• Regional leader with more market leading positions in the life insurance and asset management sectors than anyone else
Asia produced APE sales1 of £1,501 million (2009: £1,209 million) and new business profit1 of £902 million (2009: £725 million) in 2010, both figures up 24 per cent on the prior year. AER sales performance across Asia was strong, particularly in Indonesia (up 49 per cent), Malaysia (up 40 per cent), Hong Kong (up 19 per cent) and Singapore (up 37 per cent) where we have a powerful market presence. Our agency and bancassurance channels both continue to flourish, each growing at a rate in excess of 25 per cent, and our health and protection rider strategy remains highly successful, with health and protection products representing 27 per cent of new business premiums in 2010.
Of the remaining free surplus generated after reinvestment in new business, £935 million was remitted from the business units to Group. This cash was used to meet central costs (including those associated with Solvency II implementation) of £180 million, service net interest payments of £231 million and meet dividend payments (net of scrip) of £449 million. In 2010, we also incurred significant exceptional cash outflows relating to the AIA transaction costs of £377 million (pre-tax) and we utilised our central resources to fund the acquisition of UOB Life of £276 million. Our central cash resources amounted to £1,232 million at the end of the year, comfortably above the £1 billion holding company cash buffer we seek to retain.
One of the key components of our strategy is driving agency distribution scale and productivity. Our agency structures are differentiated by market depending upon their size and maturity with the management emphasis balanced between recruitment (newer markets like Indonesia and Vietnam) and productivity growth (more established markets like Hong Kong and Singapore). However this is a simplification as those two priorities are always present and not mutually exclusive; local management will always focus on both.
DAC amortisation of £334 million in 2010 compared to £223 million in 2009. 2010 includes £11 million additional amortisation as equity market returns fell below assumed rates (2009: £39 million benefit from improved equity markets). Excluding this effect, the underlying amortisation increased £61 million due to higher gross profits.
This new agreement, which is expected to go live in the second half of 2011, forms part of Prudential UK’s continuing strategy to develop diversified and complementary distribution across its Direct, Intermediary and Partnership channels.
M&G’s total funds under management at 31 December 2010 were at a record level of £198.3 billion, up 14 per cent on the 2009 year end. External funds under management at the end of 2010 of £89.3 billion were 27 per cent higher than the start of the year and now represent 45 per cent of M&G’s total funds under management.
Profit after tax attributable to equity holders of the Company £1,431m £676m Basic earnings per share 56.7p 27.0p Shareholders’ equity, excluding non-controlling interests £8.0bn £6.3bn
DIVIDENDS PER SHARE DECLARED AND PAID IN REPORTING PERIOD 20.17p 19.20p DIVIDENDS PER SHARE RELATING TO REPORTING PERIOD 23.85p 19.85p FUNDS UNDER MANAGEMENT £340bn £290bn INSURANCE GROUPS DIRECTIVE CAPITAL SURPLUS (AS ADJUSTED)* £4.3bn £3.4bn
Average funds under management (FUM)† £157.5bn £39.6bn Margin based on operating income† 31 bps 40 bps Cost/income ratio‡ 65% 67%
The negative short-term fluctuations of £378 million for our US operations principally arise on derivative and embedded derivative value movements. They include the negative net equity hedge accounting effect (net of related DAC amortisation) of £367 million (2009: negative £159 million). The strong rise in the S&P Index in the last quarter of 2010 resulted in fair value reductions in the free-standing derivatives backing the guarantees embedded in Jackson’s variable and fixed index annuity products. As a substantial proportion of these guarantees are not fair valued for accounting purposes, there is no accounting offset to these losses. Other US short-term fluctuations were negative £11 million.
Notes i The Company has amended the presentation of IFRS operating profit for its US insurance operations to remove the net equity hedge accounting effect (incorporating related amortisation of deferred acquisition costs) and include it in short-term fluctuations. 2009 amounts have been amended accordingly.
Strong new business APE profit margins were recorded across the Group. The margin for the Asian business was maintained at 60 per cent and the UK new business margin increased by 13 percentage points to 45 per cent, benefiting both from the bulk annuity buy-in agreement written in December and higher underlying margins on retail business. The US maintained much of the high margins achieved in 2009, with margins falling by eight percentage points to 65 per cent, due primarily to anticipated reductions in spread margins on fixed and fixed index annuities and the impact of lower assumed equity return assumptions on variable annuities.
Comprising Long-term business Free surplus note b 2,748 2,065 Required capital 3,415 2,994
Value created through investment in new business by life operations 2010 £m
Free surplus invested in new business (245) (16) (261) (330) (103) (678) (694)
Discounted expected free surplus generation 967 848 329 2,144 Less: Free surplus investment in new business (280) (300) (65) (645) Other items† (16) (53) 2 (67)
NET CASH REMITTED BY BUSINESS UNITS: UK Life fund paid to Group 202 284 Shareholder-backed business: Other UK paid to Group 275 189 Group invested in UK (57) (39) Total shareholder-backed business 218 150
Holding company total 3,267 177 3,444 3,240 26 3,266 Prudential Capital 250 – 250 – – – Jackson surplus notes (Lower Tier 2) 159 13 172 154 4 158
Liquidity risk • The risk that a business, though solvent on a balance sheet basis, either does not have the financial resources to meet its obligations as they fall due or can secure them only at excessive cost.
