Annual Report 2009
THERE’S
MORE TO
PRUDENTIAL
The directors’ report of
Prudential plc for the year
ended 31 December 2009
is set out on pages 1 to 94
and on pages 344 to 347
and includes the sections
of the Annual Report
referred to in these pages.
Contents
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4
6
24
40
46
63
69
76
79
93
94
96
115
OVERVIEW
At a glance
Chairman’s statement
Group Chief Executive’s report
BUSINESS REVIEW
Chief Financial Officer’s overview
Risk and capital management
Business unit review:
• Insurance operations: Asia, US, UK
• Asset management: M&G, Asia, US
Other corporate information
Corporate responsibility review
GOVERNANCE
Board of directors
Governance report
Additional disclosures
Index to principal Directors’ Report disclosures
DIRECTORS’ REMUNERATION REPORT
Directors’ remuneration report
FINANCIAL STATEMENTS AND
EUROPEAN EMBEDDED VALUE (EEV)
BASIS SUPPLEMENTARY INFORMATION
Summary of statutory and supplementary
International Financial Reporting Standards
(IFRS) basis and EEV basis results
Index to Group financial statements
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated statement of changes in equity
Consolidated statement of financial position
Consolidated statement of cash flows
Notes on the Group financial statements
Balance sheet of the parent company
118
119
120
121
123
125
126
292
293 Notes on the parent company financial statements
302
Statement of directors’ responsibilities in respect
of the Annual Report and the financial statements
Independent auditor’s report to the members of
Prudential plc
EEV basis supplementary information
304
308 Notes on the EEV basis supplementary information
341
303
Statement of directors’ responsibilities in respect
of the EEV basis supplementary information
Independent auditor’s report to Prudential plc
on the EEV basis supplementary information
342
ADDITIONAL INFORMATION
Risk factors
Shareholder information
344
348
350 How to contact us
For further information please visit
www.prudentialreports.com/2009ar
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There’s more to Prudential
In 2009 we delivered an outstanding performance
during a year of unprecedented economic uncertainty.
This performance demonstrates the success of
our strategy to focus on the most profitable growth
opportunities in our chosen markets around the world.
Our European Embedded Value (EEV) operating profit
was up 8 per cent to £3,090 million and International
Financial Reporting Standards (IFRS) operating profit
based on longer-term investment returns was up by
10 per cent to £1,405 million.
Our performance has been delivered while taking a
disciplined approach to risk management and targeted
Group-wide actions to grow and protect our capital,
consolidating our position as one of the best capitalised
insurers in the world. Our estimated Insurance Groups
Directive (IGD) surplus was £3.4 billion at 31 December
2009. In 2010 we will continue to capitalise on our
competitive differentiators to accelerate the execution
of our strategy.
KEY PERFORMANCE INDICATORS
Annual premium equivalent new business premiums
+1%
2009
+11%
Retail
£2,890m £6m
-98%
Wholesale
£2,896m
£2,879m
2008
£2,615m
£264m
European Embedded Value operating profit
from long-term business
+14%
2009
£3,202m
2008
£2,810m
European Embedded Value new business profit
+34%
2009
£1,607m
2008
£1,200m
International Financial Reporting Standards
operating profit based on longer-term
investment returns
+10%
2009
£1,405m
2008
£1,283m
External funds under management
+44%
2009
2008
£62.3bn
Comparative at Actual exchange rates (AER)
£89.8bn
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Prudential at a glance
THERE’S
MORE TO
PRUDENTIAL
Prudential plc is an international financial
services group with significant operations in
Asia, the US and the UK. We serve approximately
25 million customers and have £290 billion of
assets under management. We are one of the best
capitalised insurers in the world with an Insurance
Groups Directive (IGD) capital surplus estimated
at £3.4 billion.*
Understanding and responding to our customers’
needs is at the heart of our business. It is something
we have been doing for over 160 years. We generate
sustainable value for our shareholders through a
relentless focus on meeting our customers’ savings,
income and protection needs and a disciplined
approach to investing in the most profitable growth
opportunities.
The Group is structured around four main business
units: Prudential Corporation Asia, Jackson National
Life Insurance Company, Prudential UK and M&G.
Our operating model allows each of our businesses to
stay close to their customers within the framework of
a consistent, Group-wide global approach to managing
risk, capital, cash, reputation and leadership
development and succession.
www.prudential .co.uk
Life assurance
% of Group APE new business premiums
44% Asia
25% UK
31% US
% of Group new business profit
45% Asia
14% UK
41% US
Asset management
% of Group external funds under
management
22% Asia
78% M&G
*At 31 December 2009 before final dividend
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Prudential plc > Annual Report 2009
Overview
www.prudentialcorporation-asia.com
PRUDENTIAL CORPORATION ASIA
Through its life insurance and asset management
operations, Prudential has 28 businesses in 13 countries
across Asia.
Prudential is a leading life insurer in Asia with a presence
in 12 markets and a top three position in seven key
locations: Hong Kong, India, Indonesia, Malaysia, Singapore,
the Philippines and Vietnam. We provide a comprehensive
range of savings, protection and investment products that
are specifically designed to meet the needs of customers
in each of our local markets.
Prudential’s asset management business in Asia has retail
operations in 10 markets and independently manages
assets on behalf of a wide range of retail and institutional
investors across the region.
www.jackson.com
JACKSON NATIONAL LIFE INSURANCE COMPANY
Jackson is one of the largest life insurance companies
in the US, providing retirement savings and income
solutions to more than 2.8 million customers. Jackson
is also one of the top five providers of variable and fixed
index annuities in the US.
Founded nearly 50 years ago, Jackson has a long and
successful record of providing advisers with the products,
tools and support to design effective retirement solutions
for their clients.
www.pru.co.uk
PRUDENTIAL UK
Prudential UK is a leading life and pensions
provider to approximately 7 million customers
in the United Kingdom.
It has a number of major competitive advantages
including significant longevity experience, multi-asset
investment capabilities, a strong investment track record,
a highly respected brand and financial strength. Prudential
UK continues to focus on its core strengths including its
annuities, pensions and investment products where it
can maximise the advantage it has in offering with-profits
and other multi-asset investment funds.
www.mandg.co.uk
M&G
M&G is Prudential’s UK and European fund management
business with total assets under management of
£174 billion (at 31 December 2009).
M&G has been investing money for individual and
institutional clients for nearly 80 years. Today it is one
of the largest investors in the UK stock market, as well
as being a powerhouse in fixed income.
Key statistics
Asia
17,000
employees
15m
Asia customers
United States
2.8m
US customers
3,000
employees
United Kingdom
7m
UK customers
3,000
employees
United Kingdom and Europe
350,000
customers
through M&G
investments
1,400
employees
% of Group
operating
profits
EEV*
34%
IFRS†
26%
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2009 highlights
• Over 15 million customers in 13 markets
• Top three position in fast-growing markets:
Hong Kong, Indonesia, Malaysia, the
Philippines, Singapore, Vietnam and India
(where we remain the leading private
sector life insurer)
• Extensive regional network of over
410,000 agents
• Further enhanced bancassurance
distribution in Singapore, Indonesia and
Thailand through partnership with United
Overseas Bank
• Award-winning, widely-recognised,
trusted brand – named Asia-Pacific’s
Health Insurer of Year in 2009 by Frost
and Sullivan
Internal Rate of Return (IRR) of over
20 per cent in 2009
•
• Top five provider of variable and fixed
EEV*
index annuities in US
• Ranked top insurance company for sales
support satisfaction in the Financial
Research Corporate Adviser Insights study
on Marketing Effectiveness
• Rated as a ‘World Class’ service provider
•
for five successive years by Service Quality
Measurement Group
‘Highest Customer Satisfaction by
Industry’ award from Service Quality
Measurement Group
• Record total APE retail sales of £912 million
•
– highest level in Jackson’s history
Internal Rate of Return (IRR) of over
20 per cent in 2009
39%
IFRS†
25%
• The strength and performance of our
EEV*
With-Profits Fund has once again allowed
us to deliver strong annualised returns
for policyholders
• Maintained a leading position in the
individual annuity market and launched
a new Income Choice Annuity product
• Won ‘Best Annuity Provider’ award at
2010 Professional Adviser Awards
• Customer Service Five-Star awards in Life
and Pensions and Investment categories
at the Financial Adviser Service Awards
Internal Rate of Return (IRR) of over
15 per cent in 2009
•
27%
IFRS†
36%
• 38 per cent of retail funds delivered
IFRS†
top-quartile investment performance
over three years
• 89 per cent of active institutional
funds delivered returns ahead of their
benchmarks over three years
• Record external net fund inflows of
£13.5 billion
13%
* % of Group EEV long-term operating profits
† % of Group IFRS operating profits
IFRS operating profits based on longer-term investment returns
before restructuring costs and other income and expenditure.
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Chairman’s statement
Harvey McGrath Chairman
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Prudential plc > Annual Report 2009
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CHAIRMAN’S
STATEMENT
I am delighted to welcome you to Prudential’s
2009 Annual Report, and very pleased to report
a year of outstanding performance.
During 2009, our clear and consistent strategy delivered
a strong rise in profits in very challenging and rapidly changing
conditions. All our businesses performed extremely well,
enabling the Group to deliver exceptional growth in
shareholder value.
Against this backdrop of performance, the Board has
recommended a final dividend of 13.56 pence per share,
bringing the full-year dividend to 19.85 pence per share,
an increase of 5 per cent.
Full-year dividend per share
+5%
2009
2008
19.85p
18.90p
From our origins in the UK, and for over 160 years, our mission
has been to meet our customers’ changing needs for savings,
income and protection. At the same time, our prudent but
proactive approach to capital management has ensured that
our financial position remains robust and resilient.
What has changed in more recent years is our geographical
presence in Asia. We are now present in 13 countries with
28 businesses, which offer the right combination of mature
and rapidly emerging markets. Without doubt, Asia is the
most attractive region in the world for Prudential. The region’s
changing demography, wealth and savings ratios offer a unique
opportunity for profitable growth which, in turn, is underpinned
by the bedrock of our established businesses in the UK and
the US. On 1 March 2010, we announced an agreement with
AIG for the combination of Prudential and AIA, a wholly owned
subsidiary of AIG. This agreement provides Prudential with
a one-off opportunity to transform the growth profile of
the Group and offers long-term material benefits to our
shareholders.
From our origins in the UK, and for over 160 years,
our mission has been to meet our customers’ changing
needs for savings, income and protection.
Alongside our clear strategic focus, unrivalled strength in
Asia, established positions in the UK and the US, and our
unique asset management business, we continue to benefit
from our powerful and trusted brands, our outstanding
product expertise and the strength of our leadership team.
During 2009, we reinforced our leadership and continued
our smooth succession to a new generation. Mark Tucker,
whose decision to leave Prudential was announced in March
2009, was succeeded as Group Chief Executive on 1 October
by Tidjane Thiam, formerly our Chief Financial Officer. We
thank Mark for his immense contribution to the Group over
the past 25 years.
Throughout the year, Tidjane has demonstrated his ability
to drive performance and build value, and has consistently
proven his ability to lead Prudential to the next level.
In April 2009, we announced the appointment of Nic Nicandrou
as Chief Financial Officer in succession to Tidjane. Nic, who
joined from Aviva, combines technical depth and experience
with high-quality leadership skills, making him the ideal person
to maintain our commitment to leading best-in-class disclosure
and transparency.
In July, we announced Rob Devey’s appointment as
Chief Executive, Prudential UK and Europe, in succession
to Nick Prettejohn. Rob joined from Lloyds Banking Group,
where he held several leadership roles. Also at Board level,
Sir Win Bischoff stepped down as a non-executive director
in September 2009 on his appointment as Chairman of Lloyds
Banking Group plc. He leaves with our thanks for his contribution
and best wishes for his new role.
Our strong performance in 2009 was not just about financial
returns. Sustainability remains a philosophy that is a fundamental
part of how we do business. Our founding principles of integrity,
security and prudence continue to drive our commitment to
supporting our customers and the well-being of the communities
in which we operate.
Our founding principles of integrity, security and
prudence continue to drive our commitment to
supporting our customers and the well-being of
the communities in which we operate.
I would particularly like to highlight the contribution of our
employees who volunteer their time supporting local communities
and good causes. During 2009, over 6,400 employees signed up
as volunteers – amounting to approximately one in four of our
workforce – with nearly half of them participating in our flagship
programme, The Chairman’s Award. This programme has gone
from strength to strength, bringing together employees as
volunteers on key projects working with our global charity
partners. Our volunteering programme is a demonstration
of our brand values in action.
After an outstanding year for Prudential, I remain extremely
confident about the prospects for our business. I believe our
strategy, skills and powerful brands uniquely position us in the
sector to drive profitable growth and create sustainable value.
I would like to express my thanks to all our people across the
world for their immense contribution to our continued success.
Harvey McGrath
Chairman
5
Group Chief Executive’s report
GROUP CHIEF
EXECUTIVE’S
REPORT
Tidjane Thiam Group Chief Executive
For further information please visit
www.prudentialreports.com/2009ar
6
Prudential plc > Annual Report 2009
I am pleased to report that Prudential delivered
an outstanding performance in 2009, generating
significantly higher profits while consuming less capital.
Our discipline in allocating capital to the most profitable
products and channels, combined with our proactive
management of the Group’s balance sheet, has allowed
us to completely transform our capital position, which
is now one of the strongest in the industry.
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We have delivered excellent results against a backdrop of
unprecedented market turbulence. After the severe difficulties
encountered by the world economy and financial markets in
the second half of 2008, we entered 2009 with a deliberately
defensive position. We recognised early on the implications
of the new economic climate and focused our strategy on
capital conservation and cash generation. We prioritised value
over volume and allocated capital strictly to the products and
channels with the highest rates of return and shortest payback
periods. This led us to significantly reduce our volumes of
wholesale business, allowing us to grow our relatively more
profitable retail sales by 11 per cent in a year when many
companies saw a contraction or stagnation of sales. This
highly disciplined approach meant that, as conditions started
to improve, our capital strength allowed us to capture a more
than proportionate share of our target markets.
We have consistently said our strategy is a formula for
outperformance, and these results demonstrate that we
have been able to execute it with discipline and effectiveness.
Total EEV operating profit before tax
+8%
2009
2008
£3,090m
£2,865m
IFRS operating profit before tax
+10%
2009
2008
£1,405m
£1,283m
As Group Chief Executive, my overriding objective is to
deliver sustainable increases in shareholder value. I am
pleased to report that we achieved this once again in 2009,
outperforming the sector in our chosen markets and in total
returns for shareholders. Going forward, I believe we have
the right strategy, products, geographic presence, brands,
management and capital strength to sustain this
outperformance into the future.
We have consistently said our strategy is a formula
for outperformance, and these results demonstrate
that we have been able to execute it with discipline
and effectiveness.
On 1 March 2010 we announced our agreement with AIG for
the combination of Prudential and AIA Group Limited, a wholly
owned subsidiary of AIG. The strength of AIA’s business, its
market-leading positions in South-East Asia and the potential
for accelerated growth of the combined business in the future
present a compelling and unique opportunity for Prudential.
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Group Chief Executive’s report > continued
Group performance
Turning to our performance in 2009, our total Group operating
profit before tax from continuing operations, on the European
Embedded Value (EEV) basis, rose to £3,090 million, an increase
of 8 per cent. Our EEV new business profit increased by
£407 million, or 34 per cent to £1,607 million. Margins improved
across the Group rising from 42 per cent to 56 per cent, an
exceptional level of performance given the market conditions
prevailing in 2009. We achieved our objective of increased
profitability while consuming less capital, through investing
our free surplus in those markets and products which deliver
the highest returns within our new business strain targets.
In 2009 our investment in new business was 16 per cent
lower at £675 million (2008: £806 million).
EEV new business profit
+34%
2009
2008
£1,607m
£1,200m
On the statutory International Financial Reporting Standards
(IFRS) basis, operating profit based on longer-term investment
returns increased by 10 per cent to £1,405 million. IFRS operating
profit increased across all three life operations: in Asia it increased
62 per cent to £416 million; in the US it increased 13 per cent
to £459 million; and in the UK it increased 11 per cent to
£606 million, a very strong performance. Operating profit at M&G
decreased 17 per cent to £238 million, reflecting the impact of the
volatility in equity and property markets during the year, while our
asset management business in Asia increased operating profits
by 6 per cent to £55 million. We saw a change in other income
and expenditure to negative £395 million (2008: negative
£260 million), as a result of lower returns on central funds and
an increase in interest payable on core structural borrowings.
Net inflows increased strongly in our asset management
businesses, as our sustained investment outperformance
attracted investors. M&G recorded £13,478 million of net
inflows, 296 per cent higher than in 2008, and our asset
management business in Asia recorded £1,999 million
of net inflows, 134 per cent higher than in 2008.
Importantly, we also succeeded in significantly strengthening
our Group capital position, making us one of the best-capitalised
insurers and underpinning our ability to exploit growth
opportunities. Using the regulatory measure of the Insurance
Groups Directive (IGD), the Group’s capital surplus was estimated
at £3.4 billion at the 2009 year-end, more than double its level
of £1.5 billion at the end of 2008, with a solvency ratio of
270 per cent, or 2.7 times our regulatory requirement.
We continue to manage cash flows across the Group with
a view to achieving a balance between ensuring sufficient net
remittances from the business to cover the progressive dividend
(after corporate costs); and maximising value for shareholders
through the reinvestment of the free surplus generated at
business unit level in the particularly profitable opportunities
available to the Group, given its established positions in key life
insurance markets. On this basis, the holding company cash flow
at an operating level should generally balance to close to zero
before exceptional items. Our cash flow position remained
strong during the year. In 2008 we achieved our target of being
operating cash flow positive at the holding company level, and
we maintained this position in 2009, with a cash surplus after
dividend of £38 million.
Given the Group’s outstanding financial performance in
2009 and increasingly robust financial position, the Board has
recommended a final dividend of 13.56 pence per share, bringing
the full-year dividend to 19.85 pence per share, an increase of
5 per cent. The dividend is covered 2.2 times by post-tax IFRS
operating profit based on longer-term investment returns.
Our strategy
Our strategy is to profitably meet our customers’ changing
needs for savings, income and protection in our chosen markets.
By maintaining our focus and discipline in the implementation
of this strategy, and by allocating capital to the most attractive
opportunities, we believe we are able to generate sustainable
and differentiated value for our shareholders. Over the last
year our strategy has proven its worth under the most testing
conditions, delivering a significant outperformance in Total
Shareholder Return (TSR) in 2009.
Through our international, selective and disciplined approach
we maintain a diverse portfolio of businesses, which embrace
countries at different stages of economic development, but
which all share one key attribute: the opportunity for us to build
a market-leading operation with prospects for sustainable, long-
term, profitable growth and a superior rate of return on capital.
Our financial strength is fundamental to our strategy and as a
result of our disciplined risk management approach and targeted
Group-wide actions to grow and protect our capital, we are
emerging stronger from the global economic downturn. This
capital strength has been instrumental in our ability to invest
in profitable growth opportunities in 2009, especially in our
chosen markets in Asia and the US.
The main engine of our growth strategy is our unique presence
in Asia, which includes 28 businesses, spread over 13 countries.
Asia offers us the highly attractive combination of strong growth
and high margins. In 2006 we made an external commitment to
double our 2005 new business profit in Asia by 2009 and I am
very pleased to announce that we have met this target. This
achievement was important to me, and is particularly remarkable
given the economic conditions prevailing in the second half of
that four-year period.
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Prudential plc > Annual Report 2009
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Product and distribution strategy
Our operating model enables each of our business units to stay
close to its customers, allowing them to be flexible in identifying
and developing the specific product and distribution mix that is
right for each market.
Looking at our products, our consistent aim in all our markets is
to have a suite of savings, income and protection products that
delivers good value, and meets customers’ needs in a profitable
and capital efficient manner. We use every opportunity, from
product design to channel management, to reduce the exposure
of the Group and our capital position to downturns in the
economic cycle. The experience of the past two years has
demonstrated that this strategy is the right one, generating
highly resilient revenue streams. This is supported by our
ability to respond flexibly to customers’ changing product
and investment needs.
In Asia, a challenging economic climate in the first half of 2009
gave way to more positive conditions in the second half of the
year. While we saw our single premium volumes decline as
a result of economic uncertainty, our regular premium and
higher-margin protection business remained resilient, ensuring
we outperformed the competition, while remaining protected,
especially in the second half.
Our distribution in Asia is unique. We have developed both the
largest regional network of tied agents, over 410,000, as well as
strong partnerships with banks across the region. A significant
development in our Asian distribution capabilities is our new
long-term strategic bancassurance distribution partnership
with United Overseas Bank Limited (UOB). This partnership,
announced on 6 January 2010, will mean our life insurance
products will be distributed through UOB’s 414 bank branches
across Singapore, Indonesia and Thailand. This alliance, which
complements our long-standing successful partnerships with
Standard Chartered and other banks across the region, offers
us significant new profitable growth opportunities.
In the US, the volatility in US equity markets in 2009 saw
customers seek safer, but lower, returns by buying fixed annuities,
fixed index annuities or variable annuities with guaranteed living
benefits. Jackson responded quickly and was able to capitalise on
this shift in demand across all its annuity product lines. Supported
by our core skills in product manufacturing and distribution, our
purposeful focus on variable annuities and maintaining capital
strength enabled us to gain significant market share while
achieving a strong rise in margins and profitability.
Asia is complex, dynamic and exciting, and its economies
differ significantly, with varying levels of economic development,
from the OECD members, Japan and Korea, to the fast-growing
markets of South-East Asia, such as Indonesia and Malaysia. Our
approach to the region is highly sophisticated and discriminating
in terms of product offering, distribution and branding. Given
our strong presence in this fast-growing region, where savings
ratios tend to be higher than in the west, and the agreement we
announced on 1 March 2010 concerning AIA, we believe we are
uniquely placed to continue to deliver sustained profitable growth
for many years to come.
In the US, which remains the world’s largest retirement market,
we continued to focus on building our share of the expanding
and cash-generative annuities market. We have emerged from
the crisis with a significantly stronger position in the variable
annuities market, a key product for baby boomers as they reach
retirement. We have continued to grow our share of the fixed
index annuities market, while limiting our appetite for fixed
annuities in order to conserve capital and maximise profits.
In the UK our strategy remained to rigorously focus on
balancing new business with cash and capital preservation,
while maintaining margins. This approach delivered the sales
performance we wanted, combined with improved margins.
This strategy allows us to generate surplus capital for investment
Group-wide at significantly higher returns than in the UK.
Our business in the UK provides the foundation and fuel
for the Group’s strategy.
Our asset management businesses in the UK and Asia continue
to capitalise on our strong investment track record and trusted
brands. Asset management is a core competence of Prudential
and is a key component of our strategy, providing a reliable
source of cash and high quality profits. Asset management
remains a unique, differentiating feature of the Group in
our sector.
We believe that our strategy, and the consistency
and discipline with which we execute it, is what
differentiates us.
As a Group we have a portfolio of highly trusted brands including
Prudential, M&G and Jackson and we remain committed to this
successful multi-brand strategy. This approach gives us the
flexibility to tailor our brands to our different businesses and the
customers these businesses serve. We believe the strength of our
brands was a significant differentiator in 2009, as many customers
looked for companies with a heritage and history that they knew
and trusted, as safe havens for their assets amid the widespread
financial uncertainty.
We believe that our strategy, and the consistency and discipline
with which we execute it, is what differentiates us. In 2010 we
intend to continue our disciplined execution of this strategy,
amplifying and accelerating it to deliver continued profitable
growth and increased shareholder value.
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Group Chief Executive’s report > continued
Going forward, we aim to build on our progress in the
US in 2009 by maintaining our focus on value over volume
and continuing to target the most profitable business.
Our highly successful distribution model focuses on our
industry-leading wholesaler teams, who offer genuine
added-value to the independent financial advisor channel
while also distributing products through regional broker-
dealers and banks. We will also look to diversify our earnings
growth and capitalise on our scaleable platform by making
bolt-on acquisitions of closed books when suitable
opportunities emerge.
In the UK we continued to focus on the retail market, with
an emphasis on our market-leading with-profits and annuities
products. We restricted our appetite for the capital intensive
bulk annuity market and ceased to offer lifetime mortgages.
These decisions reflect our focus on higher margin products,
with shorter payback periods. In the UK, we have a diverse
multi-channel approach including direct sales, financial
advisers and partnerships. We continue to use our strong
foundation, brand heritage and customer franchise to
support our business.
In asset management we had another excellent year in a
challenging market environment. Both M&G and our Asia
asset management businesses continued to capitalise on
their strong track records in investment performance to
deliver strong rises in inflows. M&G benefited from its high
levels of trust and brand loyalty among investors, achieving
record net fund inflows, at a time when many other asset
managers suffered net redemptions.
In Asia, where savers are increasingly becoming investors,
our asset management business put in a resilient
performance, while focusing on maintaining profitability
across our internal life and third-party clients. In terms of
distribution, our asset management businesses achieved
flexibility through a multi-channel, multi-geography
distribution approach in both the retail and institutional
marketplaces.
10
Prudential plc > Annual Report 2009
2009 priorities
GROUP
• Balancing growth with cash and capital conservation
• Effectively manage the Group’s risk profile
• Deliver growing dividend, determined after taking
into account the Group’s financial flexibility and
opportunities to invest in areas of business offering
attractive returns
• Targeting 2 times cover over time
PRUDENTIAL CORPORATION ASIA
• Expand the agency force and continue to improve
productivity
• Maximise the potential from non-agency distribution
and add new partners
• Further develop direct marketing channels and
•
up-sell and cross-sell
Increase focus on retirement services and health
products
JACKSON NATIONAL LIFE INSURANCE COMPANY
• Capitalise on market dislocation to advance
Jackson market position
• Write profitable business and conserve IGD capital
• Grow existing retail distribution through organic
growth of National Planning Holdings (NPH),
Jackson’s independent broker-dealer network
PRUDENTIAL UK
• Build on our strengths in the retirement market and
risk products
• Make the most of our core capabilities and assets
including our longevity experience, multi-asset
investment expertise, brand, financial strength and
large customer base
• Strengthen our distribution capabilities
• Deliver improvement in operational performance and
customer service whilst preserving our focus on costs
• Selectively participate in the wholesale market
M&G
• Maintain superior investment performance for both
internal and external funds
• Continue growth in third-party retail and institutional
businesses
2009 achievements
2010 priorities
• Through prudent and proactive management we
• Accelerate execution of our strategy and
enhanced the strength and flexibility of our capital
base, increasing our Insurance Groups Directive
capital surplus to an estimated £3.4 billion
• Full Year dividend increased by five per cent
• Dividend cover of 2.2 times
operational delivery
• Prudent but dynamic management of capital
• Deliver growing dividend, determined after
taking into account the Group’s financial
flexibility and opportunities to invest in
areas of business offering attractive returns
• Targeting dividend cover of 2 times over time
O
V
E
R
V
I
E
W
• Record results across a number of metrics
• Expand the agency force and continue to
in challenging markets
• Maintained agency channel momentum
Improved proportion of Health and
•
Protection products
• Successful disposal of capital intensive
Taiwan agency back book
Increased new business profit margins
•
• Excellent investment performance
improve productivity
• Maximise the potential from non-agency
distribution and add new partners
• Further develop direct marketing channels
•
and up-sell and cross-sell
Increase focus on retirement services and
health products
• Retail sales set a record of £8.9 billion (28 per cent
increase year-on-year). Jackson benefited from
‘Flight to Quality’ as many competitors were
downgraded
• Continue to innovate around our key variable
annuity product
• Continue to focus on improving efficiency
of operation
• Total annuity market share grew from 2.3 per cent
• Expand retail distribution
in 2001 to 5.9 per cent in 2009, and Jackson climbed
from 17th to 4th in the annuity sales rankings
• Jackson had the largest increase in VA market
share in the industry from 2001 to 2009, growing
from 1 per cent in 2001 to 8 per cent during 2009
• New business was written at an aggregate after-tax
IRR of more than 20 per cent on fully allocated
‘AA’ capital
• Continued to deploy cash, capital and resources
effectively across the UK business
• Focused on core strengths including annuities,
pensions and investment products, where we
can maximise the advantage we have in offering
with-profits and other multi-asset investment funds
• Launched a new Income Choice Annuity product
• The With-Profits Fund has consistently
outperformed the market for our long-term
investors
• Gained over 50 new panel positions across 24 key
accounts, meaning our products are more widely
available to intermediaries
• Won two Five-Star awards at the Financial Adviser
Service Awards as well as the award for best
annuity provider at the Professional Adviser
Awards 2010
• Over the three years to December 2009,
38 per cent of M&G’s retail funds delivered
top-quartile investment performance
• M&G had a very strong year in 2009 posting
record external gross fund inflows of £24.9
billion, an increase of 54 per cent on 2008
• External net inflows of £13.5 billion
• Ranked number 2 based on retail FUM
in the UK
• Compete selectively in areas of the retirement
income and savings market where we can play
to our core strengths and generate attractive
returns on capital employed
• Maintain a disciplined approach to pricing and
capital usage
• Continue to build our distribution capabilities
• Deliver further improvements to operational
performance and customer service whilst
maintaining our strict focus on costs
• Maximise the opportunities arising from our
significant competitive advantages including
our financial strength, significant longevity
experience, multi-asset investment capabilities,
strong investment track record, brand and
large customer base
• Maintain superior investment performance
for both internal and external funds
• Continue growth in third-party retail and
institutional businesses
11
Group Chief Executive’s report > continued
Risk and capital management
Our strong and sustained financial performance is the result
of disciplined and rigorous management. In no aspect of our
business is this discipline more evident than in our approach
to risk and capital. As a result of our unwavering focus on
increasing our financial resilience, our capital position has
been dramatically enhanced despite significant market shocks.
