IFRS operating profit based on longer-term investment returns 1 4,256 3,969 7% (2)%
2 Underlying free surplus generated comprises underlying free surplus generated from the Group’s long-term business (net of investment in new business) and that generated from asset management operations. Further information is set out in note 9 of the EEV basis results.
8 The Group Solvency II surplus represents the shareholder capital position excluding the contribution to Own Funds and the Solvency Capital Requirement from ring-fenced with-profits funds and staff pension schemes in surplus. The estimated solvency position includes the impact of recalculated transitionals at the valuation date, which has reduced the Group shareholder surplus from £12.9 billion to £12.5 billion. The formal Quantitative Reporting Templates (Solvency II regulatory templates) will include transitional measures without this recalculation.
Our strategy is shaped around meeting those needs where they are greatest and where we have the capabilities to make the most significant impact. That is among the increasingly affluent population of Asia, who have a growing demand for the health and protection products we provide, and the ageing populations of the US and the UK, who are looking for ways to invest their savings to produce income for retirement.
Understanding that Prudential will take care of the family and protect them from the unexpected risks in life, they can live safely and peacefully.
9 The Group Solvency II surplus represents the shareholder capital position excluding the contribution to Own Funds and the Solvency Capital Requirement from ring-fenced with-profits funds and staff pension schemes in surplus. The estimated solvency position includes the impact of recalculated transitionals at the valuation date, which has reduced the Group shareholder surplus from £12.9 billion to £12.5 billion. The formal Quantitative Reporting Templates (Solvency II regulatory templates) will include transitional measures without this recalculation.
Our strategy We meet the long-term savings and protection needs of an increasingly self-reliant population. We focus on three markets – Asia, the US and the UK – where the need for our products is strong and growing and we use our capabilities, footprint and scale to meet that need.
Asia IFRS operating profit, £m Asia life and asset management pre-tax IFRS operating profit to grow at a compound annual rate of at least 15 per cent over the period 2012 to 2017.
At Eastspring we are investing in the brand, in the operating model and in talent development, in order to ensure that we expand our regional capabilities to capture the opportunities available from the growth of the retail mutual funds markets in Asia.
6 Based on FY16 or the latest information available. Source includes formal (eg Competitors results release, local regulators and insurance association) and informal (industry exchange) market share data. Ranking based on new business (APE sales on weighted full-year premium depending on availability of data). The ranking for China is among foreign players and India is among private life insurers.
Barry Stowe Chairman and Chief Executive Officer, North American Business Unit
Most notably in 2016, we responded to changes in the market following the introduction of pension freedoms by launching the Prudential Retirement Account – an online account-based plan
Investment for growth We are focused on maintaining the growth momentum created by the structural changes to retirement provision in the UK and on delivering a growth strategy underpinned by investment in product, service and distribution capabilities to meet the evolving needs of customers.
The evolving nature of how we interact with customers is also driving our ambitions to grow our direct-to-consumer business, where we have strengthened our capability ahead of a range of forthcoming developments, including launch of a direct-to-consumer ISA.
Multi-asset: M&G’s range of multi-asset funds, designed for investors seeking to spread risk across a mix of assets, has again proven popular with customers in 2016. The M&G Prudent Allocation Fund, launched in 2015 to cater specifically for European investors with a lower appetite for risk, was one of our bestselling funds in 2016. In December, we launched the M&G Global Target Return Fund, a new multi-asset fund aimed at investors seeking reasonable returns with managed volatility.
Alongside growing our overall level of life operating profit, we continue to maintain our bias for higher-quality sources of income such as insurance margin and fee income. We favour insurance margin because it is relatively insensitive to the equity and interest rate cycle and prefer fee
The result of the held for sale Korea life business, a loss of £227 million, comprises both the write down of the IFRS net assets to sales proceeds (net of costs) and the profits for the year. The comparative profits for the year have been similarly reclassified as non-operating for consistency of presentation.
In the US, new business investment was broadly consistent with 2015 at £298 million, reflecting a greater proportion of variable annuity premiums being directed to the fixed account option and higher institutional volumes. At just 2 per cent of new business single premium sales, Jackson’s overall strain remains low, supporting the generation of high returns on capital. New business economics on Jackson’s sales remain extremely attractive, with business written at an overall internal rate of return in excess of 20 per cent and payback periods averaging two years.
Estimated Solvency II surplus at 1 January/economic capital surplus at 1 January 9.7 9.7 Operating experience 2.7 2.4 Non-operating experience (including market movements) (1.1) (0.6) Other capital movements
6 Before allowing for second interim ordinary dividend. 7 The Group Solvency II surplus represents the shareholder capital position excluding the contribution to Own Funds and the Solvency Capital Requirement from ring-fenced with-profits funds and staff pension schemes in surplus. The estimated solvency position includes the impact of recalculated transitionals at the valuation date, which has reduced the Group shareholder surplus from £12.9 billion to £12.5 billion. The formal Quantitative Reporting Templates (Solvency II regulatory templates) will include transitional measures without this recalculation.