Debt portfolio Our debt portfolio on an IFRS basis was £116.4 billion at 31 December 2010. £54.0 billion of these assets backed shareholder business, of which 95 per cent were investment grade, compared to 93 per cent at 31 December 2009. Sovereign debt represented 16 per cent of the debt portfolio backing shareholder business, or £8.8 billion, at 31 December 2010. Exposures to sovereign debt have increased since December 2009 due mainly to an enlarged position in US Treasuries. 73 per cent of this was rated AAA and 93 per cent investment grade. Eurozone sovereign exposures backing shareholder business were £3.6 billion at 31 December 2010, of which 99 per cent were AAA rated. Of the remaining one per cent, the highest exposure was in respect of Italy (£52 million) and Spain (less than £1 million) whilst there was no sovereign exposure to Greece, Portugal or Ireland. The total banking exposure to Portugal, Ireland, Italy, Greece and Spain (PIIGS) was £363 million at 31 December 2010.
2 Non-financial risk Prudential is exposed to operational, business environment and strategic risk in the course of running its businesses.
The Group also has an operational risk management framework in place that facilitates both the qualitative and quantitative analysis of operational risk exposures. The output of this framework, in particular management information on key operational risk components such as risk and control assessments, internal incidents and external incidents, is reported by the business operations and presented to the Group Operational Risk Committee. This information also supports business decision-making and lessons-learned activities; the ongoing improvement of the control environment; the informing of overall levels of capital held; and determination of the adequacy of Prudential’s corporate insurance programme.
With regard to business environment risk, the Group has a wide-ranging programme of active and constructive engagement with governments, policymakers and regulators in our key markets and with relevant international institutions. Such engagement is undertaken both directly and indirectly via trade associations. The Group has procedures in place to monitor and track political and regulatory developments. Where appropriate, we provide submissions and technical input to officials and others, either via submissions to formal consultations or through interactions with officials.
3 Risk factors and contingencies Our disclosures covering risk factors can be found at the end of this document. Note H14 of the IFRS basis consolidated financial statements gives an update on the position for contingencies of the Group since those published in the 2009 Annual Report.
We believe that the results of these stress tests, together with the Group’s strong underlying earnings capacity, our established hedging programmes and our additional areas of financial flexibility, demonstrate that we are in a position to withstand significant deterioration in market conditions.
Asia The life insurance products offered by Prudential Corporation Asia include with-profits (participating) and non-participating term, whole life and endowment and unit-linked policies. To supplement our life products we also offer health, disablement, critical illness and accident cover.
Across the Group we serve more than 25 million customers. The demographics of our geographies mean the profiles of our customers and the products we offer vary across our operations. But, in all our markets, we are committed to listening to our customers and understanding their individual needs so that they are able to make well-informed decisions.
In October 2010, in partnership with the Washington DC-based think tank, the Center for Strategic and International Studies (CSIS), we published the Global Aging Preparedness Index. This study discussed the policy implications of aging populations in 20 countries and potential reform strategies. During 2011, we will continue to participate in the debate. A copy of the report is available at
Best people for the best performing business Across the Group, we have around 25,000 employees.
• Plan International Thailand, working with 316 Prudential employees who helped to build financial skills in seven schools reaching 1,500 students
Keki Dadiseth and Barry Stowe serve as non-executive directors of ICICI Prudential Life Insurance Company Limited, an Indian company which is owned 26% by Prudential. In addition, Keki serves at Prudential’s request as a non-executive director of ICICI Prudential Trust Limited, an Indian company which is owned 49% by Prudential. The Board does not consider that these appointments in any way affect Keki’s status as an independent director of Prudential.
5 Appointed as a member of the Nomination Committee on 9 November 2010. 6 Ceased to be a member of the Remuneration Committee on 9 November 2010.
Full biographical details of the members of the Committee, including their relevant experience, are set out on pages 100 to 103.
Meetings The Committee normally has scheduled meetings at least four times a year and a number of additional meetings, as required, to review remuneration policy and the application of that policy. While the Chairman and Group Chief Executive are not members, they attend meetings unless they have a conflict of interest. During 2010 a total of seven Committee meetings were held. Details of Committee members’ attendance is set out on page 107. Full details of the activities of the Remuneration Committee are set out in the Directors’ Remuneration Report on page 123 to 148.
Internal control and risk management The Board has overall responsibility for the system of internal control and risk management and for reviewing its effectiveness. The framework setting out the Group’s approach to internal control, risk management and corporate responsibility comprises the following: • Group governance framework: Documents the Group’s internal control policies and processes in an online manual, including the Group’s risk framework, code of business conduct and detailed policies on key operational and financial risks. Business units are also required to follow any additional processes necessary to comply with local statutory and regulatory requirements.
In line with the Turnbull guidance, the certification provided above does not apply to certain material joint ventures where the Group does not exercise full management control. In these cases, the Group satisfies itself that suitable governance and risk management arrangements are in place to protect the Group’s interests. However, the relevant Group company which is party to the joint venture must, in respect of any services it provides in support of the joint venture, comply with the requirements of the Group’s internal governance framework.