Our free surplus generation and proactive and innovative
capital management underpin an extremely strong solvency
ratio. Furthermore, we lead the sector in disclosure,
reporting a combination of IFRS, cash and EEV. Having clearly
demonstrated our defensive capabilities and transparency
in the downturn, we believe we are now well positioned to
outperform as markets recover.
In late 2008 and early 2009, the balance sheets and capital
positions of all insurance companies were under close scrutiny.
With this in mind, we began 2009 by taking a disciplined and
defensive stance, focusing on building our capital base and
strengthening our IGD surplus. Despite our defensive position,
we remained alert to growth opportunities, and as these
emerged in the second half of the year, our greater capital
strength enabled us to seize them aggressively.
During the course of the year we enhanced the strength
and flexibility of our capital base, increasing our IGD capital
surplus from £1.5 billion at year-end 2008 to £3.4 billion at
31 December 2009, equivalent to approximately 270 per cent
cover of the required capital. This increase resulted from a
series of measures that clearly demonstrated our disciplined
approach to capital management.
In addition to internal capital generation of £1.1 billion, we
transferred the assets and liabilities of our agency distribution
business in Taiwan to China Life of Taiwan, which boosted our
IGD capital surplus by approximately £0.8 billion. A further
£0.9 billion was contributed by issues of subordinated and
hybrid debt, and £0.9 billion by financial restructuring and
internal reorganisation of Group capital. These gains of some
£3.7 billion, were partially offset by about £0.4 billion of credit
impacts in Jackson, £0.6 billion of debt interest and other
central costs, £0.3 billion of dividends net of scrip, £0.2 billion
from regulatory changes and £0.3 billion of foreign exchange
movements.
Our prudent but dynamic management of our capital will
remain a key differentiator of our business going forward.
Outlook
As we go into 2010 we will continue to capitalise on our
competitive differentiators to amplify and accelerate the
execution of our strategy. The agreement we announced on
1 March 2010 with AIG represents a compelling and unique
opportunity to transform our position in Asia, giving us market-
leading positions in all of the critical growth markets in the
region. In the US we continue to write high-margin, capital
efficient variable annuities and in the UK we will focus on our
strong positioning, brand and products to continue to generate
cash and capital for the Group. In asset management we will
optimise both M&G and our asset management business in
Asia as a core capability of the Group.
As we go into 2010 we will continue to capitalise on
our competitive differentiators to amplify and accelerate
the execution of our strategy.
Going forward, we are increasingly positive on the outlook for
Asia and this is reflected in our announcement concerning AIA.
We remain cautious on the major Western economies, because
of a number of imbalances threatening their return to higher
growth, including high levels of consumer and government
debt, budget deficits and unemployment. In Asia we enjoy a
unique combination of market-leading positions in the fastest
growing, most profitable markets; strong brands; unrivalled
multi-channel distribution and well-designed products. Asia,
with its GDP growth rates, saving habits and low penetration,
remains the primary focus of our growth and investment.
This is the most attractive opportunity in our industry today
and the agreement we announced on 1 March 2010
demonstrates that I have every intention of ensuring that
the Group makes the most of it, while also capitalising on
our strong presence in the US, the UK and our market leading
asset management platform.
I end my first annual review as Group Chief Executive
proud of what our teams have accomplished in delivering our
highest ever margins, profits and capital surplus, a fantastic
achievement in a hugely challenging environment.
I am committed to managing the Group with discipline and
a relentless focus on execution and operational delivery.
I am confident that the quality of our teams, coupled with
our culture of discipline and focus, will position us well to
continue to outperform our industry, not only through the
current economic cycle but also through those yet to come.
Tidjane Thiam
Group Chief Executive
12
Prudential plc > Annual Report 2009
THERE’S
MORE TO
PRUDENTIAL
In 2009, we delivered an outstanding
performance generating significantly higher
profits while consuming less capital. This
performance demonstrates the success of our
strategy to focus on the most profitable growth
opportunities in our chosen markets around
the world.
In 2010, we intend to continue our disciplined
execution of our strategy, amplifying and
accelerating it to deliver further profitable
growth and increased shareholder value.
O
V
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W
13
Group Chief Executive’s report > continued
14
Prudential plc > Annual Report 2009
ACCELERATING
O
V
E
R
V
I
E
W
The main engine of our growth strategy is our unique
presence in Asia, which includes 28 businesses, spread
over 13 countries.
We have top three positions in the fast-growing
markets of Hong Kong, India, Indonesia, Malaysia, the
Philippines, Singapore and Vietnam. We will accelerate
our investment in the region to capture future growth,
fuelled by our unrivalled distribution, products,
customer service and brands.
Read more:
Asia business review
Pages 46-49
15
Group Chief Executive’s report > continued
STRENGTHENING
With 78 million baby boomers approaching retirement
age, the US is the world’s largest retirement savings and
annuity market. We emerged from the global financial
crisis as a clear winner in variable annuities, and are
continuing to gain market share.
Going forward, we will strengthen our US business still
further by writing high-margin, capital-efficient annuities
and seizing growth opportunities.
16
Prudential plc > Annual Report 2009
O
V
E
R
V
I
E
W
17
Read more:
US business review
Pages 50-53
Group Chief Executive’s report > continued
18
Prudential plc > Annual Report 2009
FOCUSING
O
V
E
R
V
I
E
W
Read more:
UK business review
Pages 54-57
In the UK, our strategy remains to focus rigorously on
balancing writing new business with cash and capital
preservation, while generating attractive returns on
capital employed. We continue to prioritise value over
volume by leveraging our unique positioning, brand
and products.
Our business in the UK provides the foundation and
fuel for the Group’s strategy.
19
Group Chief Executive’s report > continued
OPTIMISING
Our asset management businesses in the UK, Europe
and Asia are continuing to deliver outstanding results by
capitalising on their strong investment track records and
trusted brands. The excellent investment performance
of our asset management businesses is a differentiating
feature of the Group in our sector.
Asset management in both regions remains a core
capability for the Group.
20
Prudential plc > Annual Report 2009
O
V
E
R
V
I
E
W
21
Read more:
Asset management business review
Pages 58-62
Group Chief Executive’s report > continued
22
Prudential plc > Annual Report 2009
For further information please visit
www.prudentialreports.com/2009ar
BUSINESS
REVIEW
24
40
46
63
69
Chief Financial Officer’s overview
Risk and capital management
Business unit review:
• Insurance operations: Asia, US, UK
• Asset management: M&G, Asia, US
Other corporate information
Corporate responsibility review
B
U
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I
N
E
S
S
R
E
V
I
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23
Chief Financial Officer’s overview
Nic Nicandrou
Chief Financial Officer
24
Prudential plc > Annual Report 2009
CHIEF
FINANCIAL
OFFICER’S
OVERVIEW
In 2009 Prudential has continued to balance profitable
growth, capital conservation and cash generation to
both protect the Group’s financial strength and preserve
its long-term growth potential. We have focused on
generating significant levels of sales of highly profitable
and capital efficient products.
Our results, as summarised below, show that we have achieved
our dual objectives of higher profitability and lower levels of
investment in new business at a time when market conditions
remained challenging for the insurance industry. This highlights
our focus on value over volume as we manage investment in new
business to meet our capital management targets. In addition we
have been able to strengthen our capital position and have
continued to generate a positive Group operating holding
company cash flow.
The global economic environment has gradually improved
through 2009, led by emerging economies, especially Asia.
The Asian region appears to be more resilient than the rest of the
world and we expect it is likely to return sooner to strong growth
while the western world seems to be set for a prolonged period
of weaker growth. Against this backdrop, and in particular in those
countries in Asia where we have leading positions, our long-term
growth potential remains intact, and we believe we are well
positioned to take advantage of opportunities in the pre and
post retirement markets in our chosen geographical markets.
In 2009, in a difficult economic and market environment,
Prudential produced a strong performance across all of its
key performance indicators. We believe this performance
demonstrates the success of our strategy and the resilience
and strength of Prudential’s business model.
We have achieved our dual objectives of higher profitability
and lower levels of investment in new business at a time
when market conditions remained challenging for the
insurance industry.
Group retail APE new business sales were £2,890 million,
11 per cent higher than for 2008. In Asia, sales were £1,261 million,
up four per cent, boosted by a record fourth quarter. In the US,
Jackson continued to be a beneficiary of the significant changes
in the competitive landscape, with a 53 per cent increase in retail
sales at £912 million. In the UK, the Group’s disciplined approach
to capital consumption led to retail sales of £717 million, down
11 per cent. Wholesale sales were held to a minimum as the
Group continued to focus on products with higher IRRs and
shorter payback periods.
Net investment flows increased by £11.2 billion to £15.4 billion,
driven by strong performances in M&G’s retail and institutional
business, and the Asian asset management operations. With these
contributions and recovering investment markets, external funds
under management have increased by £27.5 billion to £89.8 billion
during the year.
Performance and key metrics
New business note 1
Annual premium equivalent (APE) sales:
– Retail
– Asia
– US
– UK
– Total retail
– Wholesale
– Total APE sales
EEV new business profit (NBP)
NBP margin (% APE)
Net investment flows
External funds under management
EEV basis operating profit note 1
On long-term business notes 2, 3
Total
IFRS operating profit based on longer-term investment
returns notes 1, 3
Balance sheet and capital
EEV basis shareholders’ funds
EEV basis shareholders’ funds per share
Return on Embedded Value note 4
IFRS shareholders’ funds
IGD capital surplus (as adjusted) note 5
Free surplus – investment in new business note 6
Operating holding company cash flow
Dividend per share relating to the reporting year
Dividend cover note 7
2009
£m
AER8
2008
£m
Change
%
CER8
2008
£m
Change
%
1,261
912
717
2,890
6
2,896
1,607
56%
15,417
89,780
3,202
3,090
1,216
596
803
2,615
264
2,879
1,200
42%
4,266
62,279
2,810
2,865
1,405
1,283
15.3bn
603p
14.9%
6.3bn
3.4bn
675m
38m
19.85p
2.2
15.0bn
599p
14.4%
5.1bn
1.5bn
806m
54m
18.9p
2.1
4
53
(11)
11
(98)
1
34
261
44
14
8
10
2
1
24
127
(16)
(30)
5
n/a
1,350
705
803
2,858
285
3,143
1,331
42%
4,456
60,924
3,080
3,138
1,390
14.1bn
563p
4.8bn
n/a
885m
54m
n/a
n/a
B
U
S
I
N
E
S
S
R
E
V
I
E
W
(7)
29
(11)
1
(98)
(8)
21
246
47
4
(2)
1
9
7
31
n/a
(24)
(30)
n/a
n/a
Notes
1
2
3
New business and operating profits exclude the results of the Taiwan agency business for which the sale process was completed in June 2009.
Long-term business profits after deducting Asia development expenses and before restructuring costs.
Operating profits are determined on the basis of including longer-term investment returns. EEV and IFRS operating profits are stated after excluding
the effect of short-term fluctuations in investment returns against long-term assumptions, the shareholders’ share of actuarial and other gains and
losses on defined benefit pension schemes, and the effect of disposal and results of the Taiwan agency business, for which the sale process was
completed in June 2009. In addition for EEV basis results, operating profit excludes the effect of changes in economic assumptions and the time value
of cost of options and guarantees, and the market value movement on core borrowings.
Return on Embedded Value is based on EEV operating profit after tax and minority interest as a percentage of opening EEV basis shareholders’ funds.
Insurance Groups Directive capital surplus (as adjusted). The surpluses shown for 2009, which is estimated, and 2008 are before allowing for the final
dividends for 2009 and 2008 respectively.
Free surplus – investment in new business represents EEV net worth strain together with EEV required capital to support the new business acquired.
Dividend cover is defined as IFRS operating profit after tax and minority interests divided by the dividend declared relating to the reporting period.
Actual Exchange Rate (AER) and Constant Exchange Rate (CER).
4
5
6
7
8
In this review, comparisons of financial performance are on an actual exchange rate (AER) basis, unless otherwise stated.
25
The total IFRS profit before disposal of Taiwan agency business
was £1,367 million in 2009, significantly higher than for 2008
(loss of £451 million) reflecting increased operating profits
and more favourable short-term fluctuations partially offset by
a charge for the costs of hedging the Group IGD capital surplus.
Total profit before tax from continuing operations on the IFRS
basis was £746 million in 2009 after allowing for the loss on
disposal of the Taiwan agency business of £621 million which
was completed in June 2009.
Since the beginning of the year, management actions have led
to a very material increase in the Group’s IGD surplus position to
£3.4 billion including the issuance of £400 million subordinated
debt in May to part replace maturing senior debt, the net proceeds
of the Tier 1 hybrid debt of US$750 million (circa £455 million)
issued in July, the beneficial impact of the sale of Taiwan agency
business of £800 million, with other capital initiatives and capital
generation through operating earnings net of impairments,
financing costs, effects of currency and rule changes accounting
for the balance. We believe this level of IGD acts as a prudent
regulatory buffer whilst there remains a degree of uncertainty
in the future economic environment in which we operate.
At 31 December 2009 holding company cash and short-term
investments was £1.5 billion, an increase of £0.3 billion over
2008. This increase comprises proceeds of £0.6 billion from higher
borrowings, (before allowing for exchange translation gains of
£0.2 billion on foreign currency denominated borrowings), and
positive operating holding company cash flow of £38 million, net
of exceptional payments of £360 million.
In the volatile economic environment experienced during
2009, we maintained our strong focus on risk, capital and cash
management. Our commitment to focusing on value over volume
has been demonstrated by the strong growth in both EEV and
IFRS operating profit. We have also been able to continue to be
cash flow positive at the holding company level, with a positive
contribution of £38 million before exceptional items.
The directors recommend a final dividend for 2009 of 13.56 pence
per share, bringing the total dividend for the reporting period
to 19.85 pence per share, five per cent higher then the 2008 total
dividend. The 2009 IFRS operating earnings after tax and minority
interest cover the full year dividend 2.2 times (2008 full year:
2.1 times).
Chief Financial Officer’s overview > continued
In 2009, total EEV basis operating profits based on longer-term
investment returns of £3,090 million were up eight per cent from
2008, primarily from an increase in the profitability from the
Group’s long-term business operations which was up 14 per cent
to £3,202 million comprising new business profit of £1,607 million,
in-force profits of £1,601 million and development expenses of
£6 million. New business profit increased by £407 million to
£1,607 million, driven principally by the US and Asia. Overall,
there was a two per cent decrease in the contribution from in-force
business (before development expenses), down by £35 million to
£1,601 million. The movement reflects a growing level of unwind
of discount, up by £210 million, reflecting the increased in-force
business offset by a reduction in the level of contribution from
changes to operating assumptions, experience variances and
other items of, in aggregate, £245 million. The growth in the
Group’s EEV operating profit was held back by a lower
contribution from the asset management businesses (down
£48 million to £297 million) reflecting reduced market values in
2009. There was also a negative impact on Group EEV operating
profit from other income and expenditure of £131 million due
to lower returns on central funds and higher interest payable
on core structural borrowings.
The total EEV profit before tax for 2009 of £1,743 million
compares to a loss of £2,106 million for 2008. The increase of
£3,849 million reflects the growth in operating profit of £225 million
and an increase in the aggregate effect of non-operating items of
£3,624 million which mostly arise from the net effects of improved
financial markets. Within the non-operating items of negative
£1,347 million there were positive contributions of £351 million
for short-term fluctuations in investment returns and the
£91 million from the profit on sale and results of the Taiwan
agency business that was sold in June 2009. However, these
amounts were offset by reductions of £795 million for the change
in the mark-to-market value of the Group’s borrowings as credit
spreads normalised, a charge of £910 million for the effect of
changes in economic assumptions and time value of cost of
options and guarantees arising from increasing interest rates
and the application of higher risk discount rates across our
businesses and an £84 million charge for actuarial and other
losses for the Group’s defined benefit pension schemes.
Our IFRS operating profit has increased by 10 per cent
to £1,405 million. This result was driven by higher profits
from all of our life businesses which were up 25 per cent to
£1,475 million, with a strong contribution from Asia. Overall
profits also include a lower asset management contribution
due to difficult market conditions, higher interest costs
following the issue of the hybrids during the year and lower
interest income on group assets. In the UK, operating profits
for our long-term business increased by £61 million to
£606 million reflecting growth from the shareholder backed
annuity business. Operating profits for Asia long term business,
before development expenses, increased by £159 million to
£416 million of which £96 million was due to a combination
of growth in our in-force book, lower new business strain and
foreign exchange and the remaining £63 million was due to
a one-off benefit arising from a regulatory change in Malaysia.
26
Prudential plc > Annual Report 2009
AER8
2008
£m
Change
%
CER8
2008
£m
Change
%
EEV results
EEV basis operating profit based on longer-term investment returns
Insurance business
Asia
US
UK
Development expenses
Long-term business profit
UK general insurance commission
Asset management business:
M&G
Asia asset management
Curian
US broker-dealer and asset management
Other income and expenditure
Restructuring costs
Total EEV basis operating profit
2009
£m
1,105
1,233
870
(6)
3,202
51
238
55
(6)
10
3,550
(433)
(27)
3,090
1,213
586
1,037
(26)
2,810
44
286
52
(3)
10
3,199
(302)
(32)
2,865
(9)
110
(16)
77
14
16
(17)
6
(100)
–
11
(43)
16
8
EEV basis profit after tax and minority interests
EEV basis operating profit based on longer-term investment returns
Short-term fluctuations in investment returns
– Insurance operations
– IGD hedge costs
– Other operations
Mark to market value movements on core borrowings
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes
Effect of changes in economic assumptions and time value of cost of options and guarantees
Profit on sale and results of Taiwan agency business
B
U
S
I
N
E
S
S
R
E
V
I
E
W
1,379
693
1,037
(29)
3,080
44
286
61
(4)
12
3,479
(309)
(32)
3,138
AER8
2009
£m
3,090
481
(235)
105
351
(795)
(84)
(910)
91
1,743
(481)
(14)
(3)
1,245
(20)
78
(16)
79
4
16
(17)
(10)
(50)
(17)
2
(40)
16
(2)
2008
£m
2,865
(4,654)
–
(313)
(4,967)
656
(14)
(398)
(248)
(2,106)
771
–
(3)
(1,338)
Profit (loss) before tax from continuing operations
Tax attributable to shareholders’ profit (loss)
Discontinued operations (net of tax)
Minority interests
Profit (loss) after minority interests
In 2009, Prudential Group’s total EEV basis operating profit based
on longer-term investment returns was £3,090 million, up eight
per cent from 2008.
Long-term profits generated by the Group in 2009 increased
by 14 per cent to £3,202 million. These profits comprise new
business profits of £1,607 million (2008: £1,200 million), in-force
profits of £1,601 million (2008: £1,636 million) and development
expenses of £6 million (2008: £26 million).
New business profits, at £1,607 million, were 34 per cent higher
than in 2008, with higher margins in all businesses, particularly
the US, and a one per cent increase in sales volumes year on year.
The average Group new business profit margin was 56 per cent
(2008: 42 per cent) on an APE basis and eight per cent (2008: six
per cent) on a Present value of new business premiums (PVNBP)
basis. This rise reflects increased average margins across the
businesses as we concentrated on maximising sales of our most
profitable products.
Note
See page 25.
The contribution from in-force operating profit decreased by
£35 million to £1,601 million, including unwind of discount
and other expected returns that increased by £210 million to
£1,421 million, primarily reflecting the growth in Asia’s in-force
book and the increase in risk discount rates in the US. In-force
profit in 2009 also includes the effects of operating assumption
changes and experience variances and other items which had
an aggregate impact of £180 million. This primarily reflects the
positive impact of altered assumptions for Guaranteed Minimum
Withdrawal Benefits in the US of £156 million where our
expectation of the utilisation of the withdrawal feature available
to policyholders on Variable Annuity contracts has been modified
to take account of the more recent experience of policyholder
behaviour when benefits are “in the money”. Also included are the
broadly offsetting effects of favourable experience and other items
in the US and UK against the impact of adverse persistency in Asia.
27
Mark-to-market movement on core borrowings
The mark-to-market movement on core borrowings was a negative
£795 million, as credit spreads incorporated in the market value
of the debt narrowed to more normal levels.
Shareholders’ share of actuarial and other gains and losses
on defined benefit pension schemes
The shareholders’ share of actuarial and other gains and losses on
defined benefit pension schemes of a negative £84 million reflects
the impact of a reduced discount rate and other assumption
changes on the measurement of the liabilities of the Scottish
Amicable and M&G schemes and an increase in the deficit funding
provision for the Prudential Staff Pension Scheme.
Effect of changes in economic assumptions and time value of
cost of options and guarantees
The effect of changes in economic assumptions and time value of
cost of options and guarantees of negative £910 million comprises
negative £963 million for the effect of changes in economic
assumptions partially offset by positive £53 million for the change
in the time value of cost of options and guarantees arising from
changes in economic factors. In our Asian business, economic
assumption changes were negative £165 million primarily driven
by increases in risk discount and fund earned rates across a
number of territories. In our US business, economic assumption
changes were negative £528 million, primarily reflecting an
increase in the risk discount rates following an increase in the US
10 year Treasury rate and an increase in the allowance for credit
risk for fixed annuity and variable annuity business of 1.5 per cent
and 0.3 per cent respectively, partially offset by the effect of an
increase in the separate account return assumption from 5.8 per
cent to 7.4 per cent arising from the increase in risk free rates. In
our UK business, economic assumption changes were negative
£270 million, primarily relating to with-profits business, reflecting
the fact that the risk discount rate has increased by significantly
more than the earned rate as a result of revised correlation
assumptions, a lower equity backing ratio and very low
cash return.
Profit on sale and results of Taiwan agency business
In June 2009, the Group completed the sale of our Taiwan agency
business. The 2009 result of £91 million reflects the profit on sale.
The 2008 loss of £248 million is the total result for this business,
including short-term fluctuations in investment returns.
Effective tax rates
The effective tax rate at an operating level was 28 per cent
(2008: 26 per cent), the increase reflecting the inability
to recognise a deferred tax asset on various tax losses of
non-insurance operations being partially offset by a reduction
in the effective tax rate for Asian operations from the 2008 level
that was affected by certain one-off items. The effective tax rate
at a total EEV level was 28 per cent (2008: 37 per cent) on a profit
of £1,743 million. The reduction reflects the incidence of tax
attributable to Jackson’s short-term fluctuations in investment
returns and other non-operating profits and losses.
Chief Financial Officer’s overview > continued
Operating profit from the asset management business decreased
to £297 million, down 14 per cent from £345 million in 2008,
reflecting reduced market values in 2009 compared to 2008.
Other income and expenditure totalled a net expense of
£433 million compared with £302 million in 2008, a difference
of negative £131 million of which £47 million was due to the
impact of the non-recurrence in 2009 of a positive one-off 2008
item of profit on the sale of a seed capital investment in an Indian
mutual fund. The remaining difference principally related to lower
interest received on central shareholders’ funds as a result of
falling interest rates and an increase in interest payable on core
structural borrowings.
Short-term fluctuations in investment returns
In our calculation of EEV operating profit, we use longer-term
investment return assumptions rather than actual investment
returns achieved. Short-term fluctuations represent the difference
between the actual investment return and the unwind of discount
on the value of in-force business and expected returns on
net worth.
Short-term fluctuations in investment returns for insurance
operations of positive £481 million comprise a positive
£437 million for Asia, negative £401 million for our US
operations and positive £445 million in the UK.
For our Asian business, short-term fluctuations of positive
£437 million (versus negative £903 million in 2008) primarily
reflected the effect of strong equity market performance in
particular for participating business and unit-linked business
where the in-force value benefits from increases in shareholder
transfers and from the capitalisation of increased projected fees
due to the higher asset base at the end of the year.
For our US business, short-term fluctuations in investment returns
were negative £401 million versus negative £1,344 million in 2008,
and primarily reflected the excess of impairment losses for fixed
income securities incurred in the year over the long-term charge
included within operating profit.
For our UK business, the short-term fluctuations in investment
returns were positive £445 million (versus negative £2,407 million
in 2008), including positive £430 million relating to with-profits
business, primarily reflecting the difference between the 15.5 per
cent investment return arising in the year on the investments of
the with-profits life fund (covering policyholder liabilities and
unallocated surplus) and the long-term assumed return of
6.9 per cent.
For other operations, the principal component of short-term
fluctuations in investment returns is a one-off £235 million cost
arising from the hedge temporarily put in place during the first
quarter, to protect the Group IGD capital surplus in the light of
exceptional market conditions. During the severe equity market
conditions experienced in the first quarter of 2009, coupled
with historically high equity volatility, the Group entered into
exceptional short-dated hedging contracts to protect against
potential tail-events on the IGD capital position, in addition to our
regular operational hedging programmes. The residual short-term
fluctuations in investment returns for other operations of positive
£105 million includes £66 million for unrealised appreciation on
Prudential Capital’s debt securities portfolio and £28 million on
swaps held centrally to manage Group assets and liabilities.
28
Prudential plc > Annual Report 2009
IFRS results
IFRS basis operating profit based on longer-term investment returns
2009
£m
AER8
2008
£m
Change
%
CER8
2008
£m
Change
%
Insurance business:
Long-term business
Asia
US
UK
Development expenses
Long-term business profit
UK general insurance commission
Asset management business:
M&G
Asia asset management
Curian
US broker-dealer and asset management
Other income and expenditure
Restructuring costs
Total IFRS basis operating profit based on longer-term
416
459
606
(6)
1,475
51
238
55
(6)
10
1,823
(395)
(23)
257
406
545
(26)
1,182
44
286
52
(3)
10
1,571
(260)
(28)
62
13
11
77
25
16
(17)
6
(100)
–
16
(52)
18
290
480
545
(29)
1,286
44
286
61
(4)
12
1,685
(267)
(28)
investment returns
1,405
1,283
10
1,390
B
U
S
I
N
E
S
S
R
E
V
I
E
W
43
(4)
11
79
15
16
(17)
(10)
(50)
(17)
8
(48)
18
1
Group operating profit before tax based on longer-term
investment returns on the IFRS basis after restructuring costs
was £1,405 million, an increase of 10 per cent on 2008.
In Asia, IFRS operating profit for long-term business increased
by 62 per cent from £257 million in 2008 to £416 million in 2009.
As reported in our half-year results announcement this includes
a £63 million one-off release of reserves in the Malaysian life
operations determined after assessing the measurement basis
for policyholders’ liabilities, following the implementation of
a Risk Based Capital (RBC) regime by the Malaysian regulatory
authorities. Excluding this item, Asia delivered a strong underlying
operating performance resulting in an increase of £96 million to
£353 million from £257 million for 2008. This increase reflects both
underlying growth as we build our in-force book and a reduction in
new business strain from a charge of £97 million in 2008 to a
charge of £78 million in 2009.
Our larger markets of Malaysia, Hong Kong, Singapore and
Indonesia continue to show strong increases in operating profit.
In Indonesia, the results increased from £55 million to £102 million,
reflecting the strong underlying growth of the business and further
improvements to the impact of new business on operating profits.
In Malaysia, IFRS operating profit of £65 million, excluding the one-
off credit, was up 41 per cent on 2008, driven mainly by the growth
in the profits from the in-force business. Hong Kong recorded
increased operating profit up 45 per cent to £48 million, due mainly
to increased profits from the in-force non-participating business,
both as a result of growth and the non-recurrence of one-off costs
in 2008. This has been offset by reduced participating fund profits
following lower bonus payments to policyholders in 2009 reducing
the corresponding transfer to shareholders from the with-profits
fund. Singapore saw an increase in operating profit of £29 million
(35 per cent) to £112 million reflecting growth in the in-force
business. Aside from Japan, where on 15 February 2010 the
operation suspended writing new business, Taiwan, which is
focusing on its bancassurance business following the disposal
of its agency business in June 2009, and Thailand, all the Asian life
operations are generating operating profits on the IFRS basis.
Note
See page 25.
In the US, the long-term business operating profit increased by
13 per cent from £406 million in 2008 to £459 million in 2009,
primarily from the effect of favourable exchange rate movements,
increased operating profits from the fixed and fixed indexed
annuity business and lower DAC amortisation on variable annuity
business as compared to 2008. These increases were offset by
the combined negative accounting impact of equity market
movements on Jackson’s variable annuity business and related
hedging programme. The hedging programme is undertaken on
an economic basis and the accounting measurement does not
always fully capture the economic effects.