23 Net of related charges to deferred acquisition costs and tax.
Liquidity The objective is to ensure that the Group is able to generate sufficient cash resources to meet financial obligations as they fall due in business as usual and stressed scenarios. Risk appetite with respect to liquidity risk is measured using a Liquidity Coverage Ratio which considers the sources of liquidity versus liquidity requirements under stress scenarios.
‘Macro’ risks Some of the risks that we are exposed to are necessarily broad given the external influences which may impact on the Group. These risks include: Global economic conditions Changes in global economic conditions can impact us directly; for example by leading to poor returns on our investments and increasing the cost of promises we have made to our customers. They can also have an indirect impact; for example economic pressures could lead to decreased savings, reducing the propensity for people to buy our products. Global economic conditions may also impact on regulatory risk for the Group by changing prevailing political attitudes towards regulation.
Indonesia and Prudential Indonesia to move outside of their “comfort zones” and combine financial literacy resources with the rejuvenation of the Taman Mataram city park. The end result was, however, beyond our expectations. The corporation has set exceptionally high standards in its efforts to improve the welfare of those within the communities in which it operates.’
Chairman’s Challenge is our flagship international volunteering programme, bringing together people from across the Group to help in their communities. Colleagues from across the Group give their time and skills to support our global charity partners, including Plan International, Help Age International and Junior Achievement.
Group Executive Committee (GEC) Includes Executive Directors 13 = 11 2
‘There has been a tremendous amount of interest for more recycling options in the office. The business sent approximately 1,138,000lbs of refuse in Lansing to landfill in 2015 and the aim of this new programme is to reduce waste sent to the landfill to zero. Many of our associates are students at Michigan State University and already recycle on campus. I’ve had numerous employees reach out to me with ideas and questions about how we can make more of a difference environmentally. We’re thrilled to support this programme and see it make an impact on reducing our carbon footprint.’
The Board The Board regularly reviews the Group’s corporate responsibility performance and scrutinises and approves the Group corporate responsibility report and strategy on an annual basis.
Other appointments Philip is a Deputy Chairman of the Takeover Panel, a nonexecutive director of Severn Trent plc and the Senior Independent Director of UK Financial Investments Limited. Philip is also Chairman of City of London Investment Trust plc and Chairman of M&G Group Limited, a subsidiary of Prudential plc.
Other appointments Sir Howard is Chairman of the Royal Bank of Scotland and a Professor at Institut d’Études Politiques (Sciences Po). He is Chairman of the International Advisory Board of the China Securities Regulatory Commission and a member of the International Advisory Board of the China Banking Regulatory Commission.
— Meeting regularly with the Non-executive Directors, without the Executive Directors present
— Paul plays a key role in the Group’s engagement with regulators
— Mike works closely with the Executive Directors in developing the Operating Plan, for approval by the Board
In the first half of 2016, governance processes were established for the Chairman and the Audit and Risk Committee Chairs to meet with their material subsidiary counterparts and keep the Board appropriately updated. In addition, the Audit and Risk Committees receive written updates outlining the business discussed by the material subsidiary audit and risk committees.
Post action reviews – The 2015 evaluation noted that the Board should continue to analyse past decisions closely, testing assumptions and projections made in the past.
The Board will track its progress in addressing these themes at its meetings throughout the course of 2017 and report on actions taken in its next Annual Report.
The Annual General Meeting is an opportunity for further shareholder engagement, for the Chairman to explain the Company’s progress and, along with other members of the Board, to answer any questions. All Directors then in office attended the 2016 Annual General Meeting.
The principal Committees of the Board are the Nomination and Governance, Audit, Risk, and Remuneration Committees. These Committees form a key element of the Group governance framework, facilitating effective independent oversight of the Group’s activities by the Non-executive Directors.
Committee members — Paul Manduca (Chairman) — Howard Davies — Ann Godbehere — Anthony Nightingale — Philip Remnant
Number of meetings in 2016: 10 (in addition, a joint meeting was held with the Risk Committee)
In line with the Auditing Practices Board Ethical Statements and the Sarbanes-Oxley Act, a new lead audit partner is appointed every five years. A new lead audit partner was appointed in respect of the 2012 financial year who will be replaced following the completion of this 2016 reporting cycle. The replacement lead audit partner has been identified.
At the half year, the Committee considered recommendations to refresh the Internal Audit Plan in response to changes in the business unit operating environments and an update to the Group’s top risks. The 2017 Internal Audit Plan was formulated based on a bottom-up risk assessment of audit needs mapped against various metrics combined with top-down challenge by the GwIA Leadership Team and executive management at business unit and Group level. The plan was then mapped against a series of risk and control parameters, including the top risks identified by the Risk Committee, to verify that it is appropriately balanced between financial, business change, regulatory and operational risk drivers and provides appropriate coverage of key risk areas and audit themes within a risk-based cycle of coverage. Key areas of focus for 2017 include programme assurance, cyber security, outsourcing arrangements, customer outcomes and governance.
Committee members — Howard Davies (Chairman) — Ann Godbehere — Kai Nargolwala — Lord Turner
In order to be confident that the business continued to remain within risk appetite, risk limits were reviewed and several new measures introduced.