Group Compliance: Verify compliance with regulatory standards and inform the Group’s management and the Board on key regulatory issues affecting the Group.
The Group maintains a corporate website www.prudential.co.uk containing a wide range of relevant information for private and institutional investors, including the Group’s financial calendar. The shareholder information section on pages 443 to 444 contains further details which may be of interest to shareholders.
Dividend recommended for the year Group Chief Executive’s report/ Business review 13; 25
All-employee share plans It is important that all employees are offered the opportunity to own shares in Prudential, connecting them both to the success of the Company and to the interests of other shareholders. Executive directors are invited to participate in these plans on the same basis as other staff.
Directors’ outstanding long-term incentive awards Share-based long-term incentive awards The table below sets out the outstanding share awards under the Group Performance Share Plan and Business Unit Performance Plans.
Deferred 2008 annual incentive award 2009 21,064 751 21,815 31 Dec 11 349.5
Deferred 2008 annual incentive award(note 1) 2009 110,403 110,403 0 31 Dec 11 110,403 9 Mar 10 349.5 519.5
Total comprehensive income for the year – – 1,431 251 478 2,160 5 2,165 Dividends B3 – – (511) – – (511) – (511) Reserve movements in respect of sharebased payments – – 37 – – 37 – 37 Change in non-controlling interests arising principally from purchase and sale of property partnerships of the PAC withprofits fund and other consolidated investment funds – – – – – – 7 7
TREASURY SHARES Movement in own shares held in respect of share-based payment plans – – 3 – – 3 – 3 Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS – – (3) – – (3) – (3)
• The impact of the duration of the security on the calculation of the revised estimated cash flows. • The duration of a security for maturity helps to inform whether assessments of estimated future cash flows that are higher than market value are reasonable. • The duration and extent to which the amortised cost exceeds fair value.
Accordingly, insurers must perform a product classification exercise across their portfolio of contracts issued to determine the allocation to these various categories. IFRS 4 permits the continued usage of previously applied GAAP for insurance contracts and investment contracts with discretionary participating features. Except for UK regulated with-profits funds, as described subsequently, this basis has been applied by the Group. For investment contracts that do not contain discretionary participating features, IAS 39 and, where the contract includes an investment management element, IAS 18, apply measurement principles to assets and liabilities attaching to the contract.
The Group has consolidated special purpose entities (SPEs), such as funds holding collateralised debt obligations (CDOs), where evaluation of the substance of the relationship between the SPE and the Group indicates that the Group is deemed to control the SPE under IFRS. The Group holds investments in internally and externally managed open-ended investment companies (OEICs) and unit trusts. These are consolidated where the Group’s percentage ownership level is 50 per cent or greater. The Group’s percentage ownership levels in these entities can fluctuate from day to day according to changes in the Group’s and third-party participation in the funds. In instances where the Group’s ownership of internally managed funds declines marginally below 50 per cent and, based on historical analysis and future expectations the decline in ownership is expected to be temporary, the funds continue to be consolidated as subsidiaries under IAS 27. Where the Group exercises significant influence or has the power to exercise significant influence over an entity, generally through ownership of 20 per cent or more of the entity’s voting rights, but does not control the entity, then this is considered to be an investment in an associate. With the exception of those referred to below, the Group’s investments in associates are recorded at the Group’s share of the associates’ net assets including any goodwill and intangibles arising upon initial acquisition. The carrying value of investments in associates is adjusted each year for the Group’s share of the entities’ profit or loss. This does not apply to investments in associates held by the Group’s insurance or investment funds including the venture capital business or mutual funds and unit trusts, which as permitted by IAS 28 are carried at fair value through profit and loss. The Group’s investments in joint ventures are recognised using proportional consolidation whereby the Group’s share of an entity’s individual balances are combined line-by-line with similar items into the Group financial statements.
d Operating profit based on longer-term investment returns The Group provides supplementary analysis of profit before tax attributable to shareholders that distinguishes operating profit based on longer-term investment returns from other constituent elements of the total profit.
Amendments to IAS 12, ‘Income taxes’ On 20 December 2010, the IASB published amendments to IAS 12 Deferred Tax: Recovery of Underlying Assets following the exposure draft issued on 10 September 2010. The amendments are effective for annual periods beginning on or after 1 January 2012. The amendments require the measurement of deferred tax assets and liabilities arising from investment properties and plant, property and equipment valued at fair value on the presumption that the carrying amount of the asset will be, normally, recovered through sale. These amendments are not expected to have a material effect on the Group’s financial statements.
US OPERATIONS Jackson (US insurance operations)notes ii,iv 833 618 Broker-dealer and asset managementnote iv 22 4
OTHER INCOME AND EXPENDITURE Investment return and other income 30 22 Interest payable on core structural borrowings (257) (209) Corporate expenditure (220) (203) Charge for share-based payments for Prudential schemesnote viii (3) (5)
(incorporating related amortisation of deferred acquisition costs) and include it in short-term fluctuations. The 2009 comparatives have been amended accordingly. The effect of this change is explained note A4(d)(ii).