In our UK business, the long-term business IFRS operating
profit of £606 million increased by 11 per cent from £545 million
in 2008. This reflects growth from the shareholder-backed
annuity business, with operating profits being £194 million
higher than in 2008, partially offset by lower contribution from
the with-profits business of £281 million in 2009, compared
with £395 million in 2008. The lower profit from the with-profit
business reflected the impact of rate reductions in the February
2009 bonus declaration made in response to recent volatile
investment performance. These lower bonus payments to
policyholders have a corresponding negative impact on operating
profit as they reduce the consequential transfer to shareholders
from the with-profit fund, calculated as one-ninth of the cost
of policyholders’ bonus. Profit from UK general insurance
commission increased to £51 million in 2009 from £44 million
in 2008. As a result, the total IFRS operating profit increased by
12 per cent in 2009 to £657 million from £589 million in 2008.
M&G’s operating profit for 2009 was £238 million, a decrease of
17 per cent from £286 million in 2008. This primarily reflects the
relative levels of equity and property markets between 2008 and
2009, with the FTSE All Share being on average 15 per cent lower
than in 2008, as well as higher staff costs and lower performance-
related fees. These negative impacts were partly offset by revenue
earned on the very strong fund net inflows during 2009
(£13.5 billion in 2009 compared with £3.4 billion in 2008).
29
Chief Financial Officer’s overview > continued
IFRS basis results – Analysis of life insurance pre-tax IFRS operating profit based
on longer-term investment returns by driver
Investment spread
Asset management fees
Net expense margin
DAC amortisation (Jackson only)
Net insurance margin
With-profits business
Non-recurrent release of reserves for Malaysian life operation
Other
Total
AER8
CER8
2009
£m
1,001
458
(388)
(223)
472
310
63
(218)
1,475
2008
£m
747
403
(385)
(450)
308
425
–
134
1,182
Change
%
34
14
(1)
50
53
(27)
–
(263)
25
2008
£m
852
466
(434)
(532)
357
430
–
147
1,286
Change
%
17
(2)
11
58
32
(28)
–
(248)
15
The Asian asset management operations reported operating
profits of £55 million, up by six per cent from £52 million in 2008.
This reflects favourable exchange rates and management’s focus
on profitability during the period. Profit in 2009 was adversely
impacted by a one-off loss in India of £6 million.
The change of £135 million in other income and expenditure
to negative £395 million from the negative £260 million in 2008
primarily reflects lower returns on central funds as a result of falling
interest rates, an increase in interest payable on core structural
borrowings and the non-recurrence in 2009 of a positive one-off
2008 item of profit on the sale of a seed capital investment in an
Indian mutual fund.
IFRS basis results – Analysis of life insurance pre-tax
IFRS operating profit based on longer-term investment
returns by driver
Investment spread has increased by 34 per cent to £1 billion in
2009. The main driver has been the increase in profits from our
UK shareholders’ annuity business.
Asset management fees have increased by 14 per cent to
£458 million in 2009, with growth in our Asian and US businesses
and favourable exchange rate movements more than offsetting
the impact of falling asset values on fees earned.
The net expense margin has decreased marginally from
negative £385 million in 2008 to negative £388 million in 2009.
Adverse exchange rate movements have been largely offset by
improvements to new business strain in Asia (total IFRS new
business strain in Asia, which is predominantly included in net
expense margin, has fallen from £97 million in 2008 to £78 million
in 2009).
The significant decrease in Jackson’s DAC amortisation
principally reflects the improvements in equity markets in the
period and the non-recurrence of the DAC acceleration of circa
£140 million that occurred in 2008.
Net insurance margin has grown by 53 per cent to £472 million in
2009 principally reflecting the strong growth in our Asian in-force
book (up £55 million to £253 million in 2009), improved mortality
experience in the US and UK and a one-off benefit of £34 million in
the UK relating to a longevity swap on certain aspects of the UK’s
annuity back-book liabilities.
Profits from with-profits business were £310 million in 2009
compared with £425 million in 2008, reflecting lower bonus rates,
and hence lower transfers to shareholders, which are calculated as
one-ninth of the cost of policyholders’ bonus, due to market falls.
Other of negative £218 million is primarily as a result of increased
hedging costs in the US. This negative impact is before allowing
for VA guarantee fees of £137 million included within net
insurance margin and reflects the economic nature of Jackson’s
hedging programme, with derivative losses arising from increasing
equity markets and interest rates not being fully offset by the
release of policyholder reserves (which are not economically
valued under US GAAP, the grandfathered accounting basis under
IFRS 4). After allowing for VA guarantee fees earned in the period
the cumulative impact of VA hedging activities for 2008 and 2009
is a small net operating loss of £7 million.
IFRS basis profit after tax
The total profit before disposal of Taiwan agency business
was £1,367 million in 2009, significantly higher than for 2008
(loss of £451 million). The improvement reflects the increase in
operating profit based on longer-term investment returns and
the significantly more favourable short-term fluctuations in
investment returns partially offset by a charge for the costs of
hedging the Group’s IGD capital surplus. The total profit before
tax from continuing operations on the IFRS basis was £746 million
in 2009, compared with a loss of £450 million for 2008.
In calculating the IFRS operating profit, we use longer-term
investment return assumptions rather than actual investment
returns arising in the year. The difference between actual
investment returns recorded in the income statement and
longer-term returns is shown in the analysis of profits as
short-term fluctuations in investment returns.
IFRS Short-term fluctuations in investment returns
Short-term fluctuations in investment returns for our insurance
operations of positive £166 million comprises £31 million for
Asia, £27 million for US operations and £108 million in the UK.
The positive short-term fluctuations of £31 million for our Asian
operations primarily reflect strong market performance in Taiwan
and Japan partially offset by the impact of unrealised losses on
the debt securities portfolio in Vietnam.
Note
See page 25.
30
Prudential plc > Annual Report 2009
IFRS basis profit after tax
Operating profit based on longer-term investment returns
Short-term fluctuations in investment returns
– Insurance operations
– IGD hedge costs
– Other operations
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes
Profit (loss) before loss on sale and results of Taiwan agency business
Loss on sale and results of Taiwan agency business
Profit (loss) before tax from continuing operations attributable to shareholders
Tax (charge) credit attributable to shareholders’ profit (loss)
Discontinued operations (net of tax)
Minority interests
Profit (loss) for the year attributable to equity holders of the Company
AER8
2009
£m
1,405
166
(235)
105
36
(74)
1,367
(621)
746
(55)
(14)
(1)
676
2008
£m
1,283
(1,408)
–
(313)
(1,721)
(13)
(451)
1
(450)
59
–
(5)
(396)
B
U
S
I
N
E
S
S
R
E
V
I
E
W
The positive short-term fluctuations of £27 million for our
US operations comprise positive £385 million for market value
movements on the free standing derivatives used to manage
the fixed annuity and other general account business, negative
£414 million in respect of debt securities, and positive £56 million
of other items. The negative £414 million for debt securities
reflects the levels of realised gains and losses (including write-
downs) in excess of the allowance for longer-term defaults and
amortisation of interest-related gains included in the operating
result adjusted for associated deferred acquisition costs.
The positive short-term fluctuations of £108 million for our UK
operations reflect principally value movements on the assets
backing the capital of the shareholder-backed annuity business.
Short-term fluctuations for other operations, in addition to the
previously discussed IGD hedge costs of £235 million, were
£105 million positive, which includes £66 million for unrealised
appreciation on Prudential Capital’s debt securities portfolio
and £28 million on swaps held centrally to manage Group assets
and liabilities.
Sale of Taiwan agency business
On 20 February 2009 we announced our agreement to transfer
the assets and liabilities of the agency distribution business in
Taiwan, including the capital consuming in-force book, to China
Life Insurance Limited (Taiwan). We completed the transaction
on 19 June 2009 following regulatory approval being given on that
day. The transfer has resulted in a one-off negative pre-tax impact
of £621 million. After allowing for tax, and other adjustments,
the effect on shareholders’ equity was negative £607 million.
The overall size of loss reflects the carrying value of the IFRS equity
of the business as applied in the calculation of the loss on sale and
the application of ‘grandfathered’ US GAAP under IFRS 4 for
insurance assets and liabilities. US GAAP does not and is not
designed to include the costs of holding economic capital to
support the legacy interest rate guaranteed products, as
recognised under the Company’s supplementary reporting basis
under European Embedded Value principles. The loss on sale
reflects this element of the economic value. Separately, it is to
be noted that under IFRS there is no recognition of the enhanced
IGD capital surplus position arising on completion.
Effective tax rates
The effective rate of tax on operating profits, based on longer-term
investment returns, was 23 per cent (2008: 23 per cent). The
effective rate of tax at the total IFRS profit level for continuing
operations was seven per cent (2008: 13 per cent) due to the
ability to utilise losses carried forward for which we were
previously unable to recognise a deferred tax asset in Jackson,
partially offset by the absence of tax relief on the loss on the
disposal of the Taiwan agency business.
Earnings and dividend per share
Earnings per share
Basic EPS based on operating profit
after tax and minority interest
EEV
IFRS
Basic EPS based on total profit (loss)
after minority interests
EEV
IFRS
2009 p
2008 p
88.8
43.4
49.8
27.0
85.1
39.9
(54.1)
(16.0)
Dividend per share
The directors recommend a final dividend for 2009 of 13.56 pence
per share payable on 27 May 2010 to shareholders on the register
at the close of business on 9 April 2010. The interim dividend for
2009 was 6.29 pence per share. As a result, the total dividend for
this year, including the interim dividend and the recommended
final dividend, amounts to 19.85 pence per share compared with
18.90 pence per share for 2008, an increase of five per cent.
The Board will maintain its focus on delivering a growing dividend,
which will continue to be determined after taking into account our
Group’s financial flexibility and our assessment of opportunities
to generate attractive returns by investing in specific areas of the
business. The Board believes that in the medium term a dividend
cover of around two times is appropriate. The 2009 IFRS operating
earnings after tax and minorities cover the full year dividend
32.2 times (2008: 2.1 times).
Note
See page 25.
31
Chief Financial Officer’s overview > continued
Movement on shareholders’ funds
Operating profit based on longer-term investment returns
Items excluded from operating profit
Total profit (loss) before tax
Tax, discontinued operations and minority interest
Profit (loss) for the period
Exchange movements, net of related tax
Unrealised gains and losses on Jackson securities classified
as available for salenote 1
Dividends
New share capital subscribed
Other
Net increase (decrease) in shareholders’ funds
Shareholders’ funds at beginning of year
Shareholders’ funds at end of year
Comprising:
Long-term business
Free surplusnote 2
Required capitalnote 3
Net worthnote 4
Value of in-force
Total
Other businessnote 5
Total
EEV
IFRS
2009
£m
1,405
(659)
746
(70)
676
(195)
1,043
(481)
141
29
1,213
5,058
6,271
2008
AER*
£m
1,283
(1,733)
(450)
54
(396)
510
(831)
(453)
170
(4)
(1,004)
6,062
5,058
2009
£m
3,090
(1,347)
1,743
(498)
1,245
(750)
–
(481)
141
162
317
14,956
15,273
2,065
2,994
5,059
10,283
15,342
(69)
15,273
2008
AER*
£m
2,865
(4,971)
(2,106)
768
(1,338)
2,129
–
(453)
170
(152)
356
14,600
14,956
447
4,117
4,564
9,958
14,522
434
14,956
Notes
1
2
Net of related change to deferred acquisition costs and tax.
The increase in free surplus of £1.6 billion arises primarily from £0.9 billion being generated by the long-term businesses, and an increased of £1 billion
from the disposal of Taiwan off-set by cash paid to the holding company and other items.
The reduction in required capital from £4,117 million at 31 December 2008 to £2,994 million at 31 December 2009, principally reflects the sale of the
Taiwan agency business.
Net worth principally reflects the free surplus generated in the period, offset by cash paid to the holding company and other items.
Shareholders’ funds for other than long-term business of negative £69 million comprises £1,659 million for asset management operations, including
goodwill of £1,230 million, holding company net borrowings of £1,780 million and net other shareholders’ funds of £52 million. The reduction in
shareholders’ funds for Other business from £434 million in 2008 to negative £69 million in 2009 primarily reflects the change in the mark-to-market
value movement on core borrowings between the two balance sheet dates.
See page 25.
3
4
5
*
EEV
On an EEV basis, which recognises the shareholders’ interest
in long-term business, shareholder funds at 31 December 2009
were £15.3 billion, an increase of £0.3 billion from the 2008
year-end level. This increased level of shareholders’ funds reflects
the profit after tax of £1.2 billion, the adverse effects of exchange
movements of £0.7 billion and dividend payments of £0.5 billion,
which are partially offset by new share capital subscribed of
£0.1 billion and other movements of £0.2 billion.
The shareholders’ funds at the end of 2009 relating to
long-term business of £15.3 billion comprise £5.8 billion for
our Asian long-term business operations, £4.1 billion for our
US long-term business operations and £5.4 billion for our UK
long-term business operations.
At 31 December 2009, the embedded value for our Asian
long-term business operations was £5.8 billion. The embedded
value for the established markets of Hong Kong, Singapore and
Malaysia was £3.8 billion. There is also substantial embedded
value in Indonesia (£584 million), Korea (£408 million), and
Vietnam (£199 million).
For Prudential’s other Asian markets, following the sale of the
Taiwan agency business, the embedded value was £848 million
in aggregate.
IFRS
Statutory IFRS basis shareholders’ funds at 31 December
2009 were £6.3 billion. This compares to the £5.1 billion
at 31 December 2008, an increase of £1.2 billion.
The movement reflects the profit for the year after tax of
£0.7 billion, exchange translation losses, principally on Jackson,
of £0.2 billion and dividend payments of £0.5 billion, the
positive effect of a reduction in the level of net unrealised losses
on Jackson’s debt securities of £1.0 billion and other items of
£0.2 billion.
In 2009 the net unrealised gains/losses within the statement of
financial position value for debt securities classified as available-
for-sale moved from a net unrealised loss of £2,897 million to a
net unrealised gain of £4 million. After allowing for DAC and tax
effects this reduction in the level of unrealised gains/losses has
led to a £1.0 billion increase in shareholders’ funds during the year.
The reduction in unrealised gains/losses reflects the benefits of
some normalisation in credit markets with spreads tightening.
32
Prudential plc > Annual Report 2009
Free surplus and holding company cash flow
The total movement in free surplus net of tax in the period can be analysed as follows:
Free surplus generation
Expected in-force cash flows (including expected return on net assets)
Changes in operating assumptions and variances
Underlying free surplus generated in the period
Provisions for additional allowance for credit risk
Market related items
Investment in new business
Free surplus generated in the period from retained businesses
Effect of disposal and trading results of Taiwan agency business
Net cash remitted by the business units
Other movements and timing differences
Total movement during the period
Free surplus at 1 January
Free surplus at 31 December
Comprised of:
Free surplus relating to long-term insurance business
Free surplus of other insurance business
IFRS net assets of asset management businesses excluding goodwill
Total free surplus
B
U
S
I
N
E
S
S
R
E
V
I
E
W
AER8
2009
£m
1,914
175
2,089
–
(198)
(675)
1,216
987
(688)
157
1,672
859
2,531
2,065
37
429
2,531
2008
£m
1,623
(65)
1,558
(770)
(689)
(806)
(707)
(276)
(515)
442
(1,056)
1,915
859
447
–
412
859
Free surplus generation
Sources and uses of free surplus generation from the
Group’s life and asset management operations
Group free surplus at the end of the period comprises free surplus
for the insurance businesses, representing the excess of the net
worth over the required capital included in the EEV results, and
IFRS net assets for the asset management businesses excluding
goodwill. The free surplus generated during the period comprises
the movement in this balance excluding foreign exchange,
capital movements, and other reserve movements. Specifically,
it includes amounts maturing from the in-force operations during
the period less the investment in new business, the effect of
market movements and other one-off items.
For asset management operations we have defined free surplus
generation to be total post tax IFRS profit for the period. Group
free surplus generated also includes the general insurance
commission earned during the period and excludes restructuring
and shareholders’ centrally arising other income and expenditure.
During 2009 we generated total free surplus from the retained
businesses of £1,216 million (2008: negative £707 million).
Underlying free surplus generated from the in-force book
increased 34 per cent from £1,558 million in 2008 to £2,089
million in 2009, reflecting favourable exchange rates, the
underlying growth of the portfolio, and positive changes in
operating assumptions and variances of £175 million for our
life businesses (2008: negative £65 million). These positive
changes include £158 million arising in the UK (2008: £118
million) and £115 million arising in the US (2008: negative
£1 million), consistent with management’s on-going focus
on capital preservation, and were offset by the negative
changes in Asia of £98 million (2008: negative £182 million)
principally arising from adopting higher required capital level
assumptions in a number of businesses.
Note
See page 25.
Underlying free surplus generated has been used by our life
businesses to invest in new business. Investment in new business
has fallen by £131 million to £675 million in 2009. This reduction
reflects the Group’s deliberate focus on conserving capital and
is in part due to the substantially reduced levels of wholesale
business sales in the UK and the US.
Market related movements have improved from negative
£689 million in 2008 to negative £198 million in 2009. These
improvements have been driven by higher equity returns in
Asia, and improved market performance in the US, offset by the
one-off profit in 2008 arising from the rebalancing of the credit
portfolio in the UK not being repeated in 2009.
In June 2009 we completed the sale of the Taiwan agency
business. As anticipated, this gave rise to an increase in free
surplus of £987 million, representing the release of negative free
surplus that previously applied. This compares to an increase in
IGD capital of £800 million. The difference arises predominantly
because the calibrations underpinning the capital requirements
on a regulatory (IGD) basis are different from those applied on
an economic capital (EEV) basis.
Overall, the Group wrote £2,896 million of sales on an APE
basis in 2009 (2008: £2,879 million) generating a post-tax new
business contribution to embedded value of £1,131 million
(2008: £855 million). To support these sales, we invested
£675 million of capital (2008: £806 million). We estimate the
Group’s internal rate of return for 2009 to be greater than
20 per cent. The amount of capital invested covers both
new business strain, including commissions, of £224 million
(2008: £334 million) and the required capital of £451 million
(2008: £472 million). Management’s focus in 2009 was on
capital preservation and so capital investment was focused
on those areas which added most value to the Group. Overall
investment in new business has fallen as a result of this strategy
but the amount of post-tax new business profit contribution to
embedded value per £1 million of free surplus invested increased
by 55 per cent to £1.7 million (2008: £1.1 million).
33
Chief Financial Officer’s overview > continued
Value created through investment in new business by life operations
2009
AER8 2008
Free surplus invested in new business
Increase in required capital
Net worth invested in new business
Value of in-force created by new business
Post tax new business profit for the year
Tax
Pre-tax new business profit for the year
New business sales (APE)
New business margins (% APE)
Internal rate of return†
Free surplus invested in new business
Increase in required capital
Net worth invested in new business
Value of in-force created by new business
Post tax new business profit for the year
Tax
Pre-tax new business profit for the year
New business sales (APE)
New business margins (% APE)
Internal rate of return†
Asia
£m
(246)
69
(177)
710
533
180
713
US
£m
(326)
300
(26)
458
432
232
664
UK
£m
(103)
82
(21)
187
166
64
230
Group
£m
(675)
451
(224)
1,355
1,131
476
1,607
1,261
57%
>20%
912
73%
>20%
723
32%
>15%
Asia*
£m
(224)
42
(182)
650
468
166
634
1,216
52%
>20%
Asia*
£m
(250)
47
(203)
729
526
185
711
1,350
53%
>20%
Group
£m
(806)
472
(334)
1,189
855
345
1,200
Group
£m
(885)
525
(360)
1,307
947
384
1,331
US
£m
(289)
265
(24)
214
190
103
293
716
41%
18%
UK
£m
(293)
165
(128)
325
197
76
273
947
29%
14%
CER8 2008
US
£m
(342)
313
(29)
253
224
123
347
846
41%
18%
UK
£m
(293)
165
(128)
325
197
76
273
947
29%
14%
*2008 comparatives for Asia exclude amounts in respect of the sold Taiwan agency business.
†The internal rate of return is equivalent to the discount rate at which the present value of the post-tax cash flows expected to be earned over the lifetime of
the business written in shareholder-backed life funds is equal to the total invested capital to support the writing of the business. The capital included in the
calculation of the IRR is equal to the amount required to pay acquisition costs and set up statutory reserves less premiums received, plus encumbered
capital. The impact of the time value of options and guarantees is included in the calculation.
In Asia, investment in new business was £246 million, which was
flat compared to 2008 on a CER basis (£250 million). For each
£1 million of free surplus invested we generated £2.2 million of
post-tax new business contribution to embedded value (2008:
£2.1 million). This increase arises predominantly from the benefit
derived from a change in sales mix from the lower margin markets
of Korea and India to higher margin territories in the region. The
average free surplus undiscounted payback period for business
written in the 12 months to 31 December 2009 was three years
(12 months to 31 December 2008: four years).
In the US, investment in new business was £326 million, five per
cent lower than 2008 on a CER basis (£342 million). For each
£1 million of free surplus invested we generated £1.3 million of
post-tax new business contribution to embedded value (2008:
£0.7 million). This higher return reflects the Group’s prioritisation
of capital preservation which resulted in a change in business mix
away from capital intensive wholesale products to sales of more
profitable variable annuities, as well as an increase in spread
margins due to Jackson’s reduced crediting rates. The average
free surplus undiscounted payback period for business written
in the 12 months to 31 December 2009 was two years (12 months
to 31 December 2008: five years).
In the UK, investment in new business decreased by 65 per cent
from £293 million in 2008 to £103 million in 2009, and for each
£1 million of free surplus invested we generated £1.6 million
of post-tax new business contribution to embedded value
(2008: £0.7 million). This reflects the UK’s focus on capital
preservation with an increase in with-profits bonds sales and
minimal bulk annuity transactions in 2009 and its disciplined
approach to individual annuity pricing. The average free
surplus undiscounted payback period for business written
in the 12 months to 31 December 2009 was five years (12 months
to 31 December 2008: six years).
Note
See page 25.
34
Prudential plc > Annual Report 2009
Holding company cash flow
Net cash remitted by business units:
UK Life fund paid to Group
Shareholder-backed business:
Other UK paid to Group
Group invested in UK
Total shareholder-backed business
UK net
US paid to Group
Group invested in US
US net
Asia paid to Group
Long-term business
Other operations
Group invested in Asia
Long-term business
Other operations
Asia net
M&G paid to Group
PruCap paid to Group
Net remittances to Group from Business Units
Net interest paid
Tax received
Corporate activities
Total central outflows
Operating holding company* cash flow before dividend
Dividend paid net of scrip and share options
Operating holding company* cash flow after dividend
Exceptional Items:
Cash flow arising from sale of Taiwan agency business
IGD hedge costs†
Other cash movements
Issue of hybrid debt, net of costs
Repayment of maturing debt
Receipts (payments) arising from foreign exchange movements on US$ hedging instruments
Total holding company cash flow
Cash and short-term investments at 1 January
Foreign exchange movements
Cash and short-term investments at 31 December
2009 £m
2008 £m
284
189
(39)
150
434
39
–
39
181
46
227
(101)
(86)
(187)
40
93
82
688
(214)
71
(163)
(306)
382
(344)
38
(125)
(235)
822
(249)
60
311
1,165
10
1,486
B
U
S
I
N
E
S
S
R
E
V
I
E
W
279
46
(126)
(80)
199
144
–
144
163
234
397
(310)
(82)
(392)
5
106
61
515
(128)
130
(177)
(175)
340
(286)
54
–
–
–
–
(352)
(298)
1,456
7
1,165
* Including central finance subsidiaries.
†Costs in respect of IGD hedge taken out in Q1 2009 to mitigate against further adverse movement in market indices from the lows experienced at that time.
35
Chief Financial Officer’s overview > continued
Holding company cash flow
We continue to manage cash flows across the Group with a view
to achieving a balance between ensuring sufficient net remittances
from the businesses to cover the progressive dividend (after
corporate costs) and maximising value for shareholders through
the reinvestment of the free surplus generated at business unit
level in the particularly profitable opportunities available to the
Group given its established position in key life insurance markets.
On this basis, the holding company cash flow statement at an
operating level should generally balance to close to zero before
exceptional cash flows.
Operating holding company cash flow for 2009 before dividend
was £382 million, £42 million higher than for 2008. After dividend,
the operating holding company cash flow was £38 million,
£16 million lower than 2008 reflecting the higher dividend paid
in 2009 and a higher scrip take-up in 2008.
The holding company received £688 million net remittances
from business units in 2009, (including £506 million which relates
to long-term business operations) up from £515 million in 2008,
with increased contributions from the UK and Asia businesses
partly offset by lower remittances from the US operations.
The UK shareholder-backed business was cash flow positive
in 2009, one year ahead of our previously announced target.
We have flexibility available in our management of the holding
company cash flow from and to the different business units. In
2009, we have utilised this flexibility to bring forward the cash
emergence of the in-force value through the proactive use of
financing techniques.
Capital invested in business units in 2009 was £226 million
compared to £518 million for 2008. Injections into Asia and the
UK were both down from 2008 levels, when higher injections
into Asia were made to meet solvency requirements following
market falls, and reflecting our disciplined approach to capital
preservation in the UK.
Net interest paid in 2009 increased from £128 million to
£214 million. £38 million of the increase was in respect of the two
debt issues in 2009 and in addition interest received on central
shareholders’ funds fell by £48 million due to falling interest rates.
Tax received in 2009 was £71 million, down £59 million from
2008, due to lower UK taxable profits available for offset.
Payments for corporate activities at £163 million were £14 million
lower, mainly due to the non-recurrence of 2008 costs relating
to the investigation of the potential reattribution of the
inherited estate.
After corporate costs, there was a net cash inflow before dividend
of £382 million in 2009 compared to £340 million for 2008. The
dividend paid net of scrip, was £344 million in 2009 compared
to £286 million in 2008. The take-up of scrip dividends in 2009
continued to be significant at £137 million (2008: £157 million).
As a consequence, overall, we reported a positive underlying
cash inflow before exceptional items of £38 million in 2009.
There were also two exceptional payments. We paid £125 million
in connection with the sale of the Taiwan agency business to
China Life Insurance Company Ltd of Taiwan, which comprised
of £45 million to purchase a 9.99 per cent stake in that company
and £80 million for transaction related expenditure including
restructuring costs.
In the first quarter of 2009, we incurred one-off exceptional
costs in relation to an IGD hedge taken out in 2009 to mitigate
against further adverse movement in market indices from the lows
experienced at that time, with the transaction being executed by
Jackson where the specialist skills reside for the particular types of
instruments utilised and we have injected £235 million of capital
into Jackson.
When taken in aggregate with the subordinated and Tier 1 debt
raising net of repayments undertaken during 2009, the overall
Holding Company cash balances at 31 December 2009 increased
by £0.3 billion to £1.5 billion (2008: £1.2 billion).
36
Prudential plc > Annual Report 2009
Balance sheet
Summary
Investments
Holding company cash and short-term investments
Other
Total assets
Less: Liabilities
Policyholder liabilities
Unallocated surplus of with-profits funds
Less: shareholders’ accrued interest in the long-term business
Core structural borrowings of shareholders’ financed operations (IFRS book value basis)
Other liabilities including minority interest
Total liabilities and minority interest
EEV basis net assets
Share capital and premium
IFRS basis shareholders’ reserves
IFRS basis shareholders’ equity
Additional EEV basis retained profit
AER8
2009
£m
208,722
1,486
17,546
227,754
186,398
10,019
196,417
(9,002)
187,415
3,394
21,672
212,481
15,273
1,970
4,301
6,271
9,002
2008
£m
193,434
1,165
20,943
215,542
173,977
8,414
182,391
(9,898)
172,493
2,958
25,135
200,586
14,956
1,965
3,093
5,058
9,898
B
U
S
I
N
E
S
S
R
E
V
I
E
W
EEV basis shareholders’ equity (excluding minority interest)
15,273
14,956
The following sections focus on key areas of interest in the balance sheet.
Investments
Debt securities
Equity
Property investments
Commercial mortgage loans
Other loans
Deposits
Other investments
Total
2009 £m
2008 £m
Unit-
Linked
and
variable
annuities
8,848
38,620
662
–
27
746
110
49,013
Participating
Funds
47,327
29,962
8,759
145
1,742
9,638
3,448
101,021
Shareholder-
backed
Total
Group
45,576
772
1,484
4,489
2,351
2,436
1,580
58,688
101,751
69,354
10,905
4,634
4,120
12,820
5,138
208,722
Total
Group
95,224
62,122
11,992
5,473
5,018
7,294
6,311
193,434
Total investments held by the Group at 31 December 2009 were
£208.7 billion, of which £101.0 billion were held by participating
funds, £49.0 billion by unit-linked funds and £58.7 billion by
shareholder-backed operations. Shareholders are not directly
exposed to value movements on assets backing participating
or unit-linked operations, with sensitivity mainly related to
shareholder-backed operations.