The proposed new Directors’ remuneration policy set out on pages 135 to 150 has been designed to: Simplify incentive arrangements The Committee is committed to simplifying the remuneration arrangements for the Executive Directors wherever possible. To this end, the number of Annual Incentive Plan financial metrics is being reduced from the seven measures used in 2016 to four measures (cash flow, operating free surplus, IFRS operating profit and NBP EEV profit) for the 2017 financial year. These targets are aligned with the Group’s focus on growth and cash generation. Minimum capital levels must be achieved for future bonuses to be paid, underscoring the importance of disciplined and proactive risk and capital management.
As the Committee considered the new Directors’ remuneration policy, I corresponded with and met shareholders who together own around 43 per cent of the Group’s share capital as well as organisations that represent and advise shareholders. The Committee and I are grateful for the feedback and support that we received.
Above stretch level IFRS operating profit accounted for 35 per cent of Group financial bonus targets
The maximum opportunity is up to 200% of salary 40% of bonus is deferred into shares for three years
The Chief Executive, M&G receives an award with an initial value of 300 per cent of salary under this plan. Maximum vesting is 100 per cent of the number of phantom shares originally awarded.
Prudential does not consult with employees when setting the Directors’ remuneration policy: Prudential is a global organisation with employees, and agents in multiple business units and geographies. As such, there are practical challenges associated with consulting with employees directly on this matter. As many employees are also shareholders, they are able to participate in binding votes on the Directors’ remuneration policy and annual votes on the Annual report on remuneration.
Executive Director Maximum value of award at full vesting1 Percentage of the
The employee comparator group used for the purpose of this analysis is all UK employees. This includes employees in the UK insurance operations business, M&G and Group Head Office, and reflects the average change in pay for employees employed in both 2015 and 2016. The salary increase includes uplifts made through the annual salary review as well as any additional changes in the year; for example to reflect promotions or role changes. The UK workforce has been chosen as the most appropriate comparator group as it reflects the economic environment where the Group Chief Executive is employed. The Group Chief Executive’s salary increase reflects his promotion from President & CEO, Jackson to Group Chief Executive during 2015. With effect from 1 January 2016, the Group Chief Executive’s salary increased by 1 per cent.
Buy-out award In order to facilitate Anne Richards’s appointment as Chief Executive, M&G, the Company agreed to replace the deferred bonus awards she forfeited on leaving Aberdeen Asset Management. The terms of the replacement award were designed to replicate those of the forfeited awards and are therefore not subject to performance conditions and will accrue dividend equivalents. These awards entitle Anne to receive a cash amount equal to the market value of the specified notional number of Prudential shares on the date of exercise, less an award price of 5p per share. The award will vest on the dates detailed below. The market value of Prudential plc shares on the date of the award (23 June 2016) was £13.22.
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.
5 For the 1 January 2016 figure Mike Wells’s beneficial interest in shares is made up of 232,594 ADRs (representing 465,188 ordinary shares) and 97 ordinary shares. For the 31 December 2016 figure his beneficial interest in shares is made up of 218,576 ADRs (representing 437,152 ordinary shares) and 107,382 ordinary shares.
Notes 1 The number of shares vesting includes accrued dividend shares. 2 The share price used to calculate the value was the average share price for the three months up to 31 December 2016, being £14.86.
The Remuneration Committee reviews salaries annually with changes normally effective from 1 January. In determining base salary for each executive, the Committee considers factors such as: — Salary increases for other employees across the Group; — The performance and experience of the executive; — The size and scope of the role; — Group and/or business unit financial performance; — Internal relativities; and
Contributions into the PCA Mandatory Provident Fund are in line with statutory limits.
In assessing performance, the Committee will take into account the personal performance of the Executive Director and the Group and/or business units’ adherence to the Group’s risk framework and appetite, as well as other relevant factors. To assist them in their assessment the Committee considers a report from the Group Chief Risk Officer on adherence to the Group’s risk framework and appetite and to all relevant conduct standards.
The PLTIP has a three-year performance period (although the Committee has the discretion to apply shorter or longer performance periods when the PLTIP is used for buy-out awards on recruitment – see the Approach to recruitment remuneration section).
Committee discretions For any award made under the PLTIP to vest, the Committee must be satisfied that the quality of the Company’s underlying financial performance justifies the level of reward delivered at the end of the performance period. The Committee receives data about factors such as risk management and the cost of capital to support their decision. The Committee has the discretion to alter or disapply the holding period if it believes that it is appropriate. See the Policy on corporate transactions section for details of the Committee’s powers in the case of corporate transactions.
Progress against the share ownership guidelines is detailed in the Statement of Directors’ shareholdings section of the Annual report on remuneration.
On death, disablement and in other exceptional circumstances, the Committee has discretion to release vested long-term incentive awards earlier than the end of the holding period. The clawback provisions will continue to apply.
The Committee may award a departing executive a bonus which will usually be pro-rated to reflect the portion of the final financial year in which they served which had elapsed on the last day of their employment. Any such bonus would be calculated with reference to financial, functional and/or personal performance measures in the usual way. The normal portion of any such bonus awarded must be deferred.
— Exchange or release (taking into account performance, time elapsed and other relevant matters) of PLTIP awards.
Capital measure Cumulative three-year ECap Group operating capital generation relative to plan, less cost of capital (based on the capital position at the start of the performance period).