‡ The Group has amended its presentation of equity-based derivatives and associated guarantee liabilities to remove the net equity hedge accounting effect (incorporating related amortisation of deferred acquisition costs) from operating profit based on longer-term investment returns and include it in short-term fluctuations. The 2009 comparatives have been amended accordingly. The effect of this change is explained in note A4(d)(ii).
In addition to the items discussed above, for US insurance operations, included within the statement of comprehensive income, is an increase in net unrealised gains on debt securities classified as available-for-sale of £1,221 million (2009: reduction in net unrealised losses of £2,669 million). Temporary market value movements do not reflect defaults or impairments. Additional details on the movement in the value of the Jackson portfolio are included in note D3.
AIG termination break fee 153 Underwriting fees 58 Costs associated with foreign exchange hedging 100 Adviser fees and other 66
Based on operating profit based on longer-term investment returns 1,941 (213) (5) 1,723 68.3p 68.2p
Annual Premium Equivalents (APEs) are calculated as the aggregate of regular new business amounts and one-tenth of single new business amounts. New business premiums for regular premium products are shown on an annualised basis. Department of Work and Pensions (DWP) rebate business is classified as single recurrent business. Internal vesting business is classified as new business where the contracts include an open market option.
To explain more comprehensively the assets, liabilities and capital of the Group’s businesses it is appropriate to provide an analysis of the Group’s statement of financial position by operating segment and type of business. The tables below aggregate the three asset management segments for ease of presentation and hence should be read in conjunction with the associated tables on asset management in note E2.
Reclassification of property under development 131 – – 131 – – 131
WITH-PROFITS OPERATIONS: UK insurance operationsnote i 5,237 6,451 Asian insurance operationsnote iii 435 378 i UK insurance operations The UK insurance operations’ exposure to asset-backed securities at 31 December 2010 comprises: Shareholder-backed business (2010: 51% AAA, 23% AA) 1,181 2,044 With-profits operations (2010: 52% AAA, 13% AA) 5,237 6,451
Three key points are to be noted, namely: • The Group’s with-profits and unit-linked funds absorb most market risk attaching to the funds’ investments. Except for second order effects, for example on asset management fees and shareholders’ share of cost of bonuses for with-profits business, shareholder results are not directly affected by market value movements on the assets of these funds; • The Group’s shareholder results are most sensitive to market risks for assets of shareholder-backed business; and • The main exposures of the Group’s IFRS basis results to market risk for life assurance operations on investments of shareholderbacked business are for debt securities.
Intangible assets attributable to PAC with-profits fund: In respect of acquired subsidiaries for venture fund and other investment purposes – 166 – 166 – – – 166 124
c Reconciliation of movement in policyholder liabilities and unallocated surplus of with-profits funds A reconciliation of the total policyholder liabilities and unallocated surplus of with-profits funds of UK insurance operations from the beginning of the year to the end of the year is as follows: Other shareholder-backed funds and subsidiaries
i With-profits products and PAC with-profits sub-fund Within the statement of financial position of UK insurance operations at 31 December 2010, as shown in note D2(a), there are policyholder liabilities and unallocated surplus of £82.0 billion (2009: £77.5 billion) that relate to the WPSF. These amounts include the liabilities and capital of Prudential Annuities Limited, a wholly-owned subsidiary of the fund. The WPSF mainly contains with-profits business but it also contains some non-profit business (unit-linked, term assurances and annuities). 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. The WPSF held a provision of £24 million at 31 December 2010 (2009: £31 million) to honour guarantees on a small amount of guaranteed annuity products. SAIF’s exposure to guaranteed annuities is described below. Beyond the generic guarantees described above, there are very few explicit options or guarantees such as minimum investment returns, surrender values or annuities at retirement and any granted have generally been at very low levels.
The assumptions used in the stochastic models are calibrated to produce risk-free returns on each asset class. Volatilities of, and correlations between, investment returns from different asset classes are as determined by the Group’s Portfolio Management Group and aim to be market consistent. The cost of guarantees, options and smoothing is very sensitive to the bonus, market value reduction (MVR), and investment policy employed and therefore the stochastic modelling incorporates a range of management actions that would help to protect the fund in adverse investment scenarios. Substantial flexibility has been included in the modelled management actions in order to reflect the discretion that is retained in adverse investment conditions, thereby avoiding the creation of unreasonable minimum capital requirements. The management actions assumed are consistent with the Group’s management policy for with-profits funds and the Group’s disclosures in the publicly available PPFM. The contract liabilities for with-profits business also require assumptions for persistency. These are set based on the results of recent experience analysis.
Historically, until the second half of 2007, when corporate bond spreads widened significantly, the allowance for credit risk was calculated as the long-term expected defaults and a long-term credit risk premium. This long-term credit risk was supplemented by a short-term allowance from 31 December 2007 to allow for the concern that credit ratings applied by the rating agencies may be downgraded and defaults in the short-term might be higher than the long-term assumptions. The weighted components of the bond spread over swap rates for shareholder-backed fixed and linked annuity business for PRIL at 31 December 2010, 2009 and 2008, based on the asset mix at the relevant balance sheet date are shown below.
For the 31 December 2010 valuation, long-term expected defaults are derived by applying Moody’s data from 1970 to 2009 and the definition of the credit rating used has been revised from the lowest credit rating to the second highest credit rating published by Moody’s, Standard and Poors and Fitch.