Of the £58.7 billion investments related to shareholder-backed
operations, £3.9 billion was held by Asia long-term business,
£28.9 billion by Jackson and £22.8 billion by the UK long-term
business respectively.
The investments held by the shareholder-backed operations are
predominantly debt securities, totalling £2.5 billion, £22.8 billion
and £19.0 billion for Asia, the US and the UK long-term business
respectively, of which 79 per cent, 93 per cent and 95 per cent are
rated, either externally or internally, as investment grade. Included
within debt securities of shareholder-backed operations are Tier 1
and Tier 2 bank holdings of £3.6 billion, of which Tier 1 holdings
of UK bank securities is £153 million, with exposure being wholly
within the UK long-term business. Within Tier 2, our exposure
to UK banks is £0.9 billion, with exposure being £0.7 billion,
£0.1 billion, and £0.1 billion for the UK long-term business,
the US and other operations respectively.
In addition £3.0 billion was held by asset management and other
operations, of which £2.8 billion was managed by Prudential
Capital, and a further £0.2 billion in central operations.
Note
See page 25.
37
Chief Financial Officer’s overview > continued
Policyholder liabilities and unallocated surplus of with-profits funds
At 1 January 2009
Premiums
Surrenders
Maturities/Deaths
Net cash flows
Investment related items and other movements
Disposal of Taiwan agency business
Assumption changes
Foreign exchange translation difference
At 31 December 2009
With-profits funds
– Policyholder liabilities
– Unallocated surplus
Total at 31 December 2009
Total policyholder liabilities including unallocated surplus at 31 December 2009
Shareholder-backed business
Asia
£m
12,975
2,984
(840)
(89)
2,055
2,811
(3,508)
(67)
(1,216)
US
£m
45,361
9,177
(3,255)
(733)
5,189
2,986
–
–
(5,225)
UK
£m
33,853
3,596
(1,577)
(2,092)
(73)
5,023
–
(46)
(57)
Total
£m
92,189
15,757
(5,672)
(2,914)
7,171
10,820
(3,508)
(113)
(6,498)
13,050
48,311
38,700
100,061
86,337
10,019
96,356
196,417
The Group operates a central treasury function, which has overall
responsibility for managing our capital funding programme as well
as our central cash and liquidity positions.
In addition to our core structural borrowings set out above, we also
have in place an unlimited global commercial paper programme.
As at 31 December 2009, we had issued commercial paper under
this programme totalling £409 million, US$1,976 million, and
EUR 449 million. The central treasury function also manages our
£5,000 million medium-term note (MTN) programme covering
both core and non-core borrowings, under which the outstanding
subordinated debt at 31 December 2009 was £835 million,
US$750 million and EUR 520 million, while the senior debt
outstanding was £200 million and US$12 million. In addition,
our holding company has access to £1,600 million of committed
revolving credit facilities, provided by 15 major international
banks, and renewable between September 2011 and March 2012;
and an annually renewable £500 million committed securities
lending liquidity facility. Apart from small drawdowns to test the
process, these facilities have never been drawn, and there were
no amounts outstanding at 31 December 2009. The commercial
paper programme, the MTN programme, the committed revolving
credit facilities and the committed securities lending liquidity
facility are all available for general corporate purposes and to
support the liquidity needs of our holding company and are
intended to maintain a strong and flexible funding capacity.
We manage the Group’s core debt within a target level consistent
with our current debt ratings. At 31 December 2009, the gearing
ratio (debt, net of cash and short-term investments, as a
proportion of EEV shareholders’ funds plus debt) was 11.1 per
cent, compared with 10.7 per cent at 31 December 2008.
Prudential plc has strong debt ratings from Standard & Poor’s,
Moody’s and Fitch. Prudential’s long-term senior debt is rated
A+ (negative outlook), A2 (negative outlook) and A+ (negative
outlook) from Standard & Poor’s, Moody’s and Fitch, while
short-term ratings are A-1, P-1 and F1+ respectively.
Policyholder liabilities and unallocated surplus of
with-profits funds
Policyholder liabilities related to shareholder-backed business
grew by £ 7.9 billion from £ 92.2 billion at 31 December 2008
to £100.1 billion at 31 December 2009.
The increase reflects positive net cash flows (premiums less
surrenders and maturities/deaths) of £7.2 billion in 2009,
predominantly driven by strong inflows in the US (£5.2 billion)
and Asia (£2.1 billion), as well as positive investment-related
items of £10.8 billion, primarily reflecting the growth in global
equity and bond markets during the year.
These increases were offset by foreign exchange movements of
negative £6.5 billion, the disposal of the Taiwan agency business
in June 2009 (negative impact of £3.5 billion) and a reduction in
liabilities of £0.1 billion following assumptions changes primarily
in Malaysia, namely £63 million relating to a consequential change
in reserves following the adoption of a Risk-based Capital regime
by the local regulator, (as previously highlighted), and the UK.
During 2009, the unallocated surplus, which represents the
excess of assets over policyholder liabilities for the Group’s
with-profit funds on a statutory basis, increased from £8.4 billion
at 31 December 2008 to £10.0 billion at 31 December 2009.
Shareholders’ net borrowings and ratings
The Group’s core structural borrowings at 31 December 2009
totalled £3.4 billion on an IFRS basis, compared with £3.0 billion
at the end of 2008. In May 2009, senior debt of £0.3 billion was
repaid on maturity and new hybrid debt of £0.4 billion was issued.
In July 2009 a further £0.5 billion of new hybrid debt was issued.
In addition there were exchange translation gains of £0.2 billion
on foreign currency denominated borrowings in the period.
After adjusting for holding company cash and short-term
investments of £1.5 billion, net core structural borrowings at
31 December 2009 were £1.9 billion compared with £1.8 billion
at the end of 2008. The movement of £0.1 billion includes the
gains of £0.2 billion mentioned above and the previously
discussed positive cash flow of £38 million offset by the
exceptional payments of £360 million.
38
Prudential plc > Annual Report 2009
Shareholders’ net borrowings and ratings
Shareholders’ net borrowings at 31 December 2009:
Perpetual subordinated
Capital securities (Innovative Tier 1)
Subordinated notes (Lower Tier 2)
Senior debt
2009
2023
2029
Holding company total
Jackson surplus notes (Lower Tier 2)
Total
Less: Holding company cash and
short-term investments
Net core structural borrowings of
shareholder-financed operations
2009 £m
2008 £m
Mark-to-
IFRS basis market value
EEV basis
Mark-to-
IFRS basis market value
EEV basis
1,422
1,269
2,691
–
300
249
3,240
154
3,394
(1,486)
1,908
(71)
103
32
–
8
(14)
26
4
30
–
30
1,351
1,372
2,723
–
308
235
3,266
158
3,424
1,059
928
1,987
249
300
249
2,785
173
2,958
(546)
(191)
(737)
–
(12)
(53)
(802)
(19)
(821)
513
737
1,250
249
288
196
1,983
154
2,137
B
U
S
I
N
E
S
S
R
E
V
I
E
W
(1,486)
(1,165)
–
(1,165)
1,938
1,793
(821)
972
The valuation basis under IAS 19 for the Group financial
statements differs markedly from the full triennial actuarial
valuation basis. For PSPS, the terms of the trust deed restrict
shareholders’ access to any underlying surplus in the scheme.
Accordingly, under IAS 19, any underlying surplus is not
recognised. The financial position for PSPS recorded reflects
the higher of any underlying IAS 19 deficit and any obligation
for deficit funding. At 31 December 2009, the Group has not
recognised its interest in the underlying PSPS IAS 19 surplus of
£433 million net of related tax relief and has instead recognised
a deficit funding obligation of £63 million net of related tax relief.
All amounts are based on the new funding arrangement described
above. Deficit funding for PSPS is apportioned in the ratio of
70/30 between the PAC with-profits fund and shareholder-
backed operations.
As at 31 December 2009, on the Group IFRS statement of financial
position, the shareholders’ share of the liabilities for these UK
schemes amounted to a £92 million liability net of related tax relief.
The total share attributable to the PAC with-profits fund amounted
to a liability of £110 million net of related tax relief.
Financial instruments
The Group is exposed to financial risk through our financial
assets, financial liabilities, and policyholder liabilities. The key
financial risk factors that affect us include market risk, credit risk
and liquidity risk. Information on our Group’s exposure to financial
risk factors, and our financial risk management objectives and
policies, is provided both in our Risk and Capital Management
section of the Business Review and the financial statements.
Further information on the sensitivity of our Group’s financial
instruments to market risk and our use of derivatives is also
provided in the financial statements.
The financial strength of PAC is rated AA (negative outlook) by
Standard & Poor’s, Aa2 (negative outlook) by Moody’s and AA+
(negative outlook) by Fitch.
Jackson National Life’s financial strength is rated AA (negative
outlook) by Standard & Poor’s, A1 (negative outlook) by Moody’s
and AA (negative outlook) by Fitch.
Financial position on defined benefit
pension schemes
The Group currently operates three defined benefit schemes in
the UK, of which by far the largest is the Prudential Staff Pension
Scheme (PSPS) and two smaller schemes, Scottish Amicable
(SAPS) and M&G.
Defined benefit schemes in the UK are generally required to
be subject to a full actuarial valuation every three years, in order
to assess the appropriate level of funding for schemes in relation
to their commitments. The valuations of PSPS as at 5 April 2008
and SAPS as at 31 March 2008 were finalised in the second
quarter of 2009. The valuation of the M&G pension scheme as
at 31 December 2008 was finalised in January 2010. The valuation
of PSPS demonstrated the scheme to be 106 per cent funded
by reference to the Scheme Solvency Target that forms the
basis of the scheme’s funding objective. Accordingly, the total
contributions to be made by the Group into the scheme,
representing the annual accrual cost and deficit funding, has
been reduced from the previous arrangement of £75 million
per annum to £50 million per annum effective from July 2009.
The actuarial valuation of SAPS as at 31 March 2008 demonstrated
the scheme to be 91 per cent funded, representing a deficit of
£38 million. Based on this valuation, deficit funding amounts of
£7.3 million per annum designed to eliminate the actuarial deficit
over a seven year period are being made from July 2009.
The actuarial valuation of the M&G pension scheme as at
31 December 2008 demonstrated the scheme to be 76 per cent
funded, representing a deficit of £51 million. Based on this
valuation, deficit funding amounts designed to eliminate the
actuarial deficit over a five year period are being made from
January 2010 of £14.1 million per annum for the first two years
and £9.3 million per annum for the subsequent three years.
39
In the event that any of the business unit plans imply risk limits will
be exceeded, this will necessitate a dialogue between GERC and
the relevant business unit or units. Exceeding Group limits may be
avoided if, for example, limits in other business units are not fully
utilised, or if the diversification effect at Group level of a particular
risk with other business units means the Group limit is not
breached.
Market risk is managed such that as conditions evolve the risk
profile is maintained within risk appetite. In addition to business
unit operational limits on credit risk, we set counterparty risk limits
at Group level. The limits on our total Group-wide exposures to
a single counterparty are specified within different credit rating
‘categories’. Group Risk and the GERC monitor our actual
exposures against these limits on a monthly basis.
Risk exposures
The Group Risk Framework deploys a common risk language,
allowing meaningful comparisons to be made between different
business units. Risks are broadly categorised as shown opposite.
1 Financial risks
a Market risk
i Equity risk
In the UK business, most of our equity exposure is incurred in the
with-profits fund which includes a large inherited estate estimated
at £6.4 billion as at 31 December 2009 (2008: £5.4 billion), which
can absorb market fluctuations and protect the fund’s solvency.
The inherited estate itself is partially protected against falls in
equity markets through an active hedging policy. In the course
of 2009 we have reduced the with-profit fund’s exposure to UK
equities whilst increasing the proportion of fixed income assets.
In Asia, a high proportion of our in-force book is made up of unit-
linked products with limited shareholder exposure to equities.
We have minimal direct shareholder exposure to Asian equity
markets outside our unit-linked holdings.
In the US, where we are a leading provider of variable annuities,
there are well-understood risks associated with the guarantees
embedded in our products. We provide guarantees for minimum
death benefits (GMDB) on all policies in this class, minimum
withdrawal benefits (GMWB) on 47 per cent of the book,
and minimum income benefits (GMIB) on only eight per cent.
To protect the shareholders against the volatility induced by
these embedded options, we use both a comprehensive hedging
programme and reinsurance. Due to the inability to economically
reinsure or hedge the GMIB, Jackson ceased offering this benefit
in 2009.
In our variable annuity sales activities, we focus on meeting the
needs of conservative and risk averse customers who are seeking
reliable income in retirement, and who display little tendency to
arbitrage their guarantees. These customers select conservative
investment options and, importantly, buy fewer guarantee
products compared to the industry as a whole. We are able to
meet the needs of these customers because our unique and
market leading operational platform allows us to tailor more
than 1,400 product combinations.
Business review > Risk and capital management
Risk and capital management
As a provider of financial services, including insurance,
we recognise that the managed acceptance of risk lies
at the heart of our business. As a result, effective risk
management capabilities represent a key source of
competitive advantage for our Group.
The Group’s risk appetite framework sets out our tolerance to
risk exposures as well as our approach to risk management and
return optimisation. Under this approach, we monitor our risk
profile continuously against agreed limits. Our main strategies for
managing and mitigating risk include asset liability management,
using derivatives to hedge relevant market risks, and
implementing reinsurance and corporate insurance programmes.
Risk oversight
Group risk appetite
We define and monitor aggregate risk limits for our earnings
volatility and our capital requirements based on financial and
non-financial stresses:
a Earnings volatility: the objectives of the limits are to ensure
that (a) the volatility of our earnings is consistent with our
stakeholders’ expectations, (b) the Group has adequate
earnings (and cash flows) to service debt, expected dividends
and to withstand unexpected shocks, and (c) earnings (and
cash flows) are managed properly across geographies and are
consistent with our funding strategies. The two measures we
apply to monitor the volatility of our earnings are European
Embedded Value (EEV) operating profit and International
Financial Reporting Standards (IFRS) operating profit,
although EEV and IFRS total profits are also considered.
b Capital requirements: the limits aim to ensure that (a) the
Group meets its internal economic capital requirements,
(b) the Group achieves its desired target rating to meet its
business objectives, and (c) supervisory intervention is avoided.
The two measures we apply are the EU Insurance Groups
Directive (IGD) capital requirements and internal economic
capital requirements. In addition, we also monitor capital
requirements on a local statutory basis.
Our risk appetite framework forms an integral part of our annual
business planning cycle. Our Group Risk function monitors the
Group’s risk profile against the agreed limits. Using submissions
from business units, Group Risk calculates the Group’s aggregated
position (allowing for diversification effects between business
units) relative to the limits implied by the risk appetite statements.
Local limits are agreed with each of the business units to ensure
that the aggregate risk exposure remains within the defined
Group-level risk appetite. Each business unit determines its own
individual risk position by calculating the impacts (on earnings and
capital measures) of a shock to its market, credit, insurance and
operational risk exposures and agrees them with Group Risk and
the Group Executive Risk Committee (GERC).
We use a two-tier approach to apply the limits at business unit
level. Firstly, we calculate business unit risk limits. These ensure
that, provided each business unit keeps within its limits, the Group
risk position will remain within the Group limits. Secondly, the
impact on the risk position is considered as part of Group Risk’s
scrutiny of large transactions or departures from plans proposed
by individual business units.
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Prudential plc > Annual Report 2009
Category
1 Financial
risks
Risk type
Definition
a) Market risk
b) Credit risk
c)
Insurance risk
d) Liquidity risk
The risk that arises from adverse changes in the value of, or income from, assets and
changes in interest rates or exchange rates.
The risk of loss if another party fails to meet its obligations, or fails to do so in a
timely fashion.
The inherent uncertainty as to the occurrence, amount and timing of insurance
cash flows. This includes the impact of adverse mortality, morbidity and
persistency experience.
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.
The risk of direct or indirect loss resulting from inadequate or failed internal
processes, people or systems, or from external events. This includes legal and
regulatory compliance risk.
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2 Non-financial Operational risk
risks
Business
environment risk
Exposure to forces in the external environment that could significantly change
the fundamentals that drive the business’s overall objectives and strategy.
Strategic risk
Ineffective, inefficient or inadequate senior management processes for the
development and implementation of business strategy in relation to the business
environment and the Group’s capabilities.
It is our philosophy not to compete on price. Our individual
guarantees tend to be more expensive than the market average,
because we seek to sell at a price capable of funding the cost
we incur to hedge or reinsure our risks.
We use a macro approach to hedging that covers the entire equity
risk in the US business, including all exposure to GMDB and
GMWB guarantees. Within this macro approach we make use
of the natural offsets that exist between the variable annuity
guarantees and the fixed index annuity book, and then use a
combination of OTC options and futures to hedge the residual risk,
allowing for significant market shocks and limiting the amount of
capital we are putting at risk. The hedging programme also covers
the fees on variable annuity guarantees.
Jackson hedges the economics of its products rather than the
accounting result. Accordingly, while its hedges are effective on
an economics basis, due to different accounting treatment for the
hedges and some of the underlying hedged items, the reported
income effect is more volatile. For Jackson’s variable annuities
guaranteed benefits and related hedges, while there has been
some volatility of results in 2008 and 2009, there has been a small
cumulative net operating loss of £7 million over the 24 month
period, reflecting the overall effectiveness of the hedging
programme.
ii Interest rate risk
Interest rate risk arises primarily from Prudential’s investments
in long-term debt and fixed income securities. Interest rate risk
also exists in policies that carry investment guarantees on early
surrender or at maturity, where claim values can become higher
than the value of backing assets as a result of rises or falls in
interest rates.
Interest rates primarily impact our Asia, US and UK with-profits
businesses. Following the sale of the agency-based business in
Taiwan, the exposure to interest rate risk in Asia has significantly
reduced. The remaining risk in the region relates mostly to
guarantees on traditional shareholder-backed life products and
asset-liability mismatches, driven by limited availability of long-
term assets in some territories. This exposure is monitored and
managed carefully on an ongoing basis, for example by setting
clear limits on duration risk set in the investment guidelines.
We have a range of risk mitigation options available that would
help to reduce the exposure to interest rate movements.
In the US there is interest rate risk across the portfolio. We manage
fixed annuity interest rate exposure through a combination of
interest rate swaps and interest rate options, to protect capital
against rates rising quickly, and through the contractual ability
to reset crediting rates annually.
In the UK the investment policy for the shareholder-backed
annuity business is to match the cash flow from investments with
the annuity payments. As a result, assets and liabilities are closely
matched by duration. The impact of any residual cash flow
mismatching can be adversely affected by changes in interest
rates, therefore the mismatching position is regularly monitored.
iii Foreign exchange risk
Prudential principally operates in the UK, the US, and in 13 countries
in Asia. The geographical diversity of our businesses means that
we are inevitably subject to the risk of exchange rate fluctuations.
Prudential’s international operations in the US and Asia, which
represent a significant proportion of our operating profit and
shareholders’ funds, generally write policies and invest in assets
denominated in local currency. Although this practice limits the
effect of exchange rate fluctuations on local operating results, it
can lead to significant fluctuations in our consolidated financial
statements when results are expressed in pounds sterling.
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Business review > Risk and capital management > continued
We do not generally seek to hedge foreign currency revenues,
as these are substantially retained locally to support the growth
of the Group’s business and meet local regulatory and market
requirements. However, in cases where a surplus arising in an
overseas operation supports Group capital or shareholders’
interest, this exposure is hedged if it is economically optimal
to do so. Currency borrowings, swaps and other derivatives
are used to manage exposures.
b Credit risk
Debt portfolio
Our debt portfolio on an IFRS basis was £101.8 billion at
31 December 2009. £45.6 billion of these assets backed
shareholder business, of which 93 per cent were investment
grade, compared to 96 per cent at 31 December 2008. This
change was a result of downgrades, largely occurring in March
and April, with the pace of downgrade significantly slowing
thereafter. Sovereign debt backing shareholder business
represented 11 per cent of the portfolio, or £4.9 billion at
31 December 2009, 67 per cent of this was AAA and 91 per cent
investment grade. Eurozone sovereign exposures backing
shareholder business were £3.1 billion at 31 December 2009,
98 per cent of these were AAA rated. Of the remaining 2 per cent,
the highest exposure was in respect of Italy (£55 million) and
Spain (£1 million) whilst there was no exposure to Greece,
Portugal or Ireland.
Asia
Asia’s debt portfolio totalled £10.0 billion at 31 December. Of this,
approximately 75 per cent was invested in unit-linked and with-
profits funds with minimal shareholders’ risk. The remaining 25
per cent is shareholder exposure and is invested predominantly
(79 per cent) in investment grade bonds. For Asia, the portfolio
has performed very well, and did not experience any default
losses in 2009.
UK
The UK’s debt portfolio on an IFRS basis is £67.8 billion as at
31 December 2009, including £42.3 billion within the UK with-
profits fund. Shareholders’ risk exposure to the with-profits fund
is limited as the solvency is protected by the large inherited estate.
Outside the with-profits fund there is £6.4 billion in unit linked
funds where the shareholders’ risk is limited, with the remaining
£19.0 billion backing the shareholders’ annuity business and
other non-linked business (of which 78 per cent is rated AAA
to A, 19 per cent BBB and three per cent non-investment grade).
On a statutory (Pillar 1) basis we have held prudent credit reserves
within the UK shareholder annuity funds of £1.6 billion to allow for
future credit risk. For Prudential Retirement Income Limited (PRIL)
this allowance is set at 71bps at 31 December 2009 (2008: 80bps).
This now represents 41 per cent of the portfolio spread over swaps
compared to 31 per cent as at 30 June 2009 and 25 per cent as at
31 December 2008. A low level of new defaults (£11 million) were
reported on the debt portfolio held by the UK shareholder backed
annuity business in 2009.
During the second half of 2009 we materially reduced our
holdings in subordinated financial debt backing our annuity
business, which has improved the overall credit quality of our
bond portfolios. This has resulted in gross losses of £254 million
on shareholder-backed business and £80 million on policyholder
backed business. On a Pillar I basis these losses have been fully
offset by a reduction in long-term default reserves of £180 million
shareholder/£31 million policyholder that arose as a result of the
improvement in the quality of our remaining bond portfolios and
a further £74 million shareholder/£49 million policyholder release
of short-term default reserves which were allocated to the assets
sold. On an IFRS basis, the gross costs less the reduction in long-
term and short-term default reserves resulted in an overall pre-tax
operating loss of £51 million shareholder/£32 million policyholder.
US
The most significant area of exposure to credit risk for the
shareholders is Jackson in the US. At 31 December 2009 Jackson’s
fixed income portfolio totalling £22.8 billion, comprised £16.5
billion Corporate Debt, £2.1 billion of Commercial Mortgage
Backed Securities (CMBS), £3.3 billion of Residential Mortgage
Backed Securities (RMBS) and £0.9 billion of other instruments.
The US Corporate Debt portfolio of £16.5 billion is 94 per cent
investment grade. Concentration risk is low, with the top ten
holdings accounting for less than seven per cent of the portfolio.
The non-investment grade portfolio is also well diversified with an
average holding of £8 million. Our largest sector exposures in the
investment grade portfolio are Utilities and Energy both at 15 per
cent. We actively manage the portfolio and will sell exposures as
events dictate.
Within the RMBS portfolio of £3.3 billion, the agency guaranteed
portion is 60 per cent. Another 21 per cent of the portfolio is
non-agency prime and Alt-A investments with pre-2006/2007
vintages, where experience has been much more positive than
later vintages. Our exposure to the 2006/2007 vintages totals
£466 million of which £373 million is invested in the senior part
of the capital structure, thereby significantly reducing the risk of
defaults and the magnitude of loss if a shortfall does occur. The
actual exposure to non-senior 2006/2007 Prime and Alt-A RMBS
is only £93 million. The total RMBS portfolio has an average fair
value price of 78 cents in the dollar.
The CMBS £2.1 billion portfolio is performing strongly, with
46 per cent of the portfolio rated AAA and less than 1 per cent
rated below investment grade. The entire portfolio has an average
credit enhancement level of 30 per cent. This level provides
significant protection, since it means the bond has to incur a
30 per cent loss, net of recoveries, before we are at risk.
In Jackson total amounts charged to profits relating to debt
securities was £631 million (2008: £624 million). This is net
of recoveries/reversals recognised in the year of £5 million
(2008: £3 million).
In 2009, Jackson’s total defaults were less than £1 million (2008:
£78 million). In addition, as part of our active management of the
book, we incurred net losses of £6 million (2008: £130 million)
on the sale of impaired bonds.
IFRS write-downs excluding defaults for the year were £630
million compared to £419 million in 2008. Of this amount £509
million (2008: £167 million) was in respect of RMBS securities.
42
Prudential plc > Annual Report 2009
The impairment process reflects a rigorous review of every single
bond and security in our portfolio. The accounting requires us to
book full mark-to-market losses on impaired securities through our
income statement. However we would expect only a proportion
of these losses eventually to turn into defaults, and some of the
impaired securities to recover in price over time.
In considering potential future losses for Jackson, it is essential
to examine the key components of the debt portfolio. As at
31 December 2009, 93 per cent of Jackson’s total debt portfolio
of £22.8 billion consisted of investment grade securities and
seven per cent were non-investment grade.
Asset management
The debt portfolio of the Group’s asset management operations of
£1.2 billion principally comprises £1.1 billion related to Prudential
Capital operations. Of this amount, debt securities of £1.1 billion
were rated AAA to A- by S&P or Aaa by Moody’s.
Loans
Of the total Group loans of £8.8 billion at 31 December 2009,
£6.9 billion are held by shareholder-backed operations
comprising of £4.5 billion commercial mortgage loans and
£2.4 billion of other loans.
Of this total held by shareholder-backed operations, the Asian
insurance operations held £0.4 billion of other loans, the majority
of which are commercial loans held by the Malaysian operation
that are investment graded by two local rating agencies. The
US insurance operations held £4.3 billion of loans, comprising
£3.8 billion of commercial mortgage loans, all of which are
collateralised by properties, and £0.5 billion of policy loans.
The US commercial mortgage loan portfolio does not include
any single-family residential mortgage loans and therefore is
not exposed to the risk of defaults associated with residential
sub-prime mortgage loans. The UK insurance operations held
£0.8 billion of loans, the majority of which are mortgage loans
collateralised by properties.
The balance of the total shareholder loans amounts to £1.4 billion
and relates to bridging loan finance managed by Prudential
Capital. The bridging loan assets generally have no external credit
ratings available, with internal ratings prepared by the Group’s
asset management operations as part of the risk management
process, with the majority being rated BBB+ to BBB-.
Unrealised credit losses in the US
Jackson’s net unrealised position moved from a loss of £2,897
million at 31 December 2008 to a net gain of £4 million at 31
December 2009 as the markets rebounded from the historically
wide spreads at the end of 2008. The gross unrealised loss
position moved from £3,178 million at 31 December 2008 to
£966 million at 31 December 2009. Gross unrealised losses on
securities priced at less than 80 per cent of face value totalled
£594 million at 31 December 2009 compared to £1.9 billion
at 31 December 2008.
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c Insurance risk
The processes of determining the price of our products and
reporting the results of our long-term business operations require
us to make a number of assumptions. In common with other
industry players, the profitability of our businesses depends
on a mix of factors including mortality and morbidity trends,
persistency, investment performance, unit cost of administration
and new business acquisition expenses. We continue to conduct
rigorous research into longevity risk using data from our
substantial annuitant portfolio. Prudential’s persistency
assumptions reflect recent experience for each relevant line of
business, and any expectations of future persistency. Where
appropriate, allowance is also made for the relationship – either
assumed or historically observed – between persistency and
investment returns, and for the resulting additional risk.
d Liquidity risk
The holding company has significant internal sources of liquidity
which are sufficient to meet all of our expected requirements for
the foreseeable future without having to make use of external
funding. In aggregate the Group has £2.1 billion of undrawn
committed facilities, of which, in February 2009, we renewed
£1.4 billion of the undrawn syndicated committed banking facility
for a further three years. We also have two £100 million undrawn
bilateral committed banking facilities expiring in 2011 and 2012,
with the balance being an annually renewable £500 million
committed securities lending facility. In addition the Group has
access to liquidity via the debt capital markets, which was
demonstrated most recently through the two hybrid instruments,
£400 million of Lower Tier 2 debt issued in May, US$750 million
(approximately £455 million) of Innovative Tier 1 debt issued in
July and a £250 million senior 3-year MTN issued in January 2010.
Liquidity is also assessed at business unit level under base case
and stressed assumptions. The liquidity resources available have
been assessed to be sufficient under both sets of assumptions.
2 Non-financial risk
Prudential is exposed to operational, business environment and
strategic risk in the course of running its businesses. We process
a large number of complex transactions across numerous and
diverse products, and are subject to a number of different legal
and regulatory, including tax, regimes. We also have a significant
number of third-party relationships that are important to the
distribution and processing of our products, both as market
counterparties and as business partners.