Vesting basis: 100 per cent vesting for achieving plan, otherwise 0 per cent vesting. The plan figure for this metric will be published in the Annual Report for the final year of the performance period.
As referred to in the report of the Nomination and Governance Committee, the appointment of a Chairman of the Board of a material subsidiary (Jackson National Life Insurance Company) has been agreed. The Remuneration Committee has approved a fee of £250,000 per annum, fixed for a period of two years from the date of the appointment. This fee will be payable in US dollars and is the same as the fee agreed for the chairmen of the boards of Prudential Assurance Company Limited, M&G Group Limited and Prudential Corporation Asia Limited. In addition, the Remuneration Committee has approved a basic fee of £70,000 per annum for membership of the boards of these material subsidiaries, a fee for membership of the audit or risk committees of £10,000 per annum and a fee for chairing those committees of £30,000 per annum.
Deferred 2013 PCA deferred bonus plan award 2014 70,831 70,831 – 31 Dec 15 31 Mar 16 1,317 1,301
Based on profit attributable to the equity holders of the Company: B6 * This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders. This is principally because the corporate taxes of the Group include those on the income of consolidated with-profits and unit-linked funds that, through adjustments to benefits, are borne by policyholders. These amounts are required to be included in the tax charge of the Company under IAS 12. Consequently, the profit before all taxes measure is not representative of pre-tax profits attributable to shareholders. Profit before all taxes is determined after deducting the cost of policyholder benefits and movements in the liability for unallocated surplus of the PAC with-profits fund after adjusting for taxes borne by policyholders.
Treasury shares Movement in own shares in respect of share-based payment plans – – 2 – – 2 – 2 Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS – – (6) – (6) – (6)
Profit before tax is a significant IFRS income statement item. The Group has chosen to present a measure of profit before tax attributable to shareholders which distinguishes between tax attributable to policyholders and unallocated surplus and tax borne by shareholders, to support understanding of the performance of the Group.
Assets held at amortised cost Assets held at amortised cost are subject to impairment testing where appropriate under IFRS requirements by comparing estimated future cash flows to the carrying value of the asset. In estimating future cash flows, the Group looks at the expected cash flows of the assets and applies historical loss experience of assets with similar credit risks that has been adjusted for conditions in the historical loss experience which no longer exist, or for conditions that are expected to arise. The estimated future cash flows are discounted using the financial asset’s original or variable effective interest rate and exclude credit losses that have not yet been incurred. In estimating future cash flows, for the purposes of impairment testing for assets held at amortised cost, the Group looks at the expected cash flows of the assets and applies historical loss experience of assets with similar credit risks that has been adjusted for conditions in the historical loss experience which no longer exist, or for conditions that are expected to arise. The estimated future cash flows are discounted using the financial asset’s original or variable effective interest rate and exclude credit losses that have not yet been incurred.
A3.2 New accounting pronouncements not yet effective The following standards, interpretations and amendments have been issued but are not yet effective in 2016, 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.
As a result of the scope exclusion above, this standard is of particular relevance only to the revenue recognition of the Group’s asset management contracts and the measurement of the Group’s investment contracts that do not contain discretionary participating features where the contracts include an investment management element. The Group does not expect the standard to have a significant impact on the Group’s financial statements.
— The hedge accounting requirements which are more closely aligned with the risk management activities of the company.
Profit before tax attributable to shareholders 2,275 3,148 3,437 (28)% (34)% Tax charge attributable to shareholders’ returns (354) (569) (621) 38% 43%
Profit for the year attributable to shareholders 1,921 2,579 2,816 (26)% (32)%
effect of market movements on both the measured value of guarantees in Jackson’s variable annuity and fixed index annuity products and on the related derivatives used to manage the exposures inherent in these guarantees. As the Group applies US GAAP for the measured value of the product guarantees this item also includes asymmetric impacts where the measurement bases of the liabilities and associated derivatives used to manage the Jackson annuity business differ as described below.
(iii) Other derivative value movements The principal example of non-equity-based derivatives (for example, interest rate swaps and swaptions) whose value movements are excluded from operating profit, arises in Jackson. Non-equity-based derivatives are primarily held by Jackson as part of a broadly-based hedging programme for features of Jackson’s bond portfolio (for which value movements are booked in the statement of comprehensive income rather than the income statement), product liabilities (for which US GAAP accounting as ‘grandfathered’ under IFRS 4 does not fully reflect the economic features being hedged), and the interest rate exposure attaching to equity-based embedded derivatives.
Equity-type securities As at 31 December 2016, the equity-type securities for US insurance non-separate account operations amounted to £1,323 million (2015: £1,004 million). For these operations, the longer-term rates of return for income and capital applied in the years indicated, which reflect the combination of the average risk-free rates over the year and appropriate risk premiums are as follows: Equity-type securities such as common and preferred stock and portfolio holdings in mutual funds 5.5% to 6.5% 5.7% to 6.4% Other equity-type securities such as investments in limited partnerships and private equity funds 7.5% to 8.5% 7.7% to 8.4%
The revenue for M&G of £956 million (2015: £961 million), comprising the amounts for asset management fee income, other income and performance-related fees shown above, is different to the amount of £1,188 million shown in the main table of this note. This is because the £956 million (2015: £961 million) is after deducting commissions which would have been included as charges in the main table. The difference in the presentation of commission is aligned with how management reviews the business.