(v) The very prudent Pillar 1 regulatory basis reflects the overriding objective of ensuring sufficient provisions and capital to ensure payments to policyholders can be made. The approach for IFRS aims to establish liabilities that are closer to ‘best estimate’. IFRS default assumptions are therefore set between the EEV and Pillar I assumptions.
PRIL 0.6 1.0 1.6 0.6 0.4 1.0 PAC non-profit sub-fund 0.1 0.1 0.2 0.1 – 0.1
AF92 minus 4 years 96% – 102% PNMA00 (C = 2000) with medium cohort improvement table with a minimum annual improvement of 2.25% up to age 90, tapering to zero at age 120
Note (i) The Group has amended the presentation of operating profit for its US insurance operations to remove the net equity hedge accounting effect
Assets fair valued at below book value Book value* 4,372 8,220
For traditional life insurance contracts, provisions for future policy benefits are determined under US GAAP using the net level premium method and assumptions as of the issue date as to mortality, interest, policy lapses and expenses plus provisions for adverse deviation. Institutional products are accounted for as investment contracts under IFRS with the liability classified as being in respect of financial instruments rather than insurance contracts, as defined by IFRS 4. In practice, there is no material difference between the IFRS and US GAAP basis of recognition and measurement for these contracts. Certain institutional products representing obligations issued in currencies other than US dollars have been hedged for changes in exchange rates using cross-currency swaps. The fair value of derivatives embedded in funding agreements, as well as foreign currency transaction gains and losses, are included in the carrying value of the trust instruments supported by funding agreements recorded in other non-insurance liabilities.
For term business, acquisition costs are deferred and amortised in line with expected premiums. For annuity business, acquisition costs are deferred and amortised in line with expected gross profits on the relevant contracts. For interest-sensitive business, the key assumption is the expected long-term spread between the earned rate and the rate credited to policyholders, which is based on an annual spread analysis. In addition, expected gross profits depend on mortality assumptions, assumed unit costs and terminations other than deaths (including the related charges) all of which are based on a combination of actual experience of Jackson, industry experience and future expectations. A detailed analysis of actual experience is measured by internally developed mortality and persistency studies. For variable annuity business, the key assumption is the expected long-term level of equity market returns, which for 2010 and 2009 was 8.4 per cent per annum implemented using a mean reversion methodology. These returns affect the level of future expected profits through their effects on the fee income and the required level of provision for guaranteed minimum benefits. The mean reversion methodology dampens the impact of equity market movements during a particular year, but does not fully eliminate the effects of movements in the equity markets. In addition, the mean reversion methodology includes both a cap and a floor that determine the maximum impact that the methodology may have. The projected rates of return are capped at no more than 15 per cent for each of the next five years. Further details are explained in note D3(g) above. Except to the extent of mortality experience, which primarily affects profits through variations in claim payments and GMDB reserves, the profits of Jackson are relatively insensitive to changes in insurance risk.
† The NAR for GMWB – ‘For life’ has been estimated as the present value of future expected benefit payments remaining after the amount of the ‘not for life’ guaranteed benefit is zero.
Other exposure to equity risk In addition to the above, Jackson is also exposed to equity risk from its holding of equity securities, partnerships in investment pools and other financial derivatives. A range of reasonably possible movements in the value of equity securities, partnerships in investment pools and other financial derivatives have been applied to Jackson’s holdings at 31 December 2010 and 31 December 2009. The table below shows the sensitivity to a 10 and 20 per cent fall in value and the impact that this would have on pre-tax profit, net of related changes in amortisation of DAC, profit after tax and shareholders’ equity.
A 10 or 20 per cent increase in their value is estimated to have an approximately equal and opposite effect on profit and shareholders’ equity to the sensitivities shown above. In the equity risk sensitivity analysis given above, the Group has considered the impact of an instantaneous 20 per cent fall in equity markets. If equity markets were to fall by more than 20 per cent, the Group believes that this would not be an instantaneous fall but rather this would be expected to occur over a period of time during which the Group would be able to put in place mitigating management actions.
Other non-insurance liabilities: Operational borrowings attributable to shareholders-financed operations – – 189 189 210
Summary policyholder liabilities (net of reinsurance) and unallocated surplus At 31 December 2010, the policyholder liabilities (net of reinsurance of £41 million (2009: £18 million)) and unallocated surplus for Asian operations of £28.7 billion (2009: £21.9 billion) comprised the following: Hong Kong 6,621 5,762
Subject to local market circumstances and regulatory requirements, the guarantee features described in note D2(e) in respect of UK business broadly apply to similar types of participating contracts written in the Hong Kong branch, Singapore and Malaysia. Participating products have both guaranteed and non-guaranteed elements. Non-participating long-term products are the only ones where the insurer is contractually obliged to provide guarantees on all benefits. Investment-linked products have the lowest level of guarantee, if any. Product guarantees in Asia can be broadly classified into four main categories, namely premium rate, cash value and interest rate guarantees, policy renewability and convertibility options. The risks on death coverage through premium rate guarantees are low due to appropriate product pricing.
