effect of changes in economic assumptions for US comprises: Variable annuity business (101) 86 Fixed annuity and other general account business (35) (41)
Underlying free surplus generated from insurance and asset management operations note (i) 3,640 3,566 3,691 2% (1)%
Underlying free surplus generated notes (i)(ii) 1,064 1,328 1,248 3,640 (756) 2,884 Profit attaching to disposal of businesses note 17 76 96 – 172 – 172 Other non‑operating items note (b) 254 (1,299) 572 (473) 27 (446)
Underlying free surplus generated notes (i)(ii) 859 1,565 1,142 3,566 (644) 2,922 Loss attaching to the sold Korea life business (86) – – (86) – (86) Other non‑operating items note (b) (91) (770) (64) (925) (214) (1,139)
Total long‑term business operations 39,140 34,725 * ‘Other items’ represent amounts incorporated into VIF where there is no definitive time frame for when the payments will be made or receipts received. In particular, other items include the deduction of the shareholders’ interest in the with‑profits 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.
(iii) Cost of capital A charge is deducted from the embedded value for the cost of locked‑in required capital supporting the Group’s long‑term business. The cost is the difference between the nominal value of the capital and the discounted value of the projected releases of this capital, allowing for post‑tax investment earnings on the capital.
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.
For with‑profits business written in a segregated life fund, as is the case in Asia and the UK, the capital available in the fund is sufficient to meet the required capital requirements. For M&G Prudential, a portion of future shareholder transfers expected from the with‑profits fund is recognised within net worth, together with the associated capital requirements.
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. In order to better reflect differences in relative market risk volatility inherent in each product group, Prudential sets the risk discount rates to reflect the expected volatility associated with the cash flows for each product category in the embedded value model, rather than at a Group level.
US (Jackson) For Jackson business, the allowance for long‑term defaults is reflected in the risk margin reserve (RMR) charge which is deducted in determining the projected spread margin between the earned rate on the investments and the policyholder crediting rate.
— Policyholder benefits for Jackson fixed annuity business are not fixed. It is possible in adverse economic scenarios to pass on a component of credit losses to policyholders (subject to guarantee features) through lower investment returns credited to policyholders. Consequently, it is only necessary to allow for the balance of the credit risk in the risk discount rate.
The level of the additional allowance is assessed at each reporting period to take account of prevailing credit conditions and as the business in force alters over time. The additional allowance for variable annuity business has been set at one‑fifth of the non‑variable annuity business to reflect the proportion of the allocated holdings of general account debt securities.
January to June issues 1.50 1.25 July to December issues 1.25 1.25
Overseas equities 6.2 to 10.1 6.2 to 9.4 15‑year gilt yield 1.6 1.7 Corporate bonds 3.4 3.5
On 15 August 2017, the Group through its subsidiary National Planning Holdings, Inc. (NPH) sold its US independent broker‑dealer network to LPL Financial LLC. The initial consideration received was £252 million (US$325 million) resulting in a post‑tax profit on disposal of £80 million (US$103 million) after costs and net losses that have been incurred in the year.
— The contribution from longevity reinsurance and other management actions to improve solvency during 2017 was £276 million (2016: £332 million). Further explanation and analysis is provided in Additional unaudited financial information section I(d).
— The 2017 increase in the provision for the cost of undertaking a review of past non‑advised annuity sales and related potential redress of £225 million (2016: £175 million) is explained in note C11, ‘Provisions’.
Operating income (net of commission) note (i) 1,087 438 Operating expense note (i) (602) (238) Share of associate’s results 15 – Group’s share of tax on joint ventures’ operating profit – (24)
Less: Amounts expected to be realised in the current year (675) – – – – – – (675)
Underlying free surplus generated for total insurance and asset management operations
US dollar linked note (1) 54% 46% 37% Other Asia currencies 12% 12% 11%
Benefits and claims and movement in unallocated surplus of with‑profits funds, net of reinsurance (72,532) (59,366) (29,656) (50,169) (43,154)
Notes (a) APE new business sales only include one tenth of single premiums, recorded on policies sold in the year. Gross premiums earned include 100 per cent of such premiums. (b) Other adjustments principally include amounts in respect of the following: – Gross premiums earned include premiums from existing in‑force business as well as new business. The most significant amount is recorded in Asia, where a significant portion of regular premium business is written. Asia in‑force premiums form the vast majority of the other adjustment amount; – APE includes new policies written in the year which are classified as investment contracts without discretionary participation features under IFRS 4, arising mainly in Jackson for guaranteed investment contracts and in M&G Prudential for certain unit‑linked savings and similar contracts. These are excluded from gross premiums earned and recorded as deposits; – APE new business sales are annualised while gross premiums earned are recorded only when revenues are due; and – For the purpose of reporting APE new business sales, we include the Group’s share of amounts sold by the Group’s insurance joint ventures and associates. Under IFRS, joint ventures and associates are equity accounted and so no amounts are included within gross premiums earned.
For some non‑unit‑linked investment products, in particular those written in some of the Group’s Asian operations, it may not be possible to hold assets which will provide cash flows to match those relating to policyholder liabilities. This is particularly true in those countries where bond markets are not developed and in certain markets where regulated premium and claim values are set with reference to the interest rate environment prevailing at the time of policy issue. This results in a mismatch due to the duration and uncertainty of the liability cash flows and the lack of sufficient assets of a suitable duration. While this residual asset/ liability mismatch risk can be managed, it cannot be eliminated. Where interest rates in these markets remain lower than those used to calculate premium and claim values over a sustained period, this could have a material adverse effect on Prudential’s reported profit.
Prudential’s Articles of Association contain an exclusive jurisdiction provision Under Prudential’s Articles of Association, certain legal proceedings may only be brought in the courts of England and Wales. This applies to legal proceedings by a 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.
CER Constant Exchange Rate – 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 year 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.
Investment-linked products or contracts Insurance products where the surrender value of the policy is linked to the value of underlying investments (such as collective investment schemes, internal investment pools or other property) or fluctuations in the value of underlying investment or indices. Investment risk associated with the product is usually borne by the policyholder. Insurance coverage, investment and administration services are provided for which the charges are deducted from the investment fund assets. Benefits payable will depend on the price of the units prevailing at the time of surrender, death or the maturity of the product, subject to surrender charges. These are also referred to as unit‑linked products or unit‑linked contracts.
Prudential is established as Prudential Mutual Assurance, Investment and Loan Association in Hatton Garden, London, offering loans and life assurance to professional people.