(c) Movements in amounts attributable to external unit holders are in respect of those OEICs and unit trusts which are required to be consolidated and comprises a charge of £(485) million (2015: £(599) million) for UK insurance operations and a charge of £(77) million (2015: £(19) million) for Asia insurance operations.
The PCA LTIP provides eligible employees with conditional awards. Awards are discretionary and on a year-by-year basis determined by Prudential’s full year financial results and the employee’s contribution to the business. Awards vest after three years subject to the employee being in employment. Vesting of awards may also be subject to performance conditions. All awards are made in Prudential shares, or ADRs, except for countries where share awards are not feasible due to securities and/or tax reasons, where awards will be replaced by the cash value of the shares that would otherwise have been transferred.
Employees and eligible agents in a number of geographies are eligible for plans similar to the HMRC-approved Save As You Earn (SAYE) share option scheme in the UK. Eligible employees participate in the international savingsrelated share option scheme while eligible agents based in certain regions of Asia can participate in the nonemployee savings-related share option scheme.
Eligible employees outside the UK are invited to participate in arrangements similar to the Company’s HMRCapproved UK SIP, which allows the purchase of Prudential plc shares. Staff based in Ireland and Asia are eligible for the Share Participation Plan.
The total tax charge comprises tax attributable to policyholders and unallocated surplus of with-profits funds, unit-linked policies and shareholders as shown below:
Total actual tax charge (credit) 239 (65) 190 (10) 354 937 1,291
US insurance operations The £159 million reconciling item ‘items related to taxation of life insurance businesses’ reflects the impact of the dividend received deduction on the taxation of profits from variable annuity business.
Based on profit for the year 3,148 (569) 2,579 101.0p 100.9p * To facilitate comparisons of operating profit based on longer-term investment returns that reflect the Group’s retained operations, the results attributable to the held for sale Korea life business are included separately within the supplementary analysis of profit above.
unit trusts and similar funds – – – 22 Deferred tax liabilities – 2,831 2,831 2,086 Current tax liabilities – – – 3 Accruals, deferred income and other liabilities – 4,749 4,749 4,069
Total financial investments, net of derivative liabilities 71,415 49,881 4,850 126,146
Notes (i) Loans and receivables are reported net of allowance for loan losses of £15 million (2015: £10 million). (ii) As at 31 December 2016, £306 million (2015: £481 million) of convertible bonds were included in debt securities and £1,455 million (2015: £1,217 million) were included in
(c) Liabilities of £(883) million (2015: £(1,013) million) for the net asset value attributable to external unit holders in respect of the consolidated investment funds, that are non-recourse to the Group. These liabilities are valued by reference to the underlying assets.
Corporate and government security and commercial loans: Publicly traded and SEC Rule 144A securities* 25,992 21,776 Non-SEC Rule 144A securities 4,576 3,733 Asset-backed securities (see note (e)) 4,321 4,320
(iii) Age analysis of unrealised losses for the periods indicated The following table shows the age analysis of all the unrealised losses in the portfolio by reference to the length of time the securities have been in an unrealised loss position: Noninvestment
C3.4 Financial instruments – additional information (a) Financial risk (i) Liquidity analysis Contractual maturities of financial liabilities on an undiscounted cash flow basis The following table sets out the contractual maturities for applicable classes of financial liabilities, excluding derivative liabilities and investment contracts that are separately presented. The financial liabilities are included in the column relating to the contractual maturities at the undiscounted cash flows (including contractual interest payments) due to be paid assuming conditions are consistent with those of year end.
Financial assets that would have been past due or impaired had the terms not been renegotiated amounted to £27 million
The exchange risks inherent in these exposures are mitigated through the use of derivatives, mainly forward currency contracts (note 3.4(b) below).
Financial liabilities: Securities lending and repurchase agreements (1,927) – 97 1,830 –
The following tables show the carrying value of the policyholder liabilities and the maturity profile of the cash flows, on a discounted basis for 2016 and 2015: 2016 £m
PCFA00 * For both males and females, the initial rates of mortality improvement in the CMI Model are uplifted by 0.25% per annum.
For annuities in deferment, the tables used by both the non-profit annuities within the WPSF and PRIL were AM92 – four years (males) and AF92 – four years (females) for 2015.
The interest guarantees are not explicitly valued but are reflected as they are earned in the current account liability value.
GICs feature a lump sum policyholder deposit on which interest is paid at a rate fixed at inception. Market value adjustments are made to the value of any early withdrawals.
New mortality projection models are released annually by the Continuous Mortality Investigation (CMI). The CMI 2014 model was used to produce the 2016 results calibrated to reflect an appropriate view of future mortality improvements.
Credit risk For IFRS reporting, the results for UK shareholder-backed annuity business are particularly sensitive to the allowances made for credit risk on fixed-interest securities. Further details on credit risk allowance are provided in note B4(b).