TOTAL POLICYHOLDER LIABILITIES SHOWN IN THE CONSOLIDATED STATEMENT OF FINANCIAL POSITION 9,759 71,827 81,586 43,944 60,523 28,674 214,727
Korea Policy reserves for traditional business are determined on net premium reserve basis using pricing mortality and prescribed standard interest rates. For linked business, the value of units is held together with the non-unit reserves calculated in accordance with regulatory standard actuarial methodology. The capital requirement in Korea has moved to a risk-based regulatory framework in April 2009 with a two-year transition period where insurers can choose between the prior and new framework. The risk-based regulatory framework was adopted in 2009 by the Company. Under the new framework, insurance companies in Korea are expected to maintain a level of free surplus in excess of the capital requirements with the general target level of solvency margin being in excess of 150 per cent of the risk-based capital.
iv Asian life assurance subsidiaries The increase of £251 million in 2010 reflects an underlying increase of £127 million (applying the relevant 2010 year end exchange rates) and £124 million of exchange translation gain. The underlying increase of available capital in 2010 included the effects of the acquisition of UOB Life Assurance Limited in Singapore in February 2010.
e Sensitivity of liabilities and total capital to changed market conditions and capital management policies Prudential manages its assets, liabilities and capital locally, in accordance with local regulatory requirements and reflecting the different types of liabilities Prudential has in each business. As a result of the diversity of products offered by Prudential and the different regulatory requirements in which it operates, Prudential employs differing methods of asset/liability and capital management, depending on the business concerned. Stochastic modelling of assets and liabilities is undertaken in the UK, Jackson and Asia to assess the economic capital requirements under different confidence intervals and time horizons. In addition, reserve adequacy testing under a range of scenarios and dynamic solvency testing is carried out, including under certain scenarios mandated by the UK, US and Asian regulators. A stochastic approach models the inter-relationship between asset and liability movements, taking into account asset correlation, management actions and policyholder behaviour under a large number of alternative economic scenarios. These scenarios are projected forward over a period of time, typically 25 years or longer, and the liabilities and solvency position of the fund are calculated in each scenario in each future year. The fund’s policy on management actions, including bonus and investment policy, continue to be set in order that they are consistent with the available capital and the targeted risk of default. The sensitivity of liabilities and other components of total capital vary depending upon the type of business concerned and this conditions the approach to asset/liability management. For example, for businesses that are most sensitive to interest rate changes, such as immediate annuity business, Prudential uses cash flow analysis to create a portfolio of debt securities whose value changes in line with the value of liabilities when interest rates change. This type of analysis helps protect profits from changing interest rates. This type of analysis is used in the UK for annuity business and by Jackson for its interest-sensitive and fixed indexed annuities and stable value products. For businesses that are most sensitive to equity price changes, Prudential uses stochastic modelling and scenario testing to look at the future returns on its investments under different scenarios which best reflect the large diversity in returns that equities can produce. This allows Prudential to devise an investment and with-profits policyholder bonus strategy that, on the model assumptions, allows it to optimise returns to its policyholders and shareholders over time while maintaining appropriate financial strength. Prudential uses this methodology extensively in connection with its UK with-profits business.
Comprising: Operating profit based on longer-term investment returns 284 22 72 378 297 Short-term fluctuations in investment returns‡ 47 – – 47 70 Shareholders’ share of actuarial gains and losses on defined benefit pension schemes (5) – – (5) (14)
Benefits and claims and movements in unallocated surplus of with-profits funds, net of reinsurance (18,361) (15,423) (6,734) – – – (40,518) – (40,518)
• For Asian operations the expected tax rates reflect the corporation tax rates weighted by reference to the source of profits of operations contributing to the aggregate business result.
UK life business. (d) Other operations For 2010, an exceptional tax credit which primarily relates to the impact of the settlement agreed with the UK tax authorities and the ability to recognise a deferred tax credit on various tax losses which we were previously unable to recognise, partly offset by the inability to fully recognise a tax credit in respect of non deductible capital costs incurred in relation to the terminated AIA transaction. For 2009, the ability to recognise a deferred tax asset on various tax losses which we were previously unable to recognise partly offset by adjustments in respect of the prior year tax charge.
For investment contracts in the US with fixed and guaranteed terms the fair value is determined based on the present value of future cash flows discounted at current interest rates. The fair value of other financial liabilities is determined using discounted cash flows of the amounts expected to be paid.
Total financial investments, net of derivative liabilities 40,870 43,237 3,705 87,812 Borrowings attributable to the with-profits fund held at fair value – (82) – (82) Net asset value attributable to unit holders of consolidated unit trusts and
Other investments (including derivative assets) 2,814 (81) (165) 556 (363) – 43 (2) 2,802
Unrealised losses on investments 449 1,156 Balances relating to investment and insurance contracts 11 20 Short-term timing differences 1,152 1,228 Capital allowances 16 18 Unused deferred tax losses 560 286
Investment properties of £3,435 million (2009: £3,177 million) are held under finance leases. A reconciliation between the total of future minimum lease payments at the statement of financial position date and their present value is shown below: Future minimum lease payments at 31 December 1,107 1,683 Future finance charges on finance leases (972) (1,517)
Investments in associates The Group had three associates at 31 December 2010 (2009: three) that are accounted for using the equity method. The Group’s associates are a 30 per cent interest in The Nam Khang, a Vietnamese property developer, a 30 per cent interest in Apollo Education and Training Organisation Vietnam and a 25 per cent interest in PruHealth, following the loss of joint control in the period (see note I2). OYO Developments Limited a 25 per cent associate was disposed during the year. The Group also has investments in associates which meet the IAS 28 criteria for measurement at fair value through profit and loss in accordance with IAS 39.