We use the qualitative and quantitative analysis of operational risk
exposures material to the Group to support business decisions, to
inform overall levels of capital held and to assess the adequacy of
the corporate insurance programme.
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Business review > Risk and capital management > continued
Capital management
Regulatory capital (IGD)
Prudential is subject to the capital adequacy requirements of
the European Union (EU) Insurance Groups Directive (IGD) as
implemented by the Financial Services Authority (FSA) in the UK.
The IGD capital adequacy requirements involves aggregating
surplus capital held in our regulated subsidiaries, from which
Group borrowings, except those subordinated debt issues that
qualify as capital, are deducted. No credit for the benefit of
diversification is permitted under this approach.
Our capital position has been further strengthened during 2009,
driven by our prudent but proactive risk management. Our IGD
capital surplus is estimated at £3.4 billion at 31 December 2009
(before allowing for the 2009 final dividend) giving an estimated
solvency ratio of 270 per cent. This compares to a surplus at
31 December 2008 (before allowing for the 2008 final dividend)
of £1.5 billion and a solvency ratio of 152 per cent. The positive
movement of £1.9 billion during 2009 mainly comprises:
• Net capital generation mainly through operating earnings
(in-force releases less investment in new business) of £1.1 billion
Stress testing
As at 31 December 2009, the impact of an instantaneous 20 per
cent fall in equity markets levels (which is equivalent to the worst
historic daily fall in the S&P index), would reduce IGD surplus by
£150 million. Were equity markets to fall by more than 20 per cent,
we believe that this would not be an instantaneous fall but rather
this would be expected to occur over a period of time during
which we would be able to put into place mitigating management
actions. For example, we have estimated that the impact (net of
mitigating management actions) of an additional 20 per cent fall in
equity markets over a four week period following an instantaneous
20 per cent fall would be an estimated reduction in the IGD surplus
of a further £350 million.
In summary, the findings of our stress testing and sensitivity
analysis, which are part of the continual process of assessing
the resilience of the Group’s IGD capital position to withstand
significant further deterioration in market conditions include:
• An instantaneous 20 per cent fall in equity markets from
31 December 2009 levels would reduce IGD surplus by
£150 million.
• The impact of the sale of our agency distribution business in
• A 40 per cent fall in equity markets (comprising an
Taiwan of £0.8 billion
• Hybrid debt issues in May and July 2009, totalling £0.9 billion
• Additional recognition of £0.4 billion of surplus in respect of part
of the shareholders’ interest in the future transfers from the PAC
with-profit fund, recognition of £0.2 billion of future profits in
the UK and Hong Kong and other intra-group capital efficiencies
of £0.3 billion.
Offset by:
• Final 2008 dividends, net of scrip, of £0.2 billion and interim
2009 dividends, net of scrip, of £0.1 billion
• External financing costs and other central costs of £0.6 billion
• Credit related impairments and default losses in the US of
£0.4 billion
• Impacts arising from regulatory changes of £0.2 billion
• Foreign exchange movements of £0.3 billion.
We have strengthened our IGD capital position in challenging
markets. We continue to have further options available to us to
manage available and required capital. These could take the form
of either increasing available capital (for example, through
financial reinsurance or debt issuance) or reducing required capital
(for example, through the level and the mix of new business,
notably by maintaining pricing discipline and through the use of
other risk mitigation strategies such as hedging and reinsurance).
In addition to this strong capital position, the total credit reserve
for the UK shareholder annuity funds, which protects our capital
position in excess of the IGD surplus, has been strengthened to
£1.6 billion (from £1.5 billion at 30 September 2009). This reserve
is equivalent to 71 bps per annum over the lifetime of the assets.
During the severe equity market conditions experienced in the
first quarter of 2009 the Group entered into exceptional overlay
short-dated hedging contracts to protect against potential tail-
events on the IGD capital position, in addition to the regular
operational hedging programmes. The hedge contracts have
expired and have not been renewed.
instantaneous 20 per cent fall followed by a further 20 per cent
fall over a four week period) would reduce the IGD surplus by
£500 million.
• A 150bps reduction (subject to a floor of zero) in interest rates
from 31 December 2009 would reduce the IGD surplus by
£400 million.
• Credit defaults of ten times the expected level would have an
impact of £550 million in excess of the annual reserve release.
We believe that the results of these stress tests, together with
our 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
possible significant further deterioration in market conditions.
We also use an economic capital assessment to monitor our
capital requirements across the Group, allowing for realistic
diversification benefits and continue to maintain a strong position.
This assessment provides valuable insights into our risk profile.
Solvency II
The European Union (EU) is developing a new solvency
framework for insurance companies, referred to as ‘Solvency II’.
The Solvency II Directive, which sets out the new solvency
framework for insurers in the European Union, was formally
approved by the Economic and Financial Affairs Council in
November 2009. The new approach is based on the concept
of three pillars – minimum capital requirements, supervisory
review of firms’ assessments of risk, and enhanced disclosure
requirements.
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Prudential plc > Annual Report 2009
Specifically, Pillar 1 covers the quantitative requirements around
own funds, valuation rules for assets and liabilities and capital
requirements. Pillar 2 provides the qualitative requirements
for risk management, governance and controls, including the
requirement for insurers to submit an Own Risk and Solvency
Assessment (ORSA) which will be used by the Regulator as part
of the supervisory review process. Pillar 3 deals with the enhanced
requirements for supervisory reporting and public disclosure.
A key aspect of Solvency II is that the assessment of risks and
capital requirements will be aligned more closely with economic
capital methodologies. Companies may be allowed to make use
of internal economic capital models if approved by the local
regulator.
Capital allocation
Prudential’s approach to capital allocation takes into account a
range of factors, especially risk adjusted returns on capital, the
impact of alternative capital measurement bases (accounting,
regulatory, economic and ratings agency assessments), tax
efficiency, and wider strategic objectives.
We optimise capital allocation across the Group by using a
consistent set of capital performance metrics across all business
units to ensure meaningful comparison. Capital utilisation, return
on capital and new business value creation are measured at a
product level. The use of these capital performance metrics is
embedded into our decision-making processes for product design
and product pricing.
The European Commission has already initiated the process of
developing the detailed rules that complement the high-level
principles in the Directive, referred to as ‘implementing measures’.
These are subject to a consultation process that is not expected
to be finalised until late 2011.
Our capital performance metrics are based on economic capital,
which provides a view of our capital requirements across the
Group, allowing for realistic diversification benefits. Economic
capital also provides valuable insights into our risk profile and
is used both for risk measurement and capital management.
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Risk mitigation and hedging
We manage our actual risk profile against our tolerance of risk.
To do this, we maintain risk registers that include details of the
risks we have identified and of the controls and mitigating actions
we employ in managing them. Any mitigation strategies involving
large transactions – such as a material derivative transaction –
are subject to review at Group level before implementation.
We use a range of risk management and mitigation strategies.
The most important of these include: adjusting asset portfolios
to reduce investment risks (such as duration mismatches or
overweight counterparty exposures); using derivatives to hedge
market risks; implementing reinsurance programmes to limit
insurance risk; implementing corporate insurance programmes
to limit the impact of operational risks; and revising business
plans where appropriate.
In particular, the Committee of European Insurance and
Occupational Pensions Supervisors (CEIOPS) published a number
of consultation papers in 2009 covering advice to the European
Commission on the implementing measures but there remains
significant uncertainty regarding the outcome from this process.
Prudential is actively participating in shaping the outcome through
our involvement in industry bodies and trade associations,
including the Chief Risk Officer and Chief Financial Officer Fora,
together with the Association of British Insurers (ABI) and the
Comité Européen des Assurances (CEA).
Many of the issues being actively debated have received
considerable focus both within the industry and from national
bodies. However, the application of Solvency II to international
groups is still unclear and there remains a risk of inconsistent
application, which may place Prudential at a competitive
disadvantage to other European and non-European financial
services groups. There is also a risk that the effect of the
measures finally adopted could be adverse for the Group
including potentially a significant increase in the capital
required to support the UK annuity business.
Having assessed the high-level requirements of Solvency II, an
implementation programme was initiated with dedicated teams
to manage the required work across the Group. The activity of the
local Solvency II teams is being coordinated by Group Head Office
to achieve consistency in the understanding and application of the
requirements.
Over the coming months we will be progressing our
implementation plans further and remaining in regular contact
with the FSA as we prepare for the initial stage of the approval
process for the internal model.
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Business unit review > Insurance operations > Asia
INSURANCE
OPERATIONS
ASIA
Asia is home to 60 per cent of the world’s population
and, given its impressive economic transformation
over the last few years, the region now has an
increasingly significant role in the global economy.
This is translating into the rapid emergence of an
increasingly urbanised and wealthy mass affluent
sector that generates outstanding growth potential
in retail financial services as people look to protect
their financial well being and manage their savings
in more sophisticated and efficient ways.
The word ‘Asia’ is used extensively and broadly to describe
what is, in fact, a highly diverse region of the world. This diversity
exhibits itself in myriad ways: culture, religion, politics, wealth
and distribution of wealth and not least language. Furthermore,
within the financial services sector there are complex legal and
regulatory environments which vary materially by country. These
are important considerations for any business with aspirations
to develop businesses in Asia. While there are undoubtedly
commonalities and opportunities for synergy across the region,
a ‘one size fits all’ approach will generally produce suboptimal
results. Prudential’s understanding of Asian diversity, as well as
our own diversity in terms of geographic presence, distribution
channels and product continue to be key factors in the success
of our life insurance and asset management businesses.
The concept that Asian economies are decoupling from Western
economies is a point for continued debate, but external indicators
suggest that Asia is recovering more quickly from the recent global
financial crisis. Sound fundamentals coupled with aggressive
stimuli have enabled most Asian economies to outperform the
developed Western markets over the course of 2009. So long as
inflation remains under control, we expect the Asian central banks
are likely to resist currency appreciation and maintain low interest
rates. We anticipate that capital flows into Asia should increase as
Asia’s GDP growth continues to outpace the rest of the world.
Barry Stowe
Chief Executive
Prudential Corporation Asia
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Prudential plc > Annual Report 2009
Asia
APE sales
NBP
NBP margin (% APE)
NBP margin (% PVNBP)
Total EEV basis operating profit*
Total IFRS operating profit*
2009
£m
1,261
713
57%
11.4%
1,105
416
AER8
2008
£m
1,216
634
52%
9.7%
1,213
257
Change
%
4
12
(9)
62
CER8
2008
£m
1,350
711
53%
9.7%
1,379
290
Change
%
(7)
–
(20)
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*Operating profit from long-term operations excluding asset management operations, development costs, Asia regional head office expenses and the sold
Taiwan agency business.
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Market overview
Asia’s life insurance industry saw a sharp decline in new business
premiums during the first half of 2009 with investment linked and
single premium products particularly impacted. However, balance
sheets have generally remained robust and there have been no
significant failures of insurance companies in the region.
Overall the competitive landscape for the life sector in Asia has
remained fairly static, except for Taiwan where issues regarding
the valuation of back books with high guaranteed interest
rates have caused some European players to re-evaluate their
strategies. Prudential ceased the distribution of life insurance
through tied agents in Taiwan in 2009 with the transfer of its
agents and sale of their associated back book to China Life
(Taiwan). A number of smaller regional players with subscale
operations are also reported to be considering exits. Prudential
acquired UOB Life in Singapore and entered into a long-term
strategic partnership with UOB. Through this partnership
Prudential’s life insurance products will be distributed through
UOB’s 414 bank branches across Singapore, Indonesia and
Thailand. On 15 February 2010 Prudential suspended writing
new business in Japan but will continue to manage its existing
in-force book.This suspension does not affect the Prudential
Group’s asset management business in Japan.
The region’s life insurance regulators are generally inherently
conservative and have watched the collapse of purportedly
sophisticated Western models of risk and capital management
in the banking sector with interest. They are under pressure to
ensure these ‘mis-steps’ are not replicated in their markets and so
although regulators have been raising standards for quality of sales
advice, product transparency and service for several years, this
emphasis has generally increased post-crisis. Prudential views any
measures taken to improve standards and enhance the reputation
of the industry positively as we believe we already manage our
businesses to a market-leading standard.
Initiatives in 2009
The over-arching objective for Prudential in Asia is to continue
building profitable scale. The strategic priorities articulated in
December 2006 were expanding distribution and improving
productivity together with continuing product innovation with
a focus on retirement, health and protection segments. These
remain relevant in the current environment and are being
actively pursued. While a key measure of success is market out
performance in terms of new business growth, we have continued
our disciplined approach to growth and do not pursue volume for
its own sake. Profitability and return on capital are fundamental to
this discipline.
The key components of our strategy include agency distribution
scale and productivity. During 2009 total agent numbers at
410,000 remained roughly in line with 2008’s 413,000. Underlying
this small decrease is a reduction of 41,000 non-productive agents
in India as that agency force undergoes a period of consolidation
and focus on productivity following the rapid branch expansion of
prior years. Elsewhere in the region we added a total of 38,000
agents representing growth of 30 per cent over 2008. Throughout
2009 agent activity remained around 2008 levels, a testament to
the resilience of this distribution channel in a difficult environment.
However, average premiums per policy declined as the proportion
of sales derived from health and protection products increased
(while these products have high new business margins, they
tend to have lower average premiums). More recently the trend
for average premiums per case reflects a return to 2008’s
pre-crisis levels.
The over-arching objective for Prudential in Asia is to
continue building profitable scale.
Prudential is one of the pioneers in partnership distribution in Asia.
Our unique model includes locating Prudential employed and
managed sales people, known as Financial Service Consultants
(FSC), in key branches of our bank distribution partners. Despite
challenging market conditions, FSC sales for 2009 totalled
£181 million, representing an increase of 26 per cent over 2008.
Prudential has distribution relationships with over 75 institutions
across Asia including Standard Chartered Bank, E.Sun Bank and
our joint venture partners ICICI in India and CITIC in China. On
6 January 2010 we announced an important distribution agreement
with UOB Group covering Singapore, Indonesia and Thailand.
Note
See page 25.
47
Business unit review > Insurance operations > Asia > continued
Our focus on health and protection products has been
particularly successful in a number of respects. Health and
protection products are important for the customers who buy
them and the distributors who sell them. The proportion of
health and protection products in our total APE mix increased to
29 per cent in 2009, up from 24 per cent in 2008. Higher average
new business margins for health business translated into solid
returns for shareholders, and health products accounted for over
50 per cent of the total new business profit generated in 2009.
Prudential was honoured as Asia Pacific’s Health Insurer of
Year in 2009 by Frost and Sullivan.
Average new business profit margins have increased from
52 per cent for 2008 to 57 per cent for 2009. The major drivers
of this increase are a shift in average country mix where we have
seen lower proportions of new business from the lower margin
markets of Korea and India and the positive impact of the shift
in product mix towards higher margin health and protection
products. Total new business profits of £713 million are up
12 per cent over 2008. Despite the unforeseen and very
challenging environment, we have exceeded the target we
set in December 2006 of doubling 2005 new business profits
by 2009 by £39 million.
Health and protection products are important for the
customers who buy them and the distributors who
sell them.
Prudential currently insures over 10 million life insurance
customers in Asia. While we continue to focus aggressively
on the acquisition of new customers given the generally low
penetration rates, we are equally focused on strengthening and
deepening our relationships with our existing customers. We are
developing advanced data mining and profiling capabilities which
provide us with a better understanding of which customers need
which products and when. Around 40 per cent of new business
came from existing customers in 2009 (excluding India), up from
25 per cent in 2008. Our customer retention rate was 90 per cent
in 2009, a one per cent improvement over 2008.
Financial performance
Although some challenges remain in the Asian economies,
there are encouraging signs that the recovery is well underway.
Importantly, consumer confidence is returning to the retail
financial services sector. Prudential had its highest ever quarter
in terms of new business volumes during the fourth quarter of
2009 at £415 million up 42 per cent and 45 per cent from the third
quarter of 2009 and the equivalent quarter in 2008 respectively,
driven by a continued improvement in sentiment. Full year new
business results of £1,261 million represent a growth rate of
4 per cent over 2008.
Agency remains our largest distribution channel, accounting
for 63 per cent of new business, in line with 2008. Distribution
through bank partnerships account for 24 per cent of new
business, up from 22 per cent in 2008. The proportion of
higher margin regular premium business in the mix grew to
93 per cent compared to 89 per cent in 2008. It is important to
note that while market conditions did drive down single premium
volumes in 2009 the single premiums sales total for 2008 included
exceptional volumes of Central Provident Fund (CPF) related
business in Singapore. Volumes of unit-linked business in 2009
were suppressed due to consumer concerns over capital markets,
but nevertheless these products remain the single largest element
of our product mix at 41 per cent of total APE for full year 2009
compared to 55 per cent in 2008. As noted earlier, the proportion
of higher margin health and protection products has increased
to 29 per cent for 2009, up from 24 per cent in 2008.
We have maintained strict pricing and value disciplines and have
not succumbed to the temptation to drive sales results with low
margin products. New business market share statistics for full year
2009 are not yet available but based on our estimates and market
intelligence we expect to have retained our top three positions
in seven out of our 11 life markets.
As reported at the interims, during the first half of 2009 we did
see a deterioration of persistency, principally in Korea, and we
reported adverse assumption changes and experience variances
to reflect this. During the second half of 2009, the situation has
improved as a result of management actions and an improvement
in market conditions. During the second half only an additional
£47 million of assumption changes and experience variances
relating to persistency were incurred, resulting in a full year charge
of £154 million. Overall assumption changes and experience
variances for 2009 netted out at a charge of £97 million,
representing an improvement from the charge of £124 million
reported at the half year. Given the scale of the EV shareholder
funds of the long-term business at £5.8 billion, these experience
variances and assumption changes remain small. The contribution
to in-force earnings arising from the unwind of the discount
rate and other operating investment returns amounted to
£489 million, up 20 per cent on prior year, reflecting the
growing scale of the business.
Prudential Asia Life reported record IFRS profits of £416 million
for 2009, an increase of 62 per cent over 2008. This includes the
impact of reserve releases in Malaysia following the introduction of
RBC of £63 million. Excluding this one-off, the growth rate for IFRS
profit was 37 per cent. Aside from Japan and Taiwan where we are
working through fundamental changes in our business models and
except for Thailand that made a small loss, all our life operations
are generating IFRS profits. Our life insurance joint venture with
ICICI in India generated its first IFRS profit since the inception of
the business in 2001.
Prudential Asia Life reported record IFRS profits of £416
million for 2009, an increase of 62 per cent over 2008.
New business strain on the IFRS basis is 6.2 per cent of APE
compared to 8.0 per cent reported in 2008. The main driver is
change in country mix with lower proportions of new business
from India and Korea. IFRS profits from the in-force book of
£494 million are 22 per cent ahead of 2008 excluding the
impact of the reserve release in Malaysia.
We continue to manage our investment in new business, focusing
on value creation. New business written in the period has an
average internal rate of return (IRR) in excess of 20 per cent and
an average pay back period of three years.
The Asian Life Businesses remain net remitters of cash to the
Group at £80 million.
48
Prudential plc > Annual Report 2009
Asia: our extensive agency network
The scale and reach of our Asia franchise is
unparalleled, with top three market share positions
in seven fast-growing markets.
Our growth across Asia is fuelled by our extensive tied agency
force of 410,000 sales professionals.
Many of our agents today are young female graduates and
successful entrepreneurs in their own right. Dedicated and
highly trained, our agents have the knowledge and commitment
to help our customers meet their savings, protection and
investment needs at every life stage.
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Looking at individual countries
In China, new business volumes for 2009 of £45 million are
up 18 per cent on 2008 principally driven by bancassurance.
CITIC-Prudential remains one of the leading foreign joint
ventures and we continue to pursue our strategy of quality
sales and sustainable value creation rather than chasing short-
term volumes. China is a critically important strategic market
for Prudential.
Hong Kong delivered an exceptionally strong fourth quarter of
£91 million of new business volumes, up 65 per cent on the third
quarter of 2009 and up 98 per cent on the equivalent quarter of
last year. This was driven by continuing improvements in agency
productivity along with strong recovery of the bank channel. Full
year new business for Hong Kong was £241 million, up 18 per cent
over 2008. Prudential remains amongst the top three positions in
Hong Kong based on new business premium market share and is
the only top player with distribution channel diversity.
Following a slow start to 2009, given the impacts of the market
turbulence on customer confidence in India, ICICI-Prudential has
seen an encouraging resurgence in new business volumes
during the fourth quarter. Prudential’s fourth quarter new business
volumes of £52 million (reflecting our 26 per cent ownership) is up
30 per cent on the third quarter. Agency recruitment has slowed
as our branch expansion programme has now been successfully
completed. The proportion of business derived from bank
distribution continues to increase and now stands at 30 per cent
for 2009 compared to 25 per cent for 2008. The operation remains
India’s leading private sector life insurer.
Growth in Indonesia remains on track with the fourth quarter of
£64 million of new business volumes up 49 per cent on the third
quarter of 2009 and up 36 per cent on the equivalent quarter of
last year. Full year new business in Indonesia of £190 million
represented an increase of 8 per cent on 2008. Agency manpower
continues to be the main driver of growth with over 20,000 new
agents added during the year. Takaful linked products remain
a significant contributor at 25 per cent of the new business
mix. Prudential is the market leader in Indonesia in the life
insurance industry.
As seen earlier during 2009, the market in Korea remains very
challenging and although the crisis has impacted results, a key
contributor to the 44 per cent decline in new business volumes
in the year to £122 million is our unwillingness to compete in
the low margin, high capital guaranteed products sector.
Our traditional and takaful businesses in Malaysia had a record
2009 with fourth quarter volumes of £62 million, nearly double the
third quarter and 72 per cent higher than the equivalent quarter of
2008. Agency momentum in terms of recruitment and productivity
are key drivers of the results, but there was also a significant
uptake due to a recovery in the local capital markets during the
fourth quarter. Full year new business volumes for 2009 of
£146 million is an impressive 43 per cent increase over 2008.
Although comprehensive market statistics are unavailable we
believe we are one of the leading life insurers in Malaysia.
Singapore also had a very strong finish to 2009 closing the year
with new business volumes up 14 per cent at £128 million. Fourth
quarter new business sales of £48 million were up 66 per cent
on the third quarter and 85 per cent higher than the equivalent
quarter of last year. Improved sentiment, plus increases in
agency productivity and new non-participating products drove
this very strong result. We anticipate holding our market leading
position in Singapore.
Following our exit from the agency channel in 2009, Taiwan is
now successfully focused on bank distribution principally with
partners E.Sun and Standard Chartered Bank. New business
volumes of £107 million for the year are up a significant 84 per
cent on prior year from this channel and Taiwan remains a
material contributor to Asia’s results.
Vietnam delivered a very strong result in 2009, up 36 per cent
on prior year, driven by improvements in agency productivity.
Although small, both Philippines and Thailand delivered
reasonable results given the challenging market conditions.
As announced on 15 January, PCA Life Japan has suspended
writing new business.
49
Business unit review > Insurance operations > United States
INSURANCE
OPERATIONS
UNITED STATES
The United States is the world’s largest retirement
savings market, and is continuing to grow rapidly. As
78 million baby boomers1 reach retirement age, their
retirement assets will shift from asset accumulation to
income distribution. There are already US$2 trillion of
assets generating retirement income in the US – and this
amount is forecast to rise to some US$7 trillion by 2029.2
During 2009, the US financial services industry continued to face
an array of challenges. After the S&P 500 index fell to a 12-year
low in March, it rebounded and ended the year up 23.5 per cent
(compared to a 38.5 per cent decline in 2008). Governmental
interest rates increased but remained at historic lows, and rating
agencies downgraded the financial strength ratings of many of
the largest US insurance companies.
Further uncertainty arose early in the year as several companies
scaled back their product offerings due to capital constraints
which, combined with the financial strength downgrades, caused
consumers to question the long-term financial stability of product
providers. At the same time, tightening credit spreads and the
rally in equity markets throughout the last nine months of the year
created more favourable market conditions for the sale of variable
annuities. These developments in the annuity market provided a
competitive advantage to companies with strong financial strength
ratings and a relatively consistent product set.
Prudential’s US business, Jackson, benefited significantly from this
flight to quality in the US annuity market. Our strategy continues
to target increasing volumes in variable annuities in line with the
goal of capital preservation. As Jackson focused on optimising the
balance between new business profits and capital consumption,
no institutional sales were made during the full year of 2009.
Clark Manning
President and Chief Executive Officer
Jackson National Life Insurance Company
Notes
1
2
Source: US Census Bureau
Source: Tiburon Strategic Advisers, LLC
50
Prudential plc > Annual Report 2009
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United States
APE sales
NBP
NBP margin (% APE)
NBP margin (% PVNBP)
Total EEV basis operating profit*
Total IFRS operating profit*
2009
£m
912
664
73%
7.3%
1,233
459
AER8
CER8
2008
£m
716
293
41%
4.1%
586
406
Change
%
27
127
110
13
2008
£m
846
347
41%
4.1%
693
480
Change
%
8
91
78
(4)
*Based on longer-term investment returns and excludes broker-dealer, fund management and Curian
Initiatives in 2009
Distribution
The success in the marketplace of Prudential’s US business,
Jackson, continues to be driven by our industry-leading
distribution organisation and product innovation, coupled with
our sound evaluation of product economics. Our long-term goals
for Jackson include the continued and profitable expansion of our
share of the US annuities and retail asset management markets,
which we plan to achieve by building on our advantaged position
in the advice-based distribution channels. Ongoing profitable
growth in Jackson’s share of the US annuities market largely
depends on the continued enhancement and expansion of our
existing product offering, increased penetration of existing
distribution channels and entry into new distribution channels,
as well as opportunistic inorganic growth.
The success in the marketplace of Prudential’s US business,
Jackson, continues to be driven by our industry-leading
distribution organisation and product innovation, coupled
with our sound evaluation of product economics.
The annuity industry is consolidating to the strongest players,
and this consolidation has contributed to a substantial increase in
Jackson’s distribution relationships. We have experienced a large
influx of new advisers this year, increasing our licensed agent and
registered representative count by more than 30,000 to 117,453,
which has driven significant increases in market share for Jackson,
particularly in variable annuities. Jackson signed a distribution
agreement with Merrill Lynch, which began selling Jackson
products in late 2009.
Many baby boomers are increasingly seeking advice to help them
recover the losses suffered during the crisis. With strong growth in
our distribution relationships in advice-based channels, Jackson is
well positioned to benefit from this trend.
Innovation
Innovation in product design and speed to market continue to be
key drivers of Jackson’s competitiveness in the variable annuity
market. High-quality and cost-effective technology has allowed
Jackson to offer a comprehensive product portfolio that can be
customised to meet the needs of individual customers. We offer
products on an unbundled basis, enabling customers to select
those benefits that meet their unique financial requirements
and to pay only for those benefits they truly desire. In our view,
leveraging this advantage is a more sustainable long-term strategy
than competing on price – Jackson will not sacrifice product
economics for a short-term increase in market share.
During 2009, Jackson maintained its track record of continued
product innovation by enhancing our variable annuity product
line by offering a bonus variable annuity and six new portfolio
investment options. We also continued to modify our
Guaranteed Minimum Withdrawal Benefits (GMWBs).
Customer service
The significant increase in new business in 2009, following the
difficult market conditions in 2008, resulted in higher call volume
to our service centres. Despite this increased workload, we
continued to demonstrate the ability to service investors’ and
advisers’ needs accurately and efficiently, by once again earning
recognition as a World Class service provider in the Service
Quality Measurement Group’s (SQM) latest benchmarking study
of North American service centres. Historically, only 5 per cent of
service centres receive World Class designation, but 2009 marked
the fifth year that Jackson has achieved World Class status. We
also earned SQM’s ‘Highest Customer Satisfaction by Industry’
award for having the highest rate of customer satisfaction in the
financial services industry. During 2009, Jackson created a series
of educational presentations and materials designed to address
the concerns that advisers were facing in such a challenging
economic environment. In Financial Research Corporation’s 2009
Advisor Insight study, Jackson ranked number one in overall
adviser satisfaction with marketing effectiveness.
Note
See page 25.
51
Business unit review > Insurance operations > United States > continued
Financial performance
Jackson delivered record APE sales in 2009 of £912 million,
representing a 27 per cent increase over 2008 at actual exchange
rates. It was also the highest level of total sales in the company’s
history even though we sold no institutional products. The strong
momentum seen in the first half of the year continued, as second
half sales of £5.1 billion were 34 per cent higher than the first half
of 2009 and 64 per cent higher than the second half of 2008. We
have maintained our pricing discipline and continued to write
business at very attractive Internal Rates on Return in excess of
20 per cent and with payback periods of two years.
Jackson ranked 4th in total annuity sales with a market share of
5.3 per cent in the first nine months of 2009, up from 11th and
a market share of 4.0 per cent for 20083.