Note (i) All of the additions are through internal development. The carrying amount of the balance comprises the following gross and accumulated amortisation amounts: Gross amount 145 144 Accumulated amortisation (81) (70)
£546 million. (vi) These borrowings can be converted, in whole or in part, at the Company’s option and subject to certain conditions, on any interest payment date, into one or more series of
The above table provides sensitivity movements, at a point in time, while the actual impact on financial results would vary contingent upon the volume of new product sales and lapses, changes to the derivative portfolio, correlation of market returns and various other factors including volatility, interest rates and elapsed time.
The close matching by the Group of assets of appropriate duration to annuity liabilities is based on maintaining economic and regulatory capital. The measurement of liabilities under Solvency II reporting requirements and IFRS are not the same with additional assets used for the IFRS annuity liabilities. As a result, IFRS has a different sensitivity to interest rate and credit risk than under Solvency II.
C8.2 Current tax Of the £440 million (2015: £477 million) current tax recoverable, the majority is expected to be recovered in one year or less. The current tax recoverable includes £112 million in relation to the ongoing litigation relating to the historic tax treatment of dividends received from overseas portfolio investments of life insurance companies. PAC is the test case for this litigation. In April 2016, the UK Court of Appeal found in PAC’s favour on all substantive points in the litigation. HM Revenue & Customs have been granted permission to appeal the Court of Appeal’s judgment to the Supreme Court. The Supreme Court hearing has not yet been scheduled. However, it is expected to be at some time in 2018.
Deficit funding of £21 million per annum from 1 January 2015 until 31 March 2024, or earlier if the scheme’s funding level reaches 100 per cent before this date. The deficit funding will be reviewed every three years at subsequent valuations
Rate of inflation 3.2% 3.0% RPI: Decrease by 0.2% Decrease in scheme liabilities by: with consequent reduction Other schemes 4.1% 4.0% in salary increases
The Group has provided other guarantees and commitments to third-parties entered into in the normal course of business but the Company does not consider that the amounts involved are significant.
BOCHK Aggressive Growth Fund Ordinary shares 54.69% 27th Floor, Bank of China Tower, Central and Western District, Hong Kong
Brooke (Holdco 1) Inc Ordinary shares 100.00% 1105 N Market Street, Suite 1300, Wilmington, DE 19801, USA
Eastspring Al-Wara’ Investments Berhad Ordinary shares 100.00% 16th Floor, Wisma Sime Darby, Jalan Raja Laut, 50350 Kuala Lumpur, Malaysia
Eastspring Investments Berhad Ordinary shares 100.00% 16th Floor, Wisma Sime Darby, Jalan Raja Laut, 50350 Kuala Lumpur, Malaysia
Ordinary shares 94.78% 15th Floor, Shinhan Investment Tower, 70 Yoidae-ro, Youngdungpo-gu, Seoul 07325, Korea
Edger Investments Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
First Dakota, Inc. Ordinary shares 100.00% 314 East Thayer Avenue, Bismarck, ND 58501, USA
Five Hotel Holdings, LLC Membership interest 100.00% CT Corporation System, 208 S. LaSalle St. Suite 814, Chicago IL 60604, Illinois USA
Holborn Bars Nominees Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
Jackson National Life Insurance Company Ordinary shares 100.00% 1 Corporate Way, Lansing,Michigan 48951, USA
M&G Global Credit Investment Fund Ordinary shares 100.00% 80, Route d’Esch, L-1470 Luxembourg
Prudential Africa Services Limited Ordinary shares 100.00% 5th Ngong Avenue, Nairobi, Kenya
Prudential Development Management Limited Ordinary Shares/ Redeemable Preference Shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
Ordinary shares 99.93% 9/9 Sathorn Building, 20th– 27th Fl., South Sathorn Rd., Yannawa, Sahtorn, Bangkok 10120, Thailand
Prudential Life Assurance Limited Ordinary shares 100.00% 226 Finsbury House, Buteko Avenue, Ndola, Zambia
Prudential Pensions Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
Prudential Unit Trusts Limited Ordinary shares 100.00% Laurence Pountney Hill, London EC4R 0HH, UK
(d) Investment return Investment return included in the income statement principally comprises interest income, dividends, investment appreciation/ depreciation (realised and unrealised gains and losses) on investments designated as fair value through profit or loss, and realised gains and losses (including impairment losses) on items held at amortised cost and Jackson’s debt securities designated as available-for-sale. Movements in unrealised appreciation/depreciation of Jackson’s debt securities designated as available-for-sale are recorded in other comprehensive income. Interest income is recognised as it accrues, taking into account the effective yield on investments. Dividends on equity securities are recognised on the ex-dividend date and rental income is recognised on an accrual basis.
(i) Pension schemes For the Group’s defined benefit schemes, if the present value of the defined benefit obligation exceeds the fair value of the scheme assets, then a liability is recorded in the Group’s statement of financial position. By contrast, if the fair value of the assets exceeds the present value of the defined benefit obligation then the surplus will only be recognised if the nature of the arrangements under the trust deed, and funding arrangements between the Trustee and the Company, support the availability of refunds or recoverability through agreed reductions in future contributions. In addition, if there is a constructive obligation for the Company to pay deficit funding, this is also recognised such that the financial position recorded for the scheme reflects the higher of any underlying IAS 19 deficit and the obligation for deficit funding.