vii Management analyses the net core structural borrowings position as follows: Total core structural borrowings (as above) 3,676 3,394 Less: Holding company cash and short-term investments (recorded within the consolidated statement of financial position) (1,232) (1,486)
Jacksonnote ii 10 – Investment subsidiaries 20 20 Piedmont and CDO fundsnote iii 60 183
Notes i In all instances the holders of the debt instruments issued by these subsidiaries and funds do not have recourse beyond the assets of those subsidiaries and funds. ii This represents senior debt issued through the Federal Home Loan Bank of Indianapolis and was secured on collateral posted with FHLB by
Of the other provisions balance of £282 million (2009: £206 million), £141 million (2009: £148 million) is expected to be settled within one year. Employer contributions expected to be paid into defined benefit pension schemes within one year are shown in note I3.
ALL SCHEMES UNDERLYING POSITION (WITHOUT THE EFFECT OF IFRIC 14) Surplus (deficit) 644 (71) (337) 85 17 338 Less: amount attributable to PAC with-profits fund (483) 33 207 (42) – (285)
Total charge without the effect of IFRIC 14 (109) (337) Effect of IFRIC 14 for pension schemes 94 182
Fair value of plan assets, beginning of year 376 187 563 563 Present value of benefit obligation, beginning of year (738) (738) Provision for deficit funding for PSPS (75) (75)
The expected rates of return have been determined by reference to long-term expectations, the carrying value of the assets and equity and other market conditions at the statement of financial position date. The actual return on scheme assets was a gain of £631 million (2009: £348 million) on an IAS 19 basis.
Between £6 and £7 – – – – – Between £7 and £8 – – – – –
In addition, there were fees incurred of £0.1 million (2009: £0.2 million) for the audit of pension schemes.
In 2010 and 2009, other transactions with directors were not deemed to be significant both by virtue of their size and in the context of the directors’ financial positions. As indicated above, all of these transactions are on terms broadly equivalent to those that prevail in arm’s length transactions.
Based on profit (loss) for the year attributable to the equity holders of the Company: Basic earnings per share (in pence) 56.7p 27.0p (16.0)p 38.7p 33.6p Diluted earnings per share (in pence) 56.6p 27.0p (16.0)p 38.6p 33.6p Dividend per share declared and paid in reporting period
Operating earnings per share (reflecting operating profit based on longer-term investment returns after related tax and non-controlling interests and excluding 2010 exceptional tax credit) (in pence) 106.9p 88.8p 85.1p 69.2p 58.2p
DAC adjustments 2 150 173 Expected return on shareholder assets 19 25 16 Non-recurrent release of reserve for Malaysia Life – 63 –
The IFRS accounting for minimum death and withdrawal benefits guarantees of the Group’s US insurance operations has a mixed measurement approach.
Both methods determine a hypothetical fee or charge (referred to in the rest of this note as ‘fee assessment’) that is anticipated to fund future projected benefit payments arising using the assumptions applicable for that method. After determination at issue, the FAS 157 fee assessment is fixed for the life of the policy, so that variations in experience from that assumed at issue, as well as cash flow timing issues, will create a liability or asset as the value of future benefits becomes more or less, respectively, than the value of the fee assessments.
Fund earned rate 8.4% before fees Quoted rate swap curve (10-year rate: 3.4% before fees)
TOTAL OF ALL OPERATIONS 8,031 6,271 ii Net asset value per share
Jackson 1,458 1,249 Broker-dealer, asset management and Curian operations 22 4
The Group maintains four share option schemes satisfied by the issue of new shares. UK-based executive directors are eligible to participate in the UK Savings Related Share Option Scheme, and Asia-based executives can participate in the International Savings Related Share Option Scheme. Dublin-based employees are eligible to participate in the Prudential International Assurance Sharesave Plan, and Hong Kong-based agents can participate in the Non-employee Savings Related Share Option Scheme. Further details of the schemes and accounting policies are detailed in Note I4 of the IFRS basis condensed consolidated financial statements.
TOTAL NET ASSETS (EXCLUDING PENSION) 4,226 3,789 Pension asset (net of related deferred tax) 9 41 37
For the purpose of preparing consolidated financial statements, the Group applies IFRS basis accounting including IAS 19, ‘Employee Benefits’. However, the individual accounts of the Company continue to follow UK GAAP including FRS 17. The FRS 17 disclosures are aligned with IAS 19. Under IFRS, the Group applies IFRIC 14, interpretation guidance to IAS 19 with the effect of derecognising the Group’s interest in the Scheme’s surplus and recognising an additional liability for the deficit funding obligation for the Scheme in the Group financial statements. Further details are described in note I3 ‘Staff and pension plans’ of the notes on the financial statements of the Group.