Variable annuity APE sales of £639 million in 2009 were 83 per
cent higher than 2008 at actual exchange rates and the highest
level of variable annuity sales in the company’s history. Jackson’s
strong variable annuity sales performance was due primarily to the
equity market rally that began in the second quarter of 2009, the
relative consistency of Jackson’s product offering and continued
disruptions among some of our major competitors. Jackson ranked
4th nationally in new variable annuity sales during the first three
quarters of 2009, with a market share of 7.3 per cent, up from 12th
with a market share of 4.3 per cent at the end of 20084. During the
first nine months of 2009, the latest period for which statistics are
available, Jackson ranked second in variable annuity net flows and
experienced the lowest level of outflows, as a percentage of
variable annuity inflows, in the industry4.
Fixed index annuity (FIA) APE sales of £143 million in 2009 were
up 186 per cent over 2008. Sales in the fourth quarter of £378
million were 111 per cent higher than the same quarter in 2008.
Industry FIA sales have increased due to higher customer
demand for products which offer guaranteed rates of return
with additional upside potential linked to stock market index
performance. Additionally, Jackson’s FIA sales have benefited
from the company’s consistent financial strength ratings and
further disruptions among some of the top FIA sellers. Jackson
ranked fifth in sales of FIAs during the first three quarters of 2009,
with a market share of 7.1 per cent, up from 9th with a market
share of 3.5 per cent at the end of 20085.
Jackson’s strategy of containing fixed annuity volumes
to achieve capital preservation resulted in APE sales of
£105 million, 39 per cent lower than 2008. Sales in the fourth
quarter of £212 million were 51 per cent higher than the third
quarter of 2009 and 64 per cent lower than the fourth quarter
of 2008.
Total retail annuity net flows of £5.0 billion for 2009 represent
a 115 per cent increase on the same period in 2008 at actual
exchange rates, reflecting the impacts of record sales and
continued low levels of surrender activity.
EEV basis new business profits of £664 million were 127 per cent
higher than in 2008, reflecting a 27 per cent increase in APE sales
and a significant shift in the mix of business toward variable
annuities. Total new business margin was 73 per cent,
significantly higher than the 41 per cent achieved in 2008.
New business spread assumptions have increased for some
products as a result of decreases in crediting rates on new
business, which were lowered in an effort to reduce sales
and conserve capital. Such high spreads are unusual and
tied to the unique economic environment.
The variable annuity new business margin increased from
43 per cent in 2008 to 81 per cent in 2009, arising from updated
assumptions, revised benefits and higher take-up rates on the
higher margin guaranteed withdrawal benefits.
The FIA new business margin decreased slightly from 53 per cent
in 2008 to 51 per cent in 2009, as a result of the increased risk
discount rate more than offsetting increased assumptions.
The fixed annuity new business margin increased from 37 per cent
to 57 per cent, as a result of wider spread assumptions offset to
some extent by an increase in the risk discount rate.
Total EEV basis operating profit for the long-term
business in 2009 was £1,233 million, compared to
£586 million in 2008.
There was no new institutional business as Jackson restricted
sales in this business line in order to conserve and direct capital
to higher margin variable annuity business.
Total EEV basis operating profit for the long-term business in 2009
was £1,233 million, compared to £586 million in 2008. In-force
EEV profits of £569 million were 94 per cent higher than the 2008
profit of £293 million, reflecting both the greater contribution to
earnings from the unwind of the discount rate and the beneficial
impact of updating the assumption relating to GMWB utilisation
rates to reflect recent experience studies.
Notes
3
4
5
Source: LIMRA
Source: Morningstar
Source: Advantage Group Associates, Inc
52
Prudential plc > Annual Report 2009
Jackson becomes a top five annuity provider
Our outstanding performance in the US is driven
by our success in meeting the needs of the baby-
boomer generation – the 78 million Americans
now approaching retirement and looking to turn
their retirement savings into income.
During 2009, a period of unprecedented financial turmoil, savers
began to seek greater certainty. Jackson was quick to respond
through offering a comprehensive product portfolio that could
be customised to meet the needs of individual customers.
As a result, Jackson moved from eleventh in total annuity sales
to become a top-five provider, while simultaneously achieving
a dramatic increase in margins.
IFRS operating profit for the long-term business was £459 million
in 2009, up 13 per cent over the £406 million in 2008. The
expected charge from the negative accounting effect of rising
equity markets and interest rates on derivative instruments
supporting Jackson’s variable annuity business has been more
than offset by the absence of the accelerated DAC amortisation
experienced in 2008 and the effect of movements in exchange
rates. Since Jackson hedges the economics of the product rather
than the accounting result, there will naturally be some volatility
in the reported results due to equity market and interest rate
movements. As evidence of the effectiveness of Jackson’s
hedging programme, over the cumulative 24 month period of
2008 and 2009, which included a historic decline and partial
recovery of equity markets as well as significant interest rate
movements, Jackson’s variable annuity guaranteed benefits and
related hedges resulted in a net operating loss of £7 million.
At 31 December 2009, Jackson had more than £55 billion in
total assets, including £21 billion in separate account assets.
In 2009 Jackson recorded impairment write-downs and credit
related losses on debt securities net of recoveries of £631 million
(2008: £624 million), of which £499 million (2008: £167 million)
arose on residential mortgage-backed securities.
Gross unrealised losses moved from £3,178 million at
31 December 2008 to £966 million at 31 December 2009 as the
markets rebounded from the historically wide spreads at the end
of 2008. The net unrealised position moved from an unrealised
loss of £2,897 million at 31 December 2008 to a net unrealised
gain of £4 million at 31 December 2009.
Jackson’s statutory basis total adjusted capital of £2.5 billion
is more than eight times the regulatory required risk-based
capital at the authorised control level. This equates to a RBC
percentage in excess of 400 per cent. The Michigan Insurance
Commissioner granted Jackson a permitted practice that allowed
Jackson to carry interest rate swaps at book value, as if statutory
hedge accounting were in place, instead of at fair value as would
have been otherwise required. The effect of this permitted
practice was to increase statutory total adjusted capital by
£117 million at 31 December 2009.
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53
Business unit review > Insurance operations > United Kingdom
INSURANCE
OPERATIONS
UNITED
KINGDOM
Prudential UK continues to focus on realising value
from the opportunities created by the increasing need
for retirement solutions. Prudential UK competes in
selected areas of the UK’s retirement savings and income
markets where it believes that it can generate attractive
returns from capital employed. In line with the Group’s
strategy, the business continues to place great emphasis
on the disciplined deployment of capital to seize
opportunities that play to the core strengths of the
business and this focus enabled us to deliver a strong
relative performance in 2009.
In 2009, Prudential UK performed strongly against a challenging
background of difficult capital and equity markets and widespread
economic uncertainty which led to consumers looking for greater
certainty and security through trusted and financially strong
brands. We believe that the business has a unique combination
of competitive advantages including our longevity experience,
multi-asset investment capabilities, strong brand and financial
strength, which help put Prudential UK in a strong position to
generate attractive returns across its businesses.
The UK is characterised by an ageing population and the
concentration of wealth in the mass affluent and high net
worth sectors – a combination that positions the retirement
and near-retirement segment as the fastest-growing in the
marketplace. Low savings rates and high levels of consumer
debt, coupled with an increasing shift in responsibility for
providing retirement income away from Government and
employers towards individuals, have resulted in individuals
in the UK being inadequately provided for during increasingly
long periods of retirement.
Rob Devey
Chief Executive
Prudential UK and Europe
Rob Devey Sig to come
54
Prudential plc > Annual Report 2009
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Total EEV basis operating profit
Total IFRS operating profit
2009
£m
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230
32%
3.9%
921
657
AER8
2008
£m
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Change
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2008
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3.4%
1,081
589
Change
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(24)
(16)
(15)
12
Initiatives in 2009
Maintaining leadership position in individual annuities
Prudential UK has a significant pipeline of internal vestings into its
annuity business from maturing individual and corporate pension
policies, which is expected to remain strong at least over the next
ten years. This is supplemented by strategic partnerships with
third parties where Prudential UK is the recommended annuity
provider for customers vesting their pensions at retirement.
Prudential UK is one of the largest annuity providers in the UK
market, with approximately 1.5 million annuities in payment.
Looking ahead, the UK annuities market is expected to grow in
the near-term, and Prudential UK believes it is well-positioned to
maintain a significant share of this market.
Sales of individual annuities of APE £219 million were 22 per cent
lower than 2008. Sales of external annuities of £83 million were
down 31 per cent year-on-year as Prudential UK continued to
actively manage the flow of external business to reduce capital
consumption. For internal vestings, although rates remained
robust, sales were impacted by a reduction of eight per cent in
average case sizes as a result of depressed asset values and by
customers choosing to delay their retirement to allow asset values
to recover. As a result, internal vestings sales fell by 15 per cent.
However, the year-on-year decline is also explained by the fact
that vestings were stronger than usual in the last quarter of 2008.
In the first quarter of 2009, Prudential UK launched a new Income
Choice Annuity which allows customers to choose an income
between a defined maximum and minimum level, with the option
of re-setting this every two years. It also provides an opportunity
for pension income to grow because the product is backed by
Prudential’s strong with-profits fund.
Building on our multi-asset capabilities and expertise
Prudential UK’s with-profits business performed particularly
strongly during 2009, showing once again that with-profits, when
invested in an actively managed, and financially strong fund like
Prudential’s, continues to be an attractive medium to long-term
investment, offering strong annualised returns compared with
other investment options. Prudential UK with-profits fund has
delivered investment returns of 66.3 per cent over ten years
compared with the FTSE All-Share Index (total return) of
17.7 per cent over the same period.
Sales of with-profits bonds of APE £132 million were up 35 per
cent on 2008. This strong sales growth reflects the attractiveness
of Prudential’s with-profits offering, including in particular
PruFund, in which over £1.3 billion has been invested across
Prudential UK retail savings’ product range in the last 12 months.
In 2009, Prudential UK extended further the PruFund range of
investments with the launch of the PruFund Cautious series to sit
alongside the PruFund Growth series within the on-shore bond
wrapper. Approximately £300 million has been invested in
PruFund Cautious since it was launched in the second half
of the year.
Customers have invested over £1.3 billion in PruFund
across Prudential UK’s retail savings product range
in the last 12 months.
Individual pensions sales (including income drawdown) of
APE £55 million were 20 per cent higher than 2008. Sales of
the Flexible Retirement Plan, Prudential UK’s individual pension
product with customer agreed remuneration, continued to grow
with sales in 2009 of APE £21 million up 90 per cent. Sales of the
income drawdown product of APE £9 million were 13 per cent
higher than 2008. Sales were boosted by the launch of PruFund
and PruSelect as fund options in the second half of 2008.
Note
See page 25.
55
Business unit review > Insurance operations > United Kingdom > continued
In November, Prudential UK announced the decision to close
its equity release operation to new business. For this product,
a significant cash expense is incurred up front in acquiring new
business and the payback period on capital employed is long.
Prudential UK management concluded that this is not sustainable
and that cash and capital can be deployed more effectively across
other parts of the business. Prudential UK’s existing lifetime
mortgage customers are unaffected by this decision.
Financial performance
Market conditions remained challenging in 2009, with ABI
statistics data showing a 23 per cent fall in the retail sales market in
the twelve months to September. As explained above, Prudential
UK continued to maintain a strict focus on the disciplined use of
capital and pricing to achieve its return on capital targets. Against
this background, Retail APE sales of £717 million were down
11 per cent on 2008. Total UK APE sales of £723 million were
down 24 per cent on last year, although the 2008 figure included
a large bulk annuity transaction which has not been repeated in
2009, due to the unavailability of transactions which met
Prudential’s return criteria.
The UK business continues to focus rigorously on balancing
writing new business with cash and capital preservation
while generating attractive returns on capital employed.
This disciplined pricing approach led to lower sales of individual
annuities and corporate pensions. In addition, sales of other
product lines, such as offshore bonds, were impacted by the
continued market volatility. These reductions in sales were
partially offset by the continued strength of Prudential UK’s
with-profits offering, in particular PruFund.
Lower sales resulted in total EEV new business profits
falling by 16 per cent to £230 million, but the underlying new
business margin improved from 29 per cent to 32 per cent.
This improvement was mainly due to the strong margins
achieved on shareholder-backed annuity business. The
£43 million reduction in the total EEV new business profit
compared with 2008 was mainly due to the large bulk deals
written in 2008 which were not repeated in 2009. Retail EEV
new business profits at £223 million were in line with
2008 (£226 million).
Growing other income streams
Prudential UK has a joint venture with Discovery which uses
the Prudential brand and Discovery’s expertise to build branded
distribution and innovative product offerings in the private
healthcare and protection markets. Since its launch, PruHealth
has established itself in the marketplace, and it now has more than
200,000 customers insured. PruProtect continues to grow sales
strongly following the re-launch of its product range and improved
distribution model in November 2008. APE Sales of £14 million
were achieved in 2009, an increase of 311 per cent over 2008.
Strengthening our distribution capabilities
The business increased its field sales-force with an additional
13 regional sales units and the focus is to continue developing
deeper and better relationships with key accounts and through
partnership arrangements. Prudential UK was successful in
gaining over 50 new panel positions across our 24 key accounts
in 2009, meaning that its products are now even more widely
available to intermediaries than before.
A strong focus on delivering improvements in
customer service
Prudential UK’s focus on delivering improved levels of customer
service was recognised in 2009 through the award of two
Five-Star awards at the Financial Adviser Service Awards in the
Life & Pensions and Investments categories. These awards were
achieved shortly before Prudential was named ‘Best Annuity
Provider’ at the 2010 Professional Adviser Awards.
Maintaining our disciplined approach to pricing and
capital usage
In the Wholesale markets, Prudential UK’s aim is to participate
selectively in bulk and back-book buyouts using the Group’s
financial strength, superior investment track record and annuitant
mortality risk assessment capabilities. There continues to be
a pipeline of potential wholesale deals, but maintaining a strict
focus on value means that Prudential UK will only participate in
transactions that meet its strict return on capital requirements.
As a result, 2009 APE sales of £4 million were significantly lower
than 2008.
Within corporate pensions, Prudential UK intends to continue to
focus principally on the opportunities from the substantial existing
Defined Contribution book of business as well as providing
Additional Voluntary Contribution arrangements to the public
sector. During an extremely challenging 2009 for Prudential UK’s
corporate clients and the whole industry, Prudential UK’s revenues
from existing schemes and underlying sales were broadly in line
with 2008 after excluding one-off items in both 2008 and 2009.
With the inclusion of one-off items sales of £210 million were
16 per cent lower than in 2008.
56
Prudential plc > Annual Report 2009
UK: a trusted retirement brand
In the UK, our 162-year heritage, financial strength
and trusted retirement brand provide a robust platform
for outperformance, generating capital and cash for
investment in growth opportunities worldwide.
These core strengths have made us one of the UK’s largest
providers of individual annuities, with approximately 1.5 million
annuities in payment. With the UK annuities market set for
near-term growth, we are well-placed to maintain a substantial
share of this market, supported by ongoing innovation such
as the new Income Choice Annuity we launched in 2009.
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EEV total operating profit based on longer-term investment
returns of £921 million was down 15 per cent on 2008. This
was mainly due to the £118 million benefit arising in 2008 from
rebalancing the credit portfolio that supports the shareholder-
backed annuity business compared with £22 million in 2009.
The 2009 in-force operating result includes £588 million from
the unwind of the discount rate on the value in-force business
which is three per cent higher than 2008.
Prudential UK continues to manage actively the retention of the
in-force book. During 2009, the experience at an aggregate level
has been in line with long-term assumptions.
IFRS total operating profits were up 12 per cent at £657 million.
The increase was mainly due to the superior returns achieved on
shareholder-backed annuity business, which were £194 million
higher than 2008, partly offset by a £114 million reduction in IFRS
profits attributable to the with-profits business. This decrease was
primarily due to bonus rate reductions in the February 2009 bonus
declaration. Commission received on Prudential-branded General
Insurance products contributed £51 million to IFRS operating
profits in 2009, 16 per cent higher than 2008. This increase was
due to the substantial advance commissions received on the
transfer of the business to Churchill in 2002 being fully amortised
in March 2008, so that commissions earned are now received in full.
Prudential UK writes with-profits annuity, with-profits bond and
with-profits corporate pensions business in its life fund, with other
products backed by shareholder capital. The weighted average
post-tax IRR on the shareholder capital allocated to new business
growth in the UK was in excess of 15 per cent. The average free
surplus undiscounted payback period for shareholder-backed
business written in 2009 was five years.
The business has also continued to make good progress against its
cost reduction plans. As previously announced, the first phase of
the Prudential UK cost reduction programme delivered savings of
£115 million per annum, with a further £60 million per annum of
savings expected to be delivered by the end of 2010 through the
agreement with Capita, which commenced in April 2008. The
remaining £20 million per annum is expected to be generated from
across the rest of the UK business by the end of 2010. By the end
of 2009, a total of £156 million per annum of savings had been
delivered and Prudential UK expects that it will have achieved
its total cost savings target of £195 million per annum by the
end of 2010.
Over time, the Capita contract is expected to result in the
migration of approximately seven million in-force policies from a
number of Prudential legacy IT systems to two Capita proprietary
platforms, significantly enhancing operational performance and
efficiencies. The first migration from a legacy system to a Capita
platform was completed during 2009.
57
Business unit review > Asset management > M&G
ASSET
MANAGEMENT
M&G
Global
The Group's asset management businesses provide
value to the insurance businesses within the Group
by delivering sustained superior performance. They
are also important profit generators in their own right,
having low capital requirements and generating
significant cash flow for the Group.
We believe that our asset management businesses are well
placed to capitalise on their leading market positions and strong
track records in investment performance to deliver net flows
and profit growth as well as strategically diversifying the Group’s
investment propositions in retail financial services markets
that are increasingly favouring greater product transparency,
greater cross-border opportunities and more open-architecture
investment platforms. Wholesale profit streams are also growing.
The Group’s asset management businesses operate different
models and under different brands tailored to their markets and
strengths. However, they continue to work together by managing
money for each other with clear regional specialism, distributing
each others’ products and sharing knowledge and expertise,
such as credit research.
Each business and its performance in 2009 is summarised on the
following pages.
Michael McLintock
Chief Executive
M&G
58
Prudential plc > Annual Report 2009
M&G
Net investment flows
Revenue
Other income
Staff costs
Other costs
Underlying profit before Performance-related Fees
Performance-related fees
Operating profit from asset management operations
Operating profit from Prudential Capital
Total IFRS operating profit
Funds Under Management (FUM) (£ billion)
Note: See page 25.
M&G comprises the M&G asset management business and
Prudential Capital.
M&G’s asset management business
M&G is an investment-led business which aims to deliver superior
long-term performance for third-party clients and the internal
funds of the Prudential Group.
Our strategy is to recruit and nurture leading investment talent.
We seek to create an environment in which this talent will thrive
and so deliver the level of returns that our clients expect of us.
As at 31 December 2009, M&G’s total funds under management
were £174 billion, including £70 billion of assets managed on
behalf of third-party retail and institutional clients.
For all our clients, our goal is superior performance
over the longer term.
In the retail market, we aim to offer high-performing funds which
are managed from our London headquarters and distributed in
the UK and across Europe, mainly through intermediaries. The
diversity of our retail product range proved its worth in the recent
market turmoil, as investors bought both our equity and fixed
income funds.
In the institutional market, we provide third-party clients such as
pension funds with a range of traditional and specialist investment
strategies, some of which have originally been developed for the
Prudential internal funds.
For all clients, our goal is superior performance over the longer
term. In the three years to December 2009, 38 per cent of M&G’s
retail funds delivered top-quartile investment performance1.
Over the same period, 89 per cent of M&G’s active institutional
funds delivered returns ahead of their benchmarks.
AER8
CER8
2009
£m
13,478
457
13
(205)
(100)
165
12
177
61
238
174
2008
£m
3,407
455
25
(184)
(111)
185
43
228
58
286
141
Change
%
296
–
(48)
(11)
10
(11)
(72)
(22)
5
(17)
23
2008
£m
3,407
455
25
(184)
(111)
185
43
228
58
286
141
Change
%
296
–
(48)
(11)
10
(11)
(72)
(22)
5
(17)
23
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Sales performance
M&G had an exceptional year in 2009, delivering record net fund
inflows of £13.5 billion. This 296 per cent year-on-year increase in
net new business can be attributed largely to the excellent long-
term performance of both our retail and institutional investment
management teams.
M&G had an exceptional year in 2009, delivering
record net fund inflows of £13.5 billion.
Gross fund inflows rose 54 per cent to £24.9 billion. These record
inflows and the recovery of equity markets in the latter half of 2009
led to a 23 per cent increase in M&G’s funds under management
to a total of £174 billion. As at 31 December 2009, 40 per cent of
M&G’s funds under management were for third-party clients.
M&G’s Retail Business has had a particularly strong year, seeing
net inflows jump by 259 per cent over the year to £7.5 billion.
Gross fund sales were up 50 per cent at £13.6 billion. Sales of our
top-performing fixed income funds accounted for the lion’s share
of inflows for most of the year before investor appetite switched to
our equity and property funds during the second half as sentiment
turned more bullish.
The UK Retail Business had an especially good year, with net
inflows rising by 216 per cent to £6.0 billion from £1.9 billion in
2008. This compared with total UK retail net sales of £25.8 billion
for the year (source, IMA, 12 months to end of 2009).
Similarly, the Institutional Business attracted an exceptionally high
level of net new business. Net inflows were £6.0 billion, a rise of
354 per cent on 2008. They included the award of a single fixed
income mandate valued at £4 billion and £0.8 billion of net new
money into our leveraged loan funds. Gross fund sales were up
59 per cent at £11.3 billion.
Net sales remained robust in the fourth quarter. The Retail
Business attracted net new money of £1.8 billion, more than
double the £0.7 billion taken in the same quarter in 2008. Gross
Retail sales were £3.8 billion. The Institutional Business took
£0.6 billion of net new business over the three months, compared
with an outflow of £1.4 billion for the same period a year ago.
Gross sales were 93 per cent higher year-on-year at £2.7 billion.
Note
1
Source: Morningstar.
59
Business unit review > Asset management > M&G > continued
M&G: record fund inflows
In 2009, M&G attracted record net and gross fund
inflows, at £13.5 billion and £24.9 billion respectively.
This outstanding achievement was the result of
excellent long-term investment performance combined
with a deeply-trusted brand and a high standard of
client communications.
Total funds under management for both internal and third-party
clients reached £174 billion by the end of 2009. M&G’s goal is to
deliver the level of investment performance its clients expect by
nurturing and retaining some of the best talent in the fund
management industry.
Financial performance
The collapse in investor confidence in the autumn of 2008 and the
subsequent economic turmoil had a limited impact on that year’s
results, coming as it did late in the year. Market levels are the single
most important determinant of our profits. The average level of the
FT All Share Index during 2008 was 2,743. Despite the recovery in
markets from March 2009 onwards, the average level of the FT All
Share Index in 2009 was materially lower at 2,327.
Continuing excellent investment performance in a number
of M&G’s flagship equity and bond funds gives grounds for
confidence that M&G will continue to win a healthy share
of new business.
It is in this context that M&G’s IFRS operating profits fell to
£177 million, 22 per cent lower than the record profits achieved in
2008. However, if performance related fees, investment income,
carried interest on private equity investments and costs associated
with the long-term incentive plan are excluded, M&G’s operating
profit would display an underlying growth of 14 per cent in 2009
(£182.0 million) over 2008 (£159.5 million).
M&G continues to provide capital efficient profits and cash
generation for the Prudential Group, as well as strong investment
returns on the long-term business funds. Return on capital of
76 per cent and cash remittances of £93 million in 2009 provided
strong support for the Group’s corporate objectives.
Our cost/income ratio was 65 per cent in 2009, increasing from
60 per cent in 2008. The increase can largely be attributed to the
reinstatement of costs associated with the long-term incentive
plan (LTIP), as the medium-term outlook for the business
improved in light of strong fund inflows and recovering market
levels. M&G remains focused on cost control.
Outlook
The collapse in bank deposit rates to near-zero provided an
exceptional backdrop to M&G’s sales performance in 2009 which
will not be repeated in 2010. Net sales are expected to return to
more normal levels this year. Nevertheless, continuing excellent
investment performance in a number of M&G’s flagship equity
and bond funds gives grounds for confidence that M&G will
continue to win a healthy share of new business.
60
Prudential plc > Annual Report 2009
Prudential Capital
Prudential Capital manages Prudential’s balance sheet for profit by
leveraging Prudential’s market position. This business has three
strategic objectives: to operate a first-class wholesale and capital
markets interface; to realise profitable proprietary opportunities
within a tightly-controlled risk framework; and to provide
professional treasury services to Prudential. Prudential Capital
generates revenue by providing bridging finance, managing
investments and operating a securities lending and cash
management business for the Group and its clients.
The business has consolidated its position in a period of difficult
and volatile markets, focusing on liquidity across the Group,
management of existing asset portfolio and conservative levels of
new investment. Development of new product and infrastructure
has continued, helping to maintain the dynamism and flexibility
necessary to identify and realise opportunities for profit within
acceptable risk parameters. Prudential Capital is committed to
working closely with other business units across the Group to
exploit opportunities and increase value creation for Prudential
as a whole. In particular, Prudential Capital offers to the Group
a holistic view on hedging strategy, liquidity and capital
management.
Prudential Capital has a diversified earnings base derived from
its portfolio of secured loans, debt investments and the provision
of wholesale markets services. The business delivered a good
financial result in 2009, considering prevailing market conditions.
As a result of sustained revenue and maintaining a low
cost/income ratio, IFRS operating profits increased by five per
cent to £61 million, resulting in a cash remittance to the Group
holding company of £82 million.
Business unit review > Asset management > Asia
Asia
2009
£m
1,999
55
19.5
AER8
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£m
855
52
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Change
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134
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2008
£m
1,044
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Financial performance
Asia Asset Management total funds under management as at
31 December 2009 is £42.4 billion and includes £4.2 billion of
assets from the Group, £18.7 billion from Prudential Corporation
Asia’s life funds and £19.5 billion from third-party customers.
Compared to 2008, the overall FUM increased by 22 per cent
(excluding the FUM related to the sold Taiwan agency business).
Third party net inflows were £2 billion driven principally by money
market funds in India with strong net equity inflows in Japan and
the UAE being offset by net outflows of equity funds in Korea and
fixed income funds in India.
IFRS profit from fund management is £55 million, up six per cent
on the prior year. Lower management fees were more than offset
by stringent cost control. The asset management business
requires very little capital to support its growth and in 2009
it remitted a net £33 million to the Group holding company.
Net investment flows
Total IFRS operating profit
Funds Under Management (FUM) (£ billion)*
*Third-party customers
Note: See page 25.
Introduction
Prudential’s asset management business in Asia manages
investments for Prudential UK and the Asian life companies and
has also successfully leveraged these investment capabilities to
build a market leading third-party funds management business.
Initiatives in 2009
Investment performance is one of the key drivers of success
for Asia Asset Management. In 2009, 64 per cent of its funds
outperformed their peer benchmarks or were ranked within
the top-two performance quartiles among peers1.
Fund launches were curtailed during 2009 given the market
conditions; however Asia Asset Management did successfully
raise new funds in 2009 including £300 million (US$469 million)
from a Qatar Fixed Maturity Plan Series in Dubai, £220 million
(US$345 million) from an equity fund in China and £109 million
(US$170 million) from a target return fund in India. A new
innovation was the Brazil Fund, launched in Taiwan that raised
£94 million (US$147 million).
Asia Asset Management has continued to build its retail
distribution network across Asia. For example, in Japan, the
business has successfully established distribution relationships
with mega distributors.
In China, CITIC-Prudential was awarded the prized Qualified
Domestic Institutional Investors (QDII) licence in 2009 and
in Malaysia, Asia Asset Management launched Prudential
Al-Wara as its new Islamic fund management subsidiary.
Note
1
Based on a blend of 1-year and 3-year performance.
61
Business unit review > Asset management > United States
US Asset Management
PPM America
Total IFRS operating profit
PPM America (PPMA) manages assets for Prudential’s US, UK
and Asian affiliates. PPMA also provides other affiliated and
unaffiliated institutional clients with investment services including
collateralised debt obligations (CDOs), private equity funds,
institutional accounts, and mutual funds. PPMA’s strategy is
focused on managing existing assets effectively, maximising the
benefits gleaned from synergies with our international asset
management affiliates, and leveraging investment management
capabilities across the Prudential Group. PPMA also pursues
third-party mandates on an opportunistic basis.
US broker-dealer
Broker-dealer
Revenue
Costs
Total IFRS operating profit
2009
£m
6
AER8
2008
£m
2
Change
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200
CER8
2008
£m
2
Change
%
200
Financial performance
IFRS operating profit in 2009 was £6 million, up from £2 million
in 2008, primarily due to performance driven income.
Year-end 2009 funds under management of £47 billion were
as follows:
PPMA funds under management £bn
Insurance
Unitised
CDOs
Total
Asia
–
4
–
4
US
29
–
1
30
UK
Total
12
1
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13
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5
1
47
2009
£m
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AER8
2008
£m
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Change
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CER8
2008
£m
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Change
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National Planning Holdings (NPH) is Jackson’s affiliated
independent broker-dealer network. The business comprises four
broker-dealer firms, including National Planning Corporation,
SII Investments, INVEST Financial Corporation and Investment
Centers of America.
The US broker-dealer business continued to grow through strong
recruiting efforts. By utilising our high-quality, state-of-the-art
technology, NPH’s advisers receive the tools they need to operate
their practices more efficiently. At the same time, through its
relationship with NPH, Jackson continues to benefit from an
important retail distribution outlet, as well as receive valuable
insights into the needs of financial advisers and their clients.
Financial performance
NPH generated record revenues of £390 million during the year,
up from £328 million in 2008, on gross 2009 product sales of
£9 billion. NPH’s 2009 IFRS operating profit of £4 million declined
from £8 million in 2008. NPH increased the number of registered
advisers in the network by nearly 10 per cent to approximately
3,478 at the end of 2009.
Curian
Curian
Gross investment flows
Revenue
Costs
Total IFRS operating loss
AER8
CER8
2009
£m
796
25
(31)
(6)
2008
£m
591
24
(27)
(3)
Change
%
35
4
(15)
(100)
2008
£m
699
28
(32)
(4)
Change
%
14
(11)
3
(50)
Curian Capital, Jackson’s registered investment adviser,
provides innovative fee-based separately-managed accounts
and investment products to advisers through a sophisticated
technology platform. Curian expands Jackson’s access to advisers
while also providing a complement to Jackson’s core annuity
product lines.
Financial performance
Curian’s IFRS operating loss increased in 2009 due to the
significant market disruption and lower average assets under
management throughout the year. However, Curian’s growth in
deposits and assets under management rebounded in the second
half of 2009. At the end of 2009, Curian had total assets under
management of £2.3 billion, compared to £1.8 billion at the end
of 2008. Curian generated deposits of £796 million in 2009, up
35 per cent on 2008. The increase in both deposits and assets
under management were mainly due to the rally in the equity
markets, with the S&P 500 index increasing 23.5 per cent during
2009, and several growth initiatives implemented by Curian
throughout the year.
Note
See page 25.
62
Prudential plc > Annual Report 2009
Business review > Other corporate information
Other corporate information
Products and drivers of insurance operations’ profits
Overview of the Group’s principal activities
Prudential plc is the holding company of the Prudential Group.
The principal activity of our subsidiary operations is the provision
of financial services to individuals and businesses in Asia, the
US and UK. We offer a wide range of retail financial products
and services and asset management services throughout these
territories. The retail financial products and services principally
include life insurance, pensions and annuities as well as collective
investment schemes.
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 core life products we also offer health,
disablement, critical illness and accident cover.
The primary focus in Asia is regular premium products that
provide both savings and protection benefits.
In 2009, the new business profit mix in our Asian insurance
business was derived 56 per cent (2008: 49 per cent) from health
and protection products, 31 per cent (2008: 41 per cent) from
unit-linked products and 13 per cent (2008: 10 per cent) from
non-linked products.
Unit-linked products combine savings with protection, with the
cash value of the policy depending on the value of the underlying
unitised funds. Participating products provide savings with
protection where the basic sum assured can be enhanced by a
profit share (or bonus) from the underlying fund as determined
at the discretion of the insurer. Non-participating products offer
savings with protection where the benefits are guaranteed or
determined by a set of defined market-related parameters.
Accident and health products provide mortality or morbidity
benefits and include health, disablement, critical illness and
accident cover. These products are commonly offered as
supplements to main life policies, but can also be sold separately.
Policyholder and insurer share the profits from participating
policies (typically in a 90:10 ratio) in the same way as with-profits
business in the UK. With unit-linked products, shareholders
receive the profits arising from managing the policy, its
investments and the insurance risk. Policyholders within the
underlying unitised fund receive investment gains. The profits
from accident and health and non-participating products come
from any surplus remaining after paying policy benefits.
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Unit-linked products tend to have higher profits on the EEV basis
of reporting than traditional non-linked products, as expenses and
charges are better matched and solvency capital requirements are
lower. At the end of 2009, we were offering unit-linked products in
11 of the 12 countries in Asia in which we operate, with the only
exception being Thailand.
In Malaysia and Indonesia, Prudential also offers life
insurance policies that are constructed to comply with Islamic
principles otherwise known as Takaful. The main principles are
policyholders co-operate amongst themselves for the common
good, uncertainty is eliminated in respect of subscription and
compensation and there is no investment in prohibited areas
such as gambling or alcohol.
In addition to the life products described above, we offer mutual
fund investment products in India, Taiwan, Japan, Singapore,
Malaysia, Hong Kong, Korea, Vietnam and China, thus enabling
customers to participate in debt, equity and money market
investments. We are also licensed in the United Arab Emirates.
Prudential Corporation Asia earns a fee based on assets under
management.
United States
Jackson’s product offerings include variable, fixed and fixed index
annuities, as well as life insurance, and institutional products.
Annuities
Annuity products are long-term individual retirement products,
which offer tax-deferred accumulation on the funds invested
until proceeds are withdrawn from the policy.
Interest-sensitive fixed annuities are used for asset accumulation
in retirement planning and for providing income in retirement
and offer flexible payout options. The contract holder pays us
a premium, which is credited to the contract holder’s account.
Periodically, interest is credited to the contract holder’s account
and administrative charges are deducted. The interest rate may
be reset on each contract anniversary, subject to a guaranteed
minimum, in line with state regulations. When the annuity
matures, the contract holder is paid either the amount in the
contract holder account, or staggered payments in the form of an
immediate annuity product – similar to a UK annuity in payment.
63
Business review > Other corporate information > continued
Fixed annuity policies are subject to early surrender charges for
the first six to nine years of the contract. In addition, the contract
may be subject to a market value adjustment at the time of
surrender. During the surrender charge period, the contract
holder may cancel the contract for the surrender value. Our profits
on fixed annuities come primarily from the spread between the
return earned on investments and the interest credited to the
contract holder’s account (net of any surrender charges or market
value adjustment) less expenses. Fixed annuities continue to be
a profitable book of business, benefiting from favourable spread
income in recent years. However, the continued low interest rate
environment could have an impact on the fixed annuity portfolio
as lower crediting rates could result in increased surrenders
and lower sales as customers seek alternative investment
opportunities. Alternatively, it is also the case that recent equity
market volatility may have the effect of making customers more
risk averse, and so they may view fixed annuities as an attractive
alternative to variable annuities.
Fixed index annuities (formerly referred to as equity-indexed
annuities) are similar to fixed annuities, in that the contract holder
pays a premium that is credited to the contract holder’s account,
and also in that interest is periodically credited to the contract
holder’s account and administrative charges deducted, as
appropriate. An annual minimum interest rate is guaranteed,
although actual interest credited may be higher and is linked
to an equity index over its indexed option period. Profit comes
from the investment income earned and the fees charged on the
contract, less the expenses incurred, which include the costs of
the guarantees, and the interest credited to the contract. Fixed
index annuities are subject to early surrender charges for the first
five to twelve years of the contract. During the surrender charge
period, the contract holder may cancel the contract for the
surrender value. Fixed index annuities continue to be a profitable
product, benefiting from favourable spread and the effective
management of equity risk. The fixed index book provides natural
offsetting equity exposure to the guarantees issued in connection
with our variable annuity products, which allows for efficient
hedging of the net equity exposure.
Variable annuities are tax-advantaged, deferred annuities
where the rate of return depends upon the performance of
the underlying portfolio, similar in principle to UK unit-linked
products. They are also used for asset accumulation in retirement
planning and to provide income in retirement. The contract holder
can allocate the premiums between a variety of variable sub-
accounts with a choice of fund managers and/or guaranteed
fixed-rate options. As with a unit-linked fund, the contract holder’s
premiums allocated to the variable accounts are held separately
from Jackson’s general account assets. The value of the portion of
the separate account allocated to variable sub-accounts fluctuates
with the underlying investments. Variable annuity policies are
subject to early surrender charges for the first four to seven years
of the contract. During the surrender charge period, the contract
holder may cancel the contract for the surrender value. Jackson
offers one variable annuity that has no surrender charges and also
offers a choice of guaranteed benefit options within their variable
annuity product portfolio, which customers can elect and pay for.
These options include the guaranteed minimum death benefit
(GMDB), which guarantees that, upon death of the annuitant,
the contract holder or beneficiary receives a minimum value
regardless of past market performance. These guaranteed death
benefits might be expressed as the return of original premium,
the highest past anniversary value of the contract, or as the
original premium accumulated at a fixed rate of interest. In
addition, there are three other types of guarantee: guaranteed
minimum withdrawal benefits (GMWB), guaranteed minimum
accumulation benefits (GMAB) and guaranteed minimum income
benefits (GMIB). Due to the lack of availability to economically
reinsure or hedge new issues of GMIB, Jackson discontinued
offering it in 2009.
GMWBs provide a guaranteed return of the principal invested by
allowing for periodic withdrawals that are limited to a maximum
percentage of the initial premium. One version of the GMWBs
provides for a minimum annual withdrawal amount that is
guaranteed for the contract holder’s life without annuitisation.
GMABs generally provide a guarantee for a return of a certain
amount of principal after a specified period. GMIBs provide for
a minimum level of benefits upon annuitisation regardless of the
value of the investments underlying the contract at the time of
annuitisation. The GMIB is reinsured.
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Prudential plc > Annual Report 2009
As the investment return on the separate account assets is
attributed directly to the contract holders, Jackson’s profit
arises from the fees charged on the contracts, less the expenses
incurred, which include the costs of guarantees. In addition to
being a profitable book of business in its own right, the variable
annuity book also provides an opportunity to utilise the offsetting
equity risk among various lines of business cost effectively to
manage our equity exposure. It is believed that the internal
management of equity risk, coupled with the use of external
derivative instruments where necessary, continues to provide
a cost-effective method of managing equity exposure. Profits in
the variable annuity book of business will continue to be subject
to the impact of market movements both on sales and allocations
to the variable accounts and the effects of the economic hedging
programme. While risk is hedged on an economic basis, the nature
and duration of the hedging instruments, which are recorded
at fair value through the income statement, will fluctuate and
produce some accounting volatility. Management continue to
believe that, on a long-term economic basis, the equity exposure
remains well managed.
Life insurance
Jackson also sells several types of life insurance including term
life, universal life and variable universal life. Term life provides
protection for a defined period of time and a benefit that is payable
to a designated beneficiary upon the insured’s death. Universal
life provides permanent individual life insurance for the life of the
insured and includes a savings element. Variable universal life is
a life insurance policy that combines death benefit protection and
the important tax advantages of life insurance with the long-term
growth potential of professionally managed investments.
The Jackson life insurance book has also delivered consistent
profitability, driven primarily by positive mortality and
persistency experience.
Institutional products
Jackson’s institutional products division markets institutional
products such as traditional Guaranteed Investment Contracts
(GICs), Funding Agreements and Medium Term Note (MTN)
funding agreements. The institutional product offerings also
include Jackson’s funding agreements issued to the Federal
Home Loan Bank. Institutional products are distributed directly
to investors, through investment banks, or through funding
agreement brokers.
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Mutual funds
During 2007, Jackson launched a line of retail mutual funds as a
complement to the broad product offering. Due to the significant
disruption in the mutual fund market in the fourth quarter of
2008 and first quarter of 2009, Jackson determined that its line
of retail mutual funds were subscale and, accordingly, exited this
market and allocated the capital to the more profitable variable
annuity market.
United Kingdom
In common with other UK long-term insurance companies,
Prudential UK’s products are structured as either with-profits
(or participating) products, or non-participating products including
annuities in payment and unit-linked products. Depending on the
structure, the level of shareholders’ interest in the value of policies
and the related profit or loss varies.
With-profits policies are supported by a with-profits sub-fund and
can be single premium (for example, Prudence Bond) or regular
premium (for example, certain corporate pension products).
The primary with-profits sub-fund is part of The Prudential
Assurance Company Limited (PAC)’s long-term fund. The
return to shareholders on virtually all with-profits products is in
the form of a statutory transfer to PAC shareholders’ funds. This
is analogous to a dividend from PAC’s long-term fund, and is
dependent upon the bonuses credited or declared on policies in
that year. In this context, there are two types of bonuses – ‘regular’
and ‘final’. Regular bonuses are declared regularly, usually once a
year, and are determined as a prudent proportion of the long-term
expected future investment return on the underlying assets. Once
credited, regular bonuses are guaranteed in accordance with the
terms of the particular product. In contrast, ‘final’ bonuses are only
guaranteed until the next bonus declaration, and are primarily
determined on the actual smoothed investment return achieved
over the life of the policy. Prudential’s with-profits policyholders
currently receive 90 per cent of the distribution from the main
with-profits sub-fund as bonus additions to their policies, while
shareholders receive 10 per cent as a statutory transfer.
The Defined Charge Participating Sub-Fund (DCPSF) forms part
of the PAC long-term fund. It is comprised of the accumulated
investment content of premiums paid in respect of the defined
charge participating with-profits business issued in France, the
defined charge participating with-profits business reassured into
PAC from Prudential International Assurance plc and Canada Life
(Europe) Assurance Ltd and includes the portfolio of with-profit
annuity policies acquired from Equitable Life in 2007. All profits
in this fund accrue to policyholders in the DCPSF.
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The profits from almost all of the new non-participating business
accrue solely to shareholders. Such business is written in the
non-profit sub-fund within PAC’s long-term fund, or in various
shareholder-owned direct or indirect subsidiaries. The most
significant of these is Prudential Retirement Income Limited (PRIL),
which also writes all new immediate annuities arising from vesting
deferred annuity policies in the with-profits sub-fund of PAC.
There is a substantial volume of in-force non-participating
business in PAC’s with-profits sub-fund and that fund’s wholly
owned subsidiary Prudential Annuities Limited (PAL), which is
closed to new business. Profits from this business accrue to the
with-profits sub-fund.
Analysis of long-term insurance pre-tax IFRS operating
profit by driver
This schedule classifies the Group's pre-tax operating earnings
from long-term insurance operations into the underlying drivers
of those profits, using the following categories:
(i)
Investment spread – represents the difference between net
investment income (or premium income in the case of the
UK annuities new business) and amounts credited to
policyholder accounts.
(iii) Net expense margin – represents expenses charged to the
profit and loss account (excluding those borne by the with-
profits fund and those products where earnings are purely
protection driven) including amounts relating to movements
in deferred acquisition costs, net of any fees or premium
loadings related to expenses. Jackson DAC amortisation
(net of hedging effects), which is intended to be part of the
expense margin, has been separately highlighted in the
table below.
(iv) Insurance margin – represents profits derived from the
insurance risks of mortality, morbidity and persistency
including fees earned on variable annuity guarantees.
(v) With-profits business – represents shareholders' transfer
from the with-profits fund in the period.
(vi) Other – represents a mixture of other income and expenses
that are not directly allocated to the underlying drivers,
including non-recurring items.
An analysis of Group pre-tax IFRS operating profit has also been
provided and is based on the long-term insurance operation tables
below with the following additions:
• The results of Group asset management operations have been
(ii) Asset management fees – represents profits driven by
included within asset management fees.
investment performance, being asset management fees that
vary with the size of the underlying policyholder funds net of
investment management expenses.
• UK general insurance commission of £51 million (2008:
£44 million) has been included within the other income line.
• Group Head Office (GHO) expenses consist of other operating
income and expenditure and UK restructuring costs.
IFRS operating profit
Investment spread
Asset management fees
Net expense margin
DAC amortisation (Jackson only)
Net insurance margin
With-profits business
Non-recurrent release of reserves for Malaysia Life operation
Other
GHO expenses
Total
2009
2008
Long-term Non long-term
business
£m
business
£m
1,001
458
(388)
(223)
472
310
63
(218)
–
1,475
–
297
–
–
–
–
–
51
(418)
(70)
Group
total
£m
1,001
755
(388)
(223)
472
310
63
(167)
(418)
1,405
£m
748
751
(389)
(450)
308
425
–
178
(288)
1,283
66
Prudential plc > Annual Report 2009
Analysis of pre-tax IFRS profit by driver by long-term business unit
Investment spread
Asset management fees
Net expense margin
DAC amortisation (Jackson only)
Net insurance margin
With-profits business
Non-recurrent release of reserves for Malaysia Life operations
Other note iii
Total
Investment spread
Asset management fees
Net expense margin
DAC amortisation (Jackson only)
Net insurance margin
With-profits business
Other note i
Total
Asia
notes ii and iii
2009 £m
US
UK
Total
56
80
(65)
–
253
29
63
(6)
410
622
324
(227)
(223)
178
–
–
(215)
459
323
54
(96)
–
41
281
–
3
606
1,001
458
(388)
(223)
472
310
63
(218)
1,475
Asia
notes ii and iii
2008 £m
US
UK
Total
54
54
(79)
–
198
30
(26)
231
550
292
(192)
(450)
122
–
84
406
143
57
(114)
–
(12)
395
76
545
747
403
(385)
(450)
308
425
134
1,182
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Notes
i
US ‘other’ comprises principally of hedging costs/profits before the allowance for VA guarantee fees included within net insurance margin, together
with other one-off items. Asia ‘other’ includes development expenses of £6 million (2008: £26 million). UK ‘other’ in 2008 represents the benefits
of a number of one off items.
ii Asian operations – analysis of operating profit by territory
Operating profit based on longer-term investment returns for Asian operations are analysed as follows:
2009
£m
2008
£m
China
Hong Kong
India
Indonesia
Japan
Korea
Malaysia
– underlying results
– exceptional credit for Malaysia operations
Philippines
Singapore
Taiwan bancassurance business note iii
Thailand
Vietnam
Prudential Services Asia
Total insurance operations
Development expenses
Total long-term business operating profit
The result for insurance operations comprises amounts in respect of new business and business in-force as follows:
New business strain
Business in force
Total
4
48
12
102
(18)
6
65
63
2
112
(7)
(1)
30
(2)
416
(6)
410
2009
£m
(78)
494
416
(3)
33
(6)
55
3
12
46
–
5
83
(4)
(2)
37
(2)
257
(26)
231
2008
£m
(97)
354
257
The strain represents the aggregate of the pre-tax regulatory basis strain to net worth and IFRS adjustments for deferral of acquisition costs and
deferred income where appropriate.
iii Sale of Taiwan agency business
In order to facilitate comparisons of operating profit based on longer-term investment returns that reflect the Group’s retained operations, the results
attributable to the Taiwan agency business for which the sale process was completed in June 2009 are included separately within the analysis of
operating profit.
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Business review > Other corporate information > continued
Description of EEV basis reporting
Prudential’s results are prepared on two accounting bases – the
supplementary EEV basis, and the IFRS basis for the financial
statements. Over the life of any given product, the total profit
recognised will be the same under either the IFRS or the EEV basis.
However, the two methods recognise the emergence of that profit
in different ways, with profits emerging earlier under the EEV basis
than under IFRS. This section explains how EEV differs from IFRS
and why it is used.
In broad terms, IFRS profits for long-term business reflect the
aggregate of statutory transfers from UK-style with-profits funds
and profit on a traditional accounting basis for other long-term
business. By their nature, the products sold by the life insurance
industry are long-term, as insurance companies commit to service
these products for many years into the future. The profit on these
insurance sales is generated over this long-term period. In our
view, the result under IFRS does not properly reflect the inherent
value of these future profits, as it focuses instead on the amounts
accruing to shareholders in the current year.
In May 2004 the CFO Forum, representing the Chief Financial
Officers of 19 European insurers, published the European
Embedded Value Principles (expanded by the Additional
Guidance of EEV Disclosures published in October 2005), that
provide consistent definitions, a framework for setting actuarial
assumptions, and a more explicit approach to the underlying
methodology and disclosures. So for example:
• The allowance for risk is explicit for EEV through: (i) an
allowance for the cost of capital (at the higher of economic
capital and the local statutory minimum) (ii) stochastic or other
appropriate modelling of financial options and guarantees to
ensure that an allowance for their cost is irrespective of their
value at the balance sheet date, and (iii) an explicit allowance
in the risk discount rate for financial and non-financial risks;
• EEV specifically allows for the look-through into profits arising
in shareholder service companies, most notably the profit
arising in investment management companies from managing
the insurance companies funds for covered business;
• There are extensive disclosures required for EEV on all aspects
of the calculations, including the methodology adopted and the
analysis of return.
It is thought that the EEV basis not only provides a good indication
of the value being added by management in a given accounting
period, but also helps demonstrate whether shareholder capital
is being deployed to best effect. Indeed insurance companies in
many countries use comparable bases of accounting for
management purposes.
The EEV basis is a value-based method of reporting in that it
reflects the change in value of the business over the accounting
period. This value is called the shareholders’ funds on the EEV
basis which, at a given point in time, is the value of future profits
expected to arise from the current book of long-term insurance
business plus the net worth of the company. In determining these
expected profits, full allowance is made for the risks attached to
their emergence and the associated cost of capital, and takes into
account recent experience in assessing likely future persistency,
mortality and expenses.
The change in value is typically analysed into the following
components:
• the value added from new business sold during the year;
• the change in value from existing business already in place
at the start of the year;
• short-term fluctuations in investment returns;
• change in economic assumptions;
• change in the time value of cost of options and guarantees
and economic assumption changes;
• other items (for example, profit from other Group operations,
tax, foreign exchange, exceptional items); and
• dividends.
The value added from new business – defined as the present value
of the future profits arising from new business written in the year –
is a key metric used in the management of our business. The change
in value of business in force at the start of the year demonstrates
how the existing book is being managed. Together, these metrics
provide management and shareholders with valuable information
about the underlying development of the Group’s business and
the success or otherwise of management actions.
EEV basis results are prepared by first of all setting ‘best estimate’
assumptions, by product, for all relevant factors including
expenses, surrender levels and mortality. Economic assumptions
as to future investment returns and inflation are generally based on
a combination of market data and long-term assumptions. These
assumptions are used to project future cash flows. The present
value of the future cash flows is then calculated using a discount
rate which reflects both the time value of money and the risks
associated with the cash flows. The risk discount rate is
determined by adding a risk margin to the appropriate risk free
rate of return. The actual outcome may differ from that projected,
in which case the effect will be reflected in the experience
variances for that year.
The assumptions used for the EEV basis of accounting are set
out in the notes that accompany the supplementary EEV basis
information. An indication of the sensitivity of the results to
changes in key assumptions is also provided within that information.
The publication of the EEV Principles represented a significant
step towards the harmonisation of embedded value reporting
in Europe. However, even with these principles and the
accompanying guidance, a divergence of approaches between
companies has emerged in practice. In June 2008, in an effort
to improve still further the consistency and transparency of
embedded value reporting, the CFO Forum published the Market
Consistent Embedded Value (MCEV) Principles. However, the
MCEV Principles were designed during a period of relatively
stable market conditions and their application could, in the current
turbulent markets, lead to misleading results. In December 2008,
the CFO Forum announced that it intended to conduct a review of
the impact of turbulent market conditions on the MCEV Principles,
the result of which may lead to changes in the published Principles
or the issue of additional guidance. In May 2009, the CFO Forum
announced that it had decided to perform further work to seek
to improve the consistency in the adjustments made for liquidity
premium and volatilities. In light of these developments,
mandatory MCEV reporting was deferred for member firms until
2011. In October 2009, the CFO Forum announced changes to
the MCEV Principles to allow the inclusion of a liquidity premium.
The changes to the Principles were high level, with little detail
included on how the liquidity premium should be determined
or which products it should be applied to. The CFO Forum is
currently conducting further work in these areas.
68
Prudential plc > Annual Report 2009
Business review > Corporate responsibility review
Corporate responsibility review
Harvey McGrath, Chairman, Prudential plc is the Board
sponsor for corporate responsibility (CR).
CR is a philosophy that is firmly embedded in Prudential’s
operations around the world as an integral part of the way we
do business.
We strive to minimise the social, ethical and environmental impact
of our activities and to maximise the opportunities. We recognise
the importance of engaging with our stakeholders and responding
to their concerns. To do this we maintain a regular dialogue and
conduct periodic research on the issues that matter most to them.
In 2009, financial institutions came under continued scrutiny as a
result of the market turmoil. Insurance companies are, however,
fundamentally different from banks because we invest in assets for
the long-term. During the financial turmoil we played a significant
role to help stabilise the market by providing liquidity during
difficult times to the benefit of the whole economy.
Insurance companies have a unique role in society by helping
people manage uncertainty and plan for a more secure future.
In this way, our commercial value is linked to the social value
of what we offer to our customers.
Our approach to CR is underpinned by our founding values of
integrity, security and prudence. Throughout our 160-year history
we have been committed to helping our customers safeguard their
financial security and protect their families. This, together with our
contribution to the well-being of the communities in which we
operate, is as strong today as it has always been.
CR framework
In late 2008, we enhanced our CR framework to further drive
sustainability performance, provide greater focus to our
programmes and activities, and to enable a more consistent
approach to our reporting. We frame our CR activities around
five core themes:
1
Fair and transparent products meeting customer needs
2 Best people for the best performing business
3
Protecting the environment
4 Supporting local communities
5 Accountability and governance
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While the Group sets the overall strategy for CR, our framework
gives our businesses the flexibility to implement programmes that
best meet their local markets. This recognises that our people on
the ground are closest to their customers, and their communities,
and know best how to meet their needs and expectations.
Fair and transparent products meeting customer needs
Understanding and responding to our customers’ needs is at the
heart of our business. It is something we have been doing for over
160 years.
Today, we have significant operations in Asia, the US and the UK.
We serve over 15 million customers in Asia, we have nearly 2.8
million policies and contracts in force across the US, in the UK we
have approximately seven million customers through Prudential
UK, and our asset management business, M&G, serves retail and
institutional investors, including 350,000 private investors.
Responding to customers’ needs
We are committed to listening to our customers and
understanding their individual needs so that we can help
them make well-informed decisions. The demographics of our
geographies, and our areas of expertise, mean the profiles of
our customers and our products vary across our operations.
For example, in Asia, we have broadened our accident and
health protection product portfolio, recognising the importance
customers place in healthcare for their extended family. By
offering effective, economical solutions, we give our customers
peace of mind. Our offering in this product suite includes
innovative solutions such as our first-in-market Multiple Claims
Critical Illness products that allow customers to make up to three
claims. Another example of our commitment to provide local
products meeting local needs was the launch in 2009 of our
Shariah-compliant Islamic fund management business in
Malaysia, Prudential Al-Wara’ Asset Management Berhad.
In the US, there are approximately 78 million people who will
move from the workforce into retirement during the next decade.
Jackson, our US business, is focused on understanding and
meeting customers’ post-retirement needs. During 2009, a period
of unprecedented financial turmoil, savers began to seek greater
certainty. Jackson was quick to respond through making its
variable annuity products more widely available. It also provided
customers with the flexibility to select, and only pay for, those
benefits that met their unique financial requirements. During
2009, Jackson also introduced a bespoke educational series for
advisors to help them respond to customer concerns about the
impact of the economic climate on their savings and income.
Our five corporate responsibility themes
1
Fair and
transparent
products meeting
customer needs
2
Best people for the
best performing
business
3
Protecting the
environment
4
Supporting local
communities
5
Accountability
and governance
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The UK is characterised by an ageing population. Low savings
rates and high levels of consumer debt, coupled with an increasing
shift in responsibility for providing retirement income away from
government and employers towards individuals, have resulted in
people being inadequately provided for during increasingly long
periods of retirement. As a result, there is a growing need for
financial advice and financial products, including guarantees
and longevity protection.
Prudential UK is helping to bridge this gap, principally through our
core annuities, pensions and investment products where we can
maximise the advantage we have in offering with-profits and other
multi-asset investment funds. We are the largest annuity provider
in the UK with approximately 1.5 million annuities in payment.
In addition, our with-profits offering is among the strongest in the
industry, with our With-Profits fund consistently outperforming
the market for our long-term investors and providing them with
attractive returns compared with many other investment options.
It also protects investors from the full impact of volatile market
conditions while giving them the confidence of knowing that their
savings are invested in a financially strong and well-managed fund.
At M&G, our UK and European asset manager, we believe in
offering clients straightforward products together with clear and
balanced information, helping them make the right investment
decisions for their needs. At M&G, our strategy is to invest
in companies and not just chase share prices. We are informed
shareholders, not traders, which means taking a long-term
approach to investment opportunities and, provided our
investment case remains intact, maintaining our conviction
in the companies we hold.
In response to the significant reduction in bank lending in 2009,
M&G created the M&G UK Companies Financing Fund. This fund
seeks to offer valuable finance to medium to large-sized (mid cap)
companies and has attracted some £1.6 billion in commitments
from clients.
A number of our customer-focused initiatives deliver wider
benefits across other areas of our CR agenda. For example, in the
US, Jackson’s customer e-delivery strategy – via its new website –
is providing customers with information ‘on-demand’, while also
helping to protect the environment by conserving resources and
generating cost savings for our business.
Clearly, it is in our own interest to understand and respond
to ongoing demographic change as it enables us to tailor our
products and services more effectively. However, we also take
a leading role in efforts to understand the implications of these
changes on a global scale.
In mid 2010, we will publish ‘The Global Ageing Preparedness
Index’ in partnership with the Centre for Strategic and
International Studies. This will analyse 20 countries and their
responses to the needs of an ageing population. We expect the
index to make a useful contribution and broaden the debate.
Serving our customers
We do not underestimate the importance of the financial
decisions our customers face and the trust they place in us
to help them meet their changing requirements for savings,
income and protection.
In 2009, Prudential Corporation Asia, was named ‘Asia Pacific
Health Insurer of the Year’ by Frost and Sullivan, underscoring
consumers’ trust and confidence in our brand in that region,
and the professionalism of our teams.
In the US, we once again earned recognition as a World Class
service provider in the latest benchmarking study of North
American service centres by the Service Quality Measurements
Group (SQM). This marked the fifth year that Jackson has
achieved World Class status. Jackson also earned SQM’s ‘Highest
Customer Satisfaction by Industry’ award for having the highest
rate of customer satisfaction in the financial services industry.
Our businesses participate actively in industry efforts to serve
customers better. In the UK, the Financial Services Authority (FSA)
has established Treating Customers Fairly principles. In support of
this, Prudential is a member of the Association of British Insurers’
(ABI) Customer Impact Scheme that seeks to drive continuous
improvement through the monitoring of customers’ experiences.
In 2009, Prudential UK saw an increase in the number of
customers rating it ‘very good’ or ‘excellent’ for the time taken to
arrange an annuity – from 45 per cent in 2008 to 62 per cent in
2009. Prudential UK also won two five-star awards at the Financial
Adviser Service Awards as well as receiving the award for the best
annuity provider at the Professional Adviser Awards 2010.
We always try to resolve any problems for our customers as quickly
and smoothly as possible. In 2009, the Financial Ombudsman
Service (FOS) in the UK first published its complaints data showing
the number of cases upheld by FOS in favour of the consumer.
Prudential was well above the industry norm, ranking 4th in the
list of almost 150 financial services companies.
Best people for the best performing business
At Prudential, we strive to create an environment that enables us
to attract and retain the right people – those who are committed
and able to deliver top performance for our customers and
shareholders. To achieve this we continue to drive our Human
Resources (HR) strategy around five key themes:
• Getting the right people into the business
• Building and rewarding performance
• Growing a strong talent pipeline
• Developing credible successors
• Developing an organisation that works
70
Prudential plc > Annual Report 2009
Diversity
We are committed to integrating diversity into our business
practices. Our policies are guided by the principles of the UN’s
Universal Declaration of Human Rights and the International
Labour Organisation’s core labour standards.
We fully recognise the value that a diverse workforce brings to
our organisation and believe it should reflect the diversity of the
markets in which we operate. It is Group policy to give full and
fair consideration and encouragement to the employment of
applicants with suitable aptitudes and abilities. It is also our policy
to continue employing people who become disabled, and
to provide training and career development opportunities to
disabled employees.
We also train our people to be aware of, and sensitive to, the
needs of employees and customers with a disability.
We strengthened our diversity agenda in 2009 by working to
harmonise the way employee diversity information is collected
across the Group for reporting purposes. We also reviewed and
updated a number of our employment policies. These included
our maternity/adoption policy in the UK, and our Equal Treatment
policy in Asia.
In addition, our businesses worldwide continued to drive
initiatives in 2009, reflecting our commitment to diversity. For
example, our Korean life insurance business, together with our
Asian fund management operation, introduced employee training
on aspects of our diversity policies. In the UK, M&G, our asset
management business, runs annual workshops for all managers
to support our diversity agenda. This includes ‘Respect in the
Workplace’ and ‘The Employment Life Cycle’. Employees of our
property investment management business, PRUPIM, participate
in an on-line learning programme on age discrimination legislation.
In 2009, we also participated in the Financial Services Inquiry into
the sex discrimination and gender pay gap report of the Equality
and Human Rights Commission.
Building and rewarding performance
We believe that employees should be rewarded according to the
contribution they make to our business, as a whole. We reward
our people based on both the results they achieve as well as their
behaviours and competencies. Our remuneration policies are
regularly reviewed to ensure that our reward structure keeps
pace with the markets in which we operate, and that they remain
relevant to the growth of our business.
Following the Walker Review of corporate governance in the
UK banking industry, we undertook an internal review of our
remuneration structures and governance against ‘good practice’ as
defined by the FSA. As a result of this review, we are confident that
our procedures and practices meet the standard of ‘good practice’.
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Inherent in our reward strategy is provision for our employees to
benefit from the Group’s success through share ownership. In the
UK, we operate two all employee share plans: a Share Investment
Plan (SIP) and a Save As You Earn (SAYE) scheme. In 2009 over
68 per cent of eligible employees participated in the SAYE scheme
and almost 27 per cent in the SIP. In Asia, we operate two SAYE
schemes similar to those in the UK, open to both employees and
agents. More than 32 per cent of eligible employees and just below
25 per cent of eligible agents participated in these schemes in 2009.
Growing a strong talent pipeline
We recognise that the talent and knowledge of our people is key
to our continued success. In 2009, we implemented strategic
resourcing programmes for country CEOs in Asia, and for the
Finance function globally, to improve our medium and long-term
talent pipeline.
In the US, the Jackson Professional Development Unit (PDU)
and its training programme was expanded. The PDU runs a
comprehensive training curriculum for all Jackson’s wholesalers,
who in turn provide ongoing training to advisers. In addition
during 2009, Jackson launched a monthly training programme
to help the company’s field wholesalers to enhance their
product knowledge.
Developing credible successors
Every year we conduct a review across the Group to identify,
develop and reward people with leadership potential. During
2009, we held five Management Development Programme and
seven Leadership Development Programme events. These events
support the Group’s succession and development strategy and, in
2009, over 100 individuals were assessed for their development
potential.
Our flagship Momentum Programme, operating since 2007,
aims to recruit high-potential individuals early in their careers
and to provide them with a fast-track development plan. Through
business placements and training modules, the candidates gain
the management skills and experience required in international
business. Momentum has a strong diversity focus and is open
to people both within and outside of Prudential. In 2009 the
Momentum website received more than 33,000 visits from
131 countries, and over 1,700 people from 49 countries applied.
This is the highest number of applicants since the launch of the
programme, and double the number of applications received in
2008. The 17 successful applicants increased the total number
of participants in the programme to 37, who are in roles across
all four of our businesses.
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Business review > Corporate responsibility review > continued
Developing an organisation that works
We are committed to effective communication to support
employee engagement and commitment. We conduct regular
employee surveys in our businesses around the world to monitor
our people’s level of engagement with Prudential as an employer,
identify the effectiveness of our organisation’s structures and
practices, and highlight areas for improvement.
In each of our Business Units there are dedicated intranet sites and
regular magazines to keep employees up to date, and provide a
mechanism to pose questions to their respective Chief Executive.
There are also a number of employee consultation forums in place
such as the M&G Staff Consultative Committee and the UK
Employee Forum within Prudential UK.
At Group Head Office, a dedicated team provides regular
communication to employees across the Group from the Group
Leadership Team. This enables employees to understand the
Group strategy, direction and performance.
Our Prudential UK business has a long-standing relationship
with the union Unite, and this year is the 40th anniversary of
this association.
Protecting the environment
We are committed to playing our part in protecting the
environment but we also want to ensure that our contribution
counts. Given that the built environment is responsible for
approximately 40 per cent of all carbon emissions, it makes sense
for us to focus our efforts on two distinct strategies: reducing the
direct impact of our own business operations, and ensuring that
the properties we manage through PRUPIM are environmentally
compliant and responsible. We believe that this approach is not
simply the right thing to do, but also that it is a way of creating
value as our sustainability objectives are aligned with our
business objectives of creating a competitive advantage for
the PRUPIM brand.
Prudential participates in the Carbon Disclosure Project – an
annual commitment to disclose information on carbon emissions
and strategies for managing the risks posed by climate change.
Full details of our environmental policy can be found on our website
at: www.prudential.co.uk/prudential-plc/cr/managementpolicies
Reducing our direct impact
Under the European Union Energy Performance of Buildings
Directive, Energy Performance Certificates (EPCs) are required
for any building that is constructed, sold, or rented. EPCs rate
the energy of a building enabling both property investors and
prospective occupiers to consider energy efficiency ratings
and levels of carbon emissions. In 2009 we introduced Energy
Performance Certificates for both our occupied and commercial
properties in the UK. We also gained ISO 14001 certification
for our sites in Reading and London – achieving our target of
certification for all our occupied properties by the end of 2009.
Our corporate property team has identified a three-year
Group-wide environmental strategy for all occupied buildings,
with roll-out scheduled to commence in 2010.
For the second year running, we also endorsed the ClimateWise
principles on climate change in the UK. All of Prudential’s North
America operations – including Jackson, and PPM America –
signed up for the second successive year to the US Climate
Leaders programme. This is an Environmental Protection Agency
(EPA) and industry/government partnership that works with
companies to develop comprehensive climate change strategies.
In 2009, Jackson also launched its environmental ‘Work Smart’
programme for employees.
In Asia, we grade our buildings using a clear and transparent
environmental classification system. Where opportunities
arise, we then improve our overall sustainability by migrating to
properties in the highest category for environmental performance.
Our property investment portfolio
PRUPIM’s vision as a leading sustainable real estate manager is
to deliver superior investment performance through integrating
sustainability into its business culture, activities and decision
making. It seeks not only to address its own impacts but also to
influence the property sector through innovation and thought-
leadership.
PRUPIM was the first UK property company to achieve the
International Environmental Management Standard ISO 14001
for the management of its real estate investment portfolio. In 2009,
PRUPIM achieved ISO 14001 certification for an additional six
managed investment properties and achieved PAS99 – the world’s
first integrated management system which includes ISO 14001 –
at 10 managed shopping centres, taking the total to 52 PRUPIM
properties that have been accredited to date.
PRUPIM also launched the Sustainable Refurbishment
Framework. This complements the Sustainable Development
Framework, both of which are public resources to actively
encourage sustainable practices, with the aim of sharing PRUPIM’s
many years of experience in this area with the property industry
as a whole.
PRUPIM is a signatory of the United Nations Principles for
Responsible Investment and continues to lead the property
industry’s developments in sustainability through their active
involvement in the British Property Federation, British Council
of Shopping Centres, UK Green Building Council, Green
Property Alliance, UN Environment Programme Finance
Initiative, Institutional Investors Group on Climate Change,
and, more recently, the Better Buildings Partnership – an
initiative supported by the Mayor of London.
PRUPIM’s strategic approach and progress to date can be found
in their sixth annual Sustainability Report published in 2009.
For more details please visit www.PRUPIM.com
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Prudential plc > Annual Report 2009
Chairman’s Award
Since its launch, the Chairman’s Award has gone
from strength to strength, and in 2009, more than
2,600 employees signed up to the programme and
supported over 30 projects around the world.
More than £250,000 was donated to our global charity partners.
This includes the additional cash sums awarded to the winning
projects, voted for by colleagues across the Group.
The 2009 winning project was Plan International, Thailand.
This project, supported by 368 volunteers in Thailand, aims
to make a sustainable improvement to the lives of children
and communities living in poverty.
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Supporting local communities
We strive to ensure that our investment in local communities
has a sustainable benefit. We encourage our businesses to build
projects around financial capability, education, and meeting the
needs of the most vulnerable in society, particularly the elderly
and the young.
Employee volunteering
Our approach to community investment is to support charitable
organisations and appropriate NGOs, not just through funding,
but with the experience and expertise of our employees. In 2009,
approximately one in four employees volunteered in their
community.
In 2006, we launched our flagship volunteering programme,
The Chairman’s Award, supporting our global charity partners.
This programme has gone from strength to strength and, in 2009,
over 30 projects around the world were supported.
Each year, a shortlist of volunteering programmes is chosen by a
judging panel and employees are asked to vote for the project they
believe has made the greatest impact. All of the projects included
in the Chairman’s Award receive a financial donation from the
Group for each employee who signs up as a volunteer, and the
top five short-listed projects receive additional funding.
Building financial capability
We began developing our financial capability programme in the
UK in 2001, and are continuing to see significant progress, both
in the UK and, increasingly, internationally.
In the UK, we work in partnership with a diverse range of
organisations such as Citizens Advice, the Personal Finance
Education Group (pfeg), the Specialist Schools and Academies
Trust, and the National Institute of Adult Continuing Education.
As a result of these collaborative initiatives, thousands of adults
and children are now benefiting from learning how to make
decisions that will have a profound effect on their financial
well-being. At the end of 2009, we extended the reach of our
UK-schools module ‘Adding up to a Lifetime’ by launching an
online version.
In 2009, our financial capability strategy in Asia gained further
momentum, with over 2,000 women participating in our ‘Investing
in Your Future’ seminars. The seminars, first launched in China in
2004, support women who are often responsible for planning the
family’s financial needs. The programme has been rolled out to
Vietnam, India and Indonesia. To date, more than 22,800 women
have participated.
Prudential also partnered with the Chinese Ministry of
Education, the Chinese Academy of Social Sciences (CASS) and
the Chinese Insurance Regulatory Commission (CIRC) to develop
and introduce an insurance education curriculum in schools across
the country. This programme has reached over 5,000 students
from 26 schools in seven provinces since its launch in 2007.
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Disaster relief
Supporting the relief efforts after natural disasters in our
communities is another important part of our activities. In
November 2009, we continued the work we began in 2008
in response to the earthquake in Sichuan, with the opening
of a new, state-of-the-art library at the Guihua School in
Pengzhou, Sichuan.
In September 2009, when a massive earthquake struck
Western Sumatra, Indonesia near the city of Padang, we
responded immediately to support our employees, agents and
the wider community. We activated the Group’s Disaster Relief
Fund straight away, our team on the ground immediately began
working with local relief charities and we set up a mechanism for
our employees across the Group to donate. In addition, a team
of Prudential volunteers from six different countries across
Asia travelled to Padang to help rebuild homes.
Donations
In 2009 the Group spent £6.5 million in support of its community
investment strategy. Direct donations to charitable organisations
amounted to £5.6 million, of which approximately £2.7 million
came from EU operations.
This is broken down as follows: Education £1,589,000; Social
and Welfare £632,000; Environment and Regeneration £73,000;
Cultural £94,000 and Staff Volunteering £301,000. The aggregate
figure for charitable donations from Prudential’s non-EU
subsidiaries (Jackson National Life Insurance Company and
Prudential Corporation Asia) amounted to £2.9 million.
It is the Group’s policy not to make donations to political parties
nor to incur political expenditure, within the meaning of those
expressions as defined in the Political Parties, Elections and
Referendums Act 2000. The Group did not make any such
donations or incur any such expenditure in 2009.
Accountability and governance
The Board
The Board discusses the Group’s CR performance at least once
a year and also reviews and approves the Group CR Report and
strategy on an annual basis.
Responsibility committee
Below the Board, the Responsibility Committee comprises senior
representatives from relevant Group functions and each of our
core businesses. This committee is responsible for monitoring
the Group’s CR activities and for raising issues that need to be
addressed.
Code of business conduct
Consideration of environmental, social and community matters
is embedded in our Code of Business Conduct.
Payment policy
It is our Group policy to agree terms of payment when orders
for goods and services are placed, and to pay in accordance
with those terms.
In the UK we strengthened this policy in 2009 by signing up to
the Prompt Payment Code, launched in December 2008 by the
UK Department for Business, Enterprise and Regulatory Reform.
In 2009, our trade creditor days, based on the ratio of amounts
which were owed to trade creditors at the year-end to the
aggregate of the amounts invoiced by trade creditors during
the year were 22 days.
Supply chain management
Prudential recognises that its own social, environmental and
economic impacts go beyond the products and services it supplies
to include the performance of its suppliers and contractors.
It is our policy to work in partnership with suppliers whose
standards are consistent with our Group Code of Business
Conduct. We are also committed to helping our suppliers reduce
their impact on the environment.
Procurement practices in Prudential UK have been successfully
accredited with the Chartered Institute of Purchasing and Supply
(CIPS) certification, an industry benchmark of recognised good
practice.
Prudential’s 2009 on-line CR Report can be found at
www.prudentialreports.com/2009cr
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Prudential plc > Annual Report 2009
GOVERNANCE
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Board of directors
Governance report:
• Corporate governance
• Risk governance
• Corporate responsibility governance
Additional disclosures
Index to principal Directors’ Report disclosures
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Governance > Board of directors
Chairman
Executive directors
Harvey McGrath
Chairman
Tidjane Thiam
Group Chief Executive
Nic Nicandrou
Chief Financial Officer
Executive directors
Rob Devey
Executive director
Clark Manning
Executive director
Michael McLintock
Executive director
Barry Stowe
Executive director
Non-executive directors
Keki Dadiseth
Non-executive director
Michael Garrett
Non-executive director
Ann Godbehere
Non-executive director
Bridget Macaskill
Non-executive director
Kathleen O’Donovan
Non-executive director
James Ross
Senior Independent
Director
Lord Turnbull
Non-executive director
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Prudential plc > Annual Report 2009
Rob Devey
Executive director (from 16 November 2009)
Rob Devey has been an executive director of Prudential and Chief
Executive, Prudential UK and Europe since 16 November 2009. Rob
joined Prudential from Lloyds Banking Group where he worked from
2002 in a number of senior leadership roles across insurance and retail
banking including Managing Director, Direct Channels UK Retail Banking,
Managing Director of HBOS Financial Services and Managing Director of
HBOS General Insurance. Prior to joining HBOS, Rob was a consultant with
the Boston Consulting Group (BCG) in the UK, US and Europe, working
in financial services.
Clark Manning FSA MAAA
Executive director
Clark Manning has been an executive director of Prudential since January
2002. He is also President and Chief Executive Officer of Jackson National
Life Insurance Company. Clark was previously Chief Operating Officer,
Senior Vice President and Chief Actuary of Jackson National Life Insurance
Company, which he joined in 1995. Prior to that, he was Senior Vice
President and Chief Actuary for SunAmerica Inc, and prior to that,
Consulting Actuary at Milliman & Robertson Inc. Clark has more than
25 years’ experience in the life insurance industry, and holds both a
bachelor’s degree in actuarial science and an MBA from the University
of Texas. He also holds professional designations of Fellow of the
Society of Actuaries (FSA) and Member of the American Academy
of Actuaries (MAAA).
Michael McLintock
Executive director
Michael McLintock has been an executive director of Prudential since
September 2000. He is also Chief Executive of M&G, a position he held at
the time of M&G’s acquisition by Prudential in 1999. Michael joined M&G
in 1992. He previously also served on the board of Close Brothers Group
plc as a non-executive director (2001-2008). Since October 2008, he has
been a Trustee of the Grosvenor Estate.
Barry Stowe
Executive director
Barry Stowe has been an executive director of Prudential since November
2006, and Chief Executive, Prudential Corporation Asia since October
2006. He has also been a director of the Life Insurance Marketing Research
Association (LIMRA) and the Life Office Management Association (LOMA)
since October 2008, and a member of the Board of Visitors of Lipscomb
University since May 2009. Previously, Barry was President, Accident &
Health Worldwide for AIG Life Companies. He joined AIG in 1995, and
prior to that was President and CEO of Nisus, a subsidiary of Pan-American
Life, from 1992-1995. Before joining Nisus, Barry spent 12 years at Willis
Corroon in the US.
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Chairman
Harvey McGrath
Chairman and Chairman of the Nomination Committee
Harvey McGrath was appointed as an independent non-executive director
of Prudential on 1 September 2008, and became Chairman and Chairman
of the Nomination Committee on 1 January 2009. Harvey has a long and
distinguished career in the international financial services industry. He
started his career at Chase Manhattan Bank in London and New York. From
1980 to 2007 he worked for the Man Group, first as Treasurer, then Finance
Director, then President of Man Inc. in New York, before being appointed
as Chief Executive of Man Group plc in London in 1990, and then
Chairman in 2000. He left Man Group in 2007.
Harvey is also Chairman of the London Development Agency, which
works for the Mayor of London, coordinating economic development and
regeneration across London, and Vice Chairman of the London Skills and
Employment Board, which is tasked with developing a strategy for adult
skills in London. He is the former Chairman of both London First and the
East London Business Alliance, and a Member of the International Advisory
Board of the School of Oriental and African Studies.
Harvey is a trustee of a number of charities including New Philanthropy
Capital, a research based charity which gives advice and guidance to
donors and charities; the Royal Anniversary Trust which operates the
Queen’s Anniversary Prizes for Higher and Further Education; Children
and Families Across Borders (CFAB), which protects the rights and welfare
of children and vulnerable adults across borders; icould, an online careers
resource; and the Prince’s Teaching Institute, which promotes subject-
based professional development for teachers.
Executive directors
Tidjane Thiam
Group Chief Executive (from 1 October 2009)
Chief Financial Officer (to 30 September 2009)
Tidjane Thiam has been an executive director of Prudential since 25 March
2008. He was the Chief Financial Officer until 30 September 2009, and
became Group Chief Executive with effect from 1 October 2009. Tidjane
was previously Chief Executive Officer, Europe at Aviva, where he also held
successively the positions of Group Strategy and Development Director
and Managing Director, Aviva International. Tidjane spent the first part of
his professional career with McKinsey & Company in Paris, London and
New York, serving insurance companies and banks. He then spent a
number of years in Africa where he was Chief Executive and then Chairman
of the National Bureau for Technical Studies and Development in Côte
d’Ivoire and a cabinet member as Secretary of Planning and Development.
Tidjane returned to France to become a partner with McKinsey & Company
as one of the leaders of their Financial Institutions practice before joining
Aviva in 2002.
Tidjane was a non-executive director of Arkema in France until November
2009, when he resigned from the Arkema board. He is a member of the
Council of the Overseas Development Institute (ODI) in London, a sponsor
of Opportunity International, and a member of the Africa Progress Panel
chaired by Kofi Annan.
Nic Nicandrou ACA
Chief Financial Officer (from 28 October 2009)
Nic Nicandrou has been an executive director of Prudential and Chief
Financial Officer since 28 October 2009. Before joining Prudential, he
worked at Aviva, where he held a number of senior finance roles, including
Norwich Union Life Finance Director and Board Member, Aviva Group
Financial Control Director, Aviva Group Financial Management and
Reporting Director and CGNU Group Financial Reporting Director.
Nic started his career at PriceWaterhouse Coopers, where he worked
in both London and Paris.
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Non-executive directors
Keki Dadiseth FCA
Independent non-executive director and
member of the Remuneration Committee
Keki Dadiseth has been an independent non-executive director of
Prudential since April 2005. During 2006, he was appointed as a non-
executive director of ICICI Prudential Life Assurance Company Limited and
ICICI Prudential Trust Limited. Keki is also a director of Britannia Industries
Limited, Piramal Healthcare Limited, Siemens Limited, The Indian Hotels
Company Limited and Godrej Properties Limited, all of which are quoted
on the Bombay Stock Exchange. In addition, he acts as advisor to Goldman
Sachs, Fleishman-Hillard Inc and Oliver Wyman Limited, and as a trustee
for a number of Indian charities. Keki is the non-executive Chairman of
Omnicom India Marketing Advisory Services Private Limited, an unquoted
Indian company, and is also a board member of various other unquoted
Indian companies, including his recent appointment as Chairman of Sony
India Pvt Ltd and Senior Advisor to Sony Group in India.
Before he retired from Unilever in 2005, Keki was Director, Home and
Personal Care, responsible for the HPC business of Unilever worldwide,
a Board member of Unilever PLC and Unilever N.V., and a member of
Unilever’s Executive Committee. He joined Hindustan Lever Ltd in India
in 1973 and in 1987, he joined the Board of Hindustan Lever and became
Chairman in 1996.
Michael Garrett
Independent non-executive director and
member of the Remuneration Committee
Michael Garrett has been an independent non-executive director of
Prudential since September 2004. He worked for Nestlé from 1961,
becoming Head of Japan (1990-1993), and then Zone Director and
Member of the Executive Board, responsible for Asia and Oceania, and in
1996 his responsibilities were expanded to include Africa and the Middle
East. Michael retired as Executive Vice President of Nestlé in 2005. He
served the Government of Australia as Chairman of the Food Industry
Council and as a Member of the Industry Council of Australia, and was also
a member of the Advisory Committee for an APEC (Asia-Pacific Economic
Cooperation) Food System, a Member of The Turkish Prime Minister’s
Advisory Group and the WTO (World Trade Organization) Business
Advisory Council in Switzerland.
Michael remains a director of Nestlé in India, and was appointed
Chairman of the Evian Group in 2001, a think tank and forum for dialogue
promoting free trade. He also serves as a non-executive director on the
Boards of the Bobst Group in Switzerland, Hasbro Inc. in the USA, and
Gottex Fund Management Holdings Limited in Guernsey. In addition,
he is a member of the Development Committee of the International
Business Leaders Forum (IBLF), as well as a Member of the Swaziland
International Business Advisory Panel under the auspices of the
Global Leadership Foundation (GLF) London.
Ann Godbehere FCGA
Independent non-executive director and
Chairman of the Audit Committee
Ann Godbehere has been an independent non-executive director
of Prudential since August 2007. She has been a member of the Audit
Committee since October 2007 and became its Chairman on 1 October
2009. Ann began her career in 1976 with Sun Life of Canada, joining
Mercantile & General Reinsurance Group in 1981, where she held a
number of management roles rising to Senior Vice President and
Controller for life and health and property/casualty businesses in North
America in 1995. In 1996, Swiss Re acquired Mercantile & General
Reinsurance Group, and Ann became Chief Financial Officer of Swiss Re
Life & Health, North America. In 1997, she was made Chief Executive
Officer of Swiss Re Life & Health, Canada. She moved to London as Chief
Financial Officer of Swiss Re Life & Health Division in 1998 and joined the
Property & Casualty Business Group, based out of Zurich, as Chief
Financial Officer on its establishment in 2001. From 2003 until February
2007, Ann was Chief Financial Officer of the Swiss Re Group.
Ann is also a non-executive director of Rio Tinto plc, Rio Tinto Limited,
UBS AG, Ariel Holdings Limited, Atrium Underwriting Group Limited and
Atrium Underwriters Limited. In 2008 and until January 2009, Ann was
Chief Financial Officer and an executive director of Northern Rock.
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Prudential plc > Annual Report 2009
Bridget Macaskill
Independent non-executive director,
Chairman of the Remuneration Committee
and member of the Nomination Committee
Bridget Macaskill has been an independent non-executive director of
Prudential since September 2003. Bridget rejoined the Board of Prudential
having previously resigned due to a potential conflict of interest in 2001.
She has been a member of the Remuneration Committee since 2003 and
became its Chairman in May 2006.
Bridget joined First Eagle Investment Management, LLC, (formerly
Arnhold and S. Bleichroeder Advisers, LLC), a US based investment
management firm, as President and Chief Operating Officer in February
2009. She is a trustee of the TIAA-CREF funds and was previously also a
non-executive director of the Federal National Mortgage Association –
Fannie Mae (2005-2008), Scottish & Newcastle PLC (2004-2008)
and J Sainsbury Plc (2002-2006). Prior to that, she spent 18 years at
OppenheimerFunds Inc, a major New York based investment management
company, the final 10 years of which she was Chief Executive Officer.
Kathleen O’Donovan ACA
Independent non-executive director and
member of the Audit Committee
Kathleen O’Donovan has been an independent non-executive director
of Prudential since May 2003. She has been a member of the Audit
Committee since 2003, and was its chairman from May 2006 until
30 September 2009. Kathleen is also a director and Chairman of the
Audit Committee of Trinity Mirror plc, a non-executive director of
ARM Holdings plc, and Chairman of the Invensys Pension Scheme.
Previously, Kathleen was a non-executive director and Chairman of the
Audit Committees of Great Portland Estates PLC, EMI Group plc and the
Court of the Bank of England, and a non-executive director of O2 plc.
From 1991 to 2002, Kathleen was Chief Financial Officer of BTR and
Invensys, and prior to that she was a partner at Ernst & Young.
James Ross
Senior Independent Director and member of the
Remuneration and Nomination Committees
James Ross has been an independent non-executive director of Prudential
since May 2004 and the Senior Independent Director since May 2006.
He is also a non-executive director of Schneider Electric in France, and
Chairman of the Leadership Foundation for Higher Education and of the
Liverpool School of Tropical Medicine. James was previously a non-
executive director of McGraw-Hill and Datacard Inc in the United States,
and prior to that, Chairman of National Grid plc and Littlewoods plc. He
was also Chief Executive of Cable and Wireless plc and Chairman and
Chief Executive of BP America Inc., and a Managing Director of the British
Petroleum Company plc.
Lord Turnbull KCB CVO
Independent non-executive director and
member of the Audit Committee