Additionally: — In the US, the valuation of the guarantees in the variable annuity business is a complex exercise as it involves exercising significant judgement over the relationship between the investment return attaching to these products and the guarantees contractually provided to policyholders and the likely policyholder behaviour in response to changes in investment performance.
The risk The Group’s investment portfolio represents 90 per cent of the Group’s total assets. The valuation of the portfolio involves judgement in selecting the valuation basis for each investment and further judgement in determining the appropriate valuation for harder to value investments.
Audits of account balances that correspond to the risks of material misstatement identified above in relation to Prudential Capital and the insurance operations in Korea (full scope audit in 2015), China, Taiwan and Vietnam. The account balances audited are policyholder liabilities, investments, and deferred acquisition costs.
Net increase in shareholders’ equity 9 7,082 3,198 Shareholders’ equity at beginning of year
Policyholder liabilities (net of reinsurers’ share) and unallocated surplus of with-profits funds (393,262) (327,711) Less shareholders’ accrued interest in the long-term business 9 24,302 19,404
Total EEV basis shareholders’ equity (excluding non-controlling interests) 9 38,968 32,359 * Following its classification as held for sale, Korea life business is included in total assets at a carrying value of £105 million (see note 17 for details). † Including liabilities in respect of insurance products classified as investment contracts under IFRS 4. ‡ The 2016 results for UK insurance operations have been prepared on a basis that reflects the Solvency II regime effective from 1 January 2016 (see note 2 for details). The 2015 comparative results for UK insurance operations reflect the Solvency I basis being the regime applicable for the year.
Effect of implementation of Solvency II on net worth note (a) 2,760 Effect of implementation of Solvency II on net value of in-force business (VIF) note (b) (3,233)
Life operations excluding UK bulk annuities 4 3,088 2,492 2,774 24% 11%
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Existing business – transfer to net worth 1,223 (213) 1,010 (1,010) – Expected return on existing business note 5 47 53 100 483 583 Changes in operating assumptions and
Other income and expenditure net of restructuring and Solvency II costs note (iii)(b) (703) (588) (588) (20)% (20)%
Covered business comprises the Group’s long-term business operations, with two exceptions: — The closed Scottish Amicable Insurance Fund (SAIF) which is excluded from covered business. SAIF is a ring-fenced sub-fund of the Prudential Assurance Company (PAC) long-term fund, established by a Court-Approved Scheme of Arrangement in October 1997. SAIF is closed to new business and the assets and liabilities of the fund are wholly attributable to the policyholders of the fund.
(viii) Allowance for risk and risk discount rates Overview Under the EEV Principles, discount rates used to determine the present value of future cash flows are set by reference to risk-free rates plus a risk margin.
The risk margin should reflect any non-diversifiable risk associated with the emergence of distributable earnings that is not allowed for elsewhere in the valuation. Prudential has selected a granular approach to better reflect differences in market risk inherent in each product group. The risk discount rate so derived does not reflect an overall Group market beta but instead reflects the expected volatility associated with the cash flows for each product category in the embedded value model.
Notes (a) For shareholder-backed annuity business, the movements in the pre-tax long-term nominal rates of return and risk discount rates for new and in-force businesses reflect the effect of changes in asset yields (based on average yields for new business).
Asia insurance operations Cambodia – – 14 8 14 8 66 38 Hong Kong 1,140 546 1,798 1,158 1,912 1,213 10,930 7,007 Indonesia 236 230 255 303 279 326 1,048 1,224 Malaysia 110 100 233 201 244 211 1,352 1,208 Philippines 91 146 61 44 70 59 278 287 Singapore 523 454 299 264 351 309 2,627 2,230 Thailand 80 69 81 88 89 95 404 422 Vietnam 6 6 115 82 116 83 519 343
— Insurance margin increased on a constant exchange rate basis by 24 per cent to £1,040 million in 2016 (AER: 38 per cent), primarily reflecting the continued growth of the in-force book, which contains a relatively high proportion of risk-based products. Insurance margin includes non-recurring items of £49 million (2015: £17 million on CER basis; £15 million on AER basis).
Analysis of UK operating profit drivers: — Spread income reduced from £258 million in 2015 to £177 million in 2016, mainly due to lower annuity sales. Spread income has two components: – A contribution from new annuity business which was lower at £41 million in 2016 compared to £123 million in 2015, as we withdrew our participation from this business. IFRS accounting (based on grandfathered GAAP) permits up front recognition of a considerable proportion of the spread to be earned over the entire term of the new contracts.
— The contribution from longevity reinsurance and other management actions to improve solvency during 2016 was £332 million (2015: £400 million). Further explanation and analysis is provided in Additional Unaudited IFRS Financial Information section I(d).
IFRS shareholders’ equity 14.7 13.0 Restate US insurance entities from IFRS onto local US statutory basis (2.2) (1.5) Remove DAC, goodwill and intangibles (3.8) (3.7) Add subordinated debt 6.3 4.4 Impact of risk margin (net of transitionals) (3.4) (2.5) Add value of shareholder transfers 4.0 3.1 Liability valuation differences 10.5 8.6 Increase in value of net deferred tax liabilities (resulting from valuation differences above) (1.3) (0.9)
IFRS unallocated surplus of UK with-profits funds 11.7 10.5 Adjustments from IFRS basis to Solvency II
Less: Amounts expected to be realised in the current year (1,120) – – – – – – (1,120)
Underlying free surplus generated for total insurance and asset management operations note (2)
Annual premium equivalent (APE) sales 6,320 5,466 4,514 4,310 4,100 EEV new business profit (NBP) (post-tax) 3,088 2,609 2,104 2,057 1,766 * Excluding the £23 million APE and £11 million NBP for the sold PruHealth and PruProtect businesses.
Global financial markets are subject to uncertainty and volatility created by a variety of factors, including concerns over: the change in accommodative monetary policies in the US, the UK and other jurisdictions with the risk of a disorderly repricing of inflation expectations and global bond yields, sovereign debt, a general slowing in world growth, the increased level of geopolitical risk and policy‑related uncertainty and potentially negative socio‑political events.
A significant part of the profit from Prudential’s UK insurance operations is related to bonuses for policyholders declared on with‑profits products, which are broadly based on historical and current rates of return on equity, real estate and fixed income securities, as well as Prudential’s expectations of future investment returns. This profit could be lower in a sustained low interest rate environment.
In the US, there has been significant attention on the different regulatory standards applied to investment advice delivered to retail customers by different sectors of the industry. As a result of reports relating to perceptions of industry abuses, there have been numerous regulatory inquiries and proposals for legislative and regulatory reforms. This includes focus on the suitability of sales of certain products, alternative investments and the widening of the circumstances under which a person or entity providing investment advice with respect to certain employee benefit and pension plans would be considered a fiduciary (subjecting the person or entity to certain regulatory requirements, such as those adopted by the US Department of Labor issued in April 2016 which is likely to cause market disruption in the shorter term). There is a risk that new regulations introduced may have a material adverse effect on the sales of the products by Prudential and increase Prudential’s exposure to legal risks.
Within the UK, Prudential’s principal competitors include many of the major retail financial services companies and fund management companies including, in particular, Aviva, Legal & General, Lloyds Banking Group, Standard Life, Schroders, Invesco Perpetual, and Fidelity.
Prudential Assurance Co. Singapore (Pte) Ltd’s financial strength is rated AA by Standard & Poor’s. This rating is on a stable outlook.
Constant Exchange Rates (CER) Constant Exchange Rates – Prudential plc reports its results at both actual exchange rates (AER) to reflect actual results and also constant exchange rates (CER) so as to eliminate the impact from exchange translation. CER results are calculated by translating prior period results using current period foreign currency exchange rates, ie, current period average rates for the income statements and current period closing rate for the balance sheet.
Irish branch register Capita Asset Services, Shareholder solutions (Ireland) Ltd, PO Box 7117, Dublin 2, Ireland.
Barry Stowe Chairman and Chief Executive Officer of North American Business Unit
This document may contain ‘forwardlooking statements’ with respect to certain of Prudential's plans and its goals and expectations relating to its future financial condition, performance, results, strategy and objectives. Statements that are not historical facts, including statements about Prudential’s beliefs and expectations and including, without limitation, statements containing the words ‘may’, ‘will’, ‘should’, ‘continue’, ‘aims’, ‘estimates’, ‘projects’, ‘believes’, ‘intends’, ‘expects’, ‘plans’, ‘seeks’ and ‘anticipates’, and words of similar meaning, are forward-looking statements. These statements are based on plans, estimates and projections as at the time they are made, and therefore undue reliance should not be placed on them. By their nature, all forward-looking statements involve risk and uncertainty. A number of important factors could cause Prudential's actual future financial condition or performance or other indicated results to differ materially from those indicated in any forward-looking statement. Such factors include, but are not limited to, future market conditions, including fluctuations in interest rates and exchange rates, the potential for a sustained low-interest rate environment, and the performance of financial markets generally; the policies and actions of regulatory authorities, including, for example, new government initiatives; the political, legal and economic effects of the UK’s vote to leave the European Union; the impact of continuing designation as a Global Systemically Important Insurer or ‘G-SII’; the impact of competition, economic uncertainty, inflation and deflation; the effect on Prudential’s business and results from, in particular, mortality and morbidity trends, lapse rates and policy renewal rates; the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; the impact of changes in capital, solvency standards, accounting standards or relevant regulatory frameworks, and tax and other legislation and regulations in the jurisdictions in which Prudential and its affiliates operate; and the impact of legal and regulatory actions, investigations and disputes. These and other important factors may, for example, result in changes to assumptions used for determining results of operations or re-estimations of reserves for future policy benefits. Further discussion of these and other important factors that could cause Prudential's actual future financial condition or performance or other indicated results to differ, possibly materially, from those anticipated in Prudential's forward-looking statements can be found under the 'Risk factors' heading in the Annual Report and the ‘Risk factors’ heading of Prudential’s most recent annual report on Form 20-F filed with the US Securities and Exchange Commission. Prudential’s most recent annual report and Form 20-F are available on its website at www.prudential.co.uk