In July 2010, the UK Government announced plans to use the Consumer Price Index (CPI) in place of the Retail Price Index (RPI) in its determination of the statutory minimum pension increases for private sector occupational pension schemes. In December 2010, the Government published the statutory revaluation order for 2011 which confirms the change to use CPI. In addition, the Government has also published in December 2010 a consultation paper which sets out the Government’s views on the impact that the switch from RPI to CPI will have on the private sector occupational pension schemes. The consultation period closed on 2 March 2011.
Only those tranches of the Scheme which are subject to statutory increases in accordance with the Scheme rules may be affected by the Government’s decision to change the indexation from RPI to CPI. Other tranches of the Scheme are unaffected.
Opinion on financial statements 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 2010 and of the Group’s profit for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; • the parent company financial statements have been properly prepared in accordance with UK Generally Accepted Accounting Practice; • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006; and, as regards the group financial statements, Article 4 of the IAS Regulation.
Opinion on other matters prescribed by the Companies Act 2006 In our opinion: • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
* Return on embedded value is based on EEV operating profit after tax and non-controlling interests (adjusted to exclude an exceptional tax credit of £158 million (as shown in note 11)) as a percentage of opening EEV basis shareholders’ equity.
ii Level of required capital In adopting the EEV Principles, Prudential has based required capital on its internal targets for economic capital subject to it being at least the local statutory minimum requirements. Economic capital is assessed using internal models but, when applying the EEV Principles, Prudential does not take credit for the significant diversification benefits that exist within the Group. 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 shareholder-backed business the following capital requirements apply: • Asian operations: the level of required capital has been set at the higher of local statutory requirements and the economic capital requirement; • US operations: the level of required capital has been set to an amount at least equal to 235 per cent of the risk-based capital required by the National Association of Insurance Commissioners (NAIC) at the Company Action Level (CAL); and
Allowance for non-diversifiable non-market risks Finance theory cannot be used to determine the appropriate component of beta for non-diversifiable non-market risks since there is no observable risk premium associated with it that is akin to the equity risk premium. Recognising this, a pragmatic approach has been applied.
Unwind of discount and other expected returns 573 369 550 1,492 Effect of change in operating assumptions (23) 3 (3) (23) Experience variances and other items (1) 325 24 348
h The positive expense experience variance of £32 million (2009: £40 million) primarily represents favourable experience variance relating to marketing expenses.
In July 2009, the Company issued US$750 million perpetual subordinated capital securities. In accordance with the EEV Principles, core borrowings are carried at market value. As the liabilities are generally held to maturity or for the long-term, no deferred tax asset or liability has been established on the market value adjustment above. ii The movement in the mark to market value adjustment represents: Mark to market movement in balance sheet: 2010 £m 2009 £m
US OPERATIONS SHAREHOLDERS’ EQUITY AT 1 JANUARY 2010 749 1,405 2,154 1,968 4,122 New business contributionnote ii (300) 270 (30) 525 495 Existing business – transfer to net worth 692 (329) 363 (363) – Expected return on existing business 31 56 87 153 240 Changes in operating assumptions and experience variances 191 18 209 1 210 Changes in non-operating assumptions and experience variances and non-controlling interests (192) 42 (150) (213) (363)
Note ‘Other items’ represents deductions for amounts incorporated into VIF where there is no definitive timeframe for when the payments will be made. In particular, other items includes the deduction of the value of the shareholders’ interest in the estate, the value of which is derived by increasing final bonus rates so as to exhaust the estate over the lifetime of the in-force with-profits business. This is an assumption to give an appropriate valuation. To be conservative this item is excluded from the expected free surplus generation profile below.
Expected period of conversion of future post-tax distributable earnings and required capital flows to free surplus 2010 Total as shown above 1-5 years 6-10 years 11-15 years 16-20 years 20+ years
In the event that US 10-year treasury rates increase, the altered embedded value results would reflect a lower contribution from fixed annuity business and a partially offsetting increase for variable annuity business as the projected earned rate, as well as the discount rate, would increase for this type of business.
Credit risk allowance Long-term expected defaults 16 19 Long-term credit risk premium 10 13 Short-term allowance for credit risk 42 39
On 1 February 2010, the Group acquired from United Overseas Bank (UOB) its 100 per cent interest in UOB Life Assurance Limited in Singapore for total cash consideration, after post-completion adjustments of SGD67 million (£32 million), of SGD495 million (£220 million). As part of the transaction the Group also entered into a long-term strategic partnership to develop a major regional bancassurance business with UOB. In addition to the amounts above the Group incurred £2 million of acquisition-related costs (excluding integration costs).
iv UK wholesale sales for 2010 include amounts for a bulk annuity buy-in insurance agreement with an APE of £88 million.
The directors have chosen to prepare supplementary information in accordance with the EEV Principles issued in May 2004 by the European CFO Forum as supplemented by the Additional Guidance on EEV Disclosures issued in October 2005.
Shareholder enquiries For enquiries about shareholdings, including dividends and lost share certificates, please contact the Company’s registrars: By post: Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA
Jackson National Life Insurance Company 1 Corporate Way Lansing Michigan 48951 USA Tel: +1 517 381 5500 www.jackson.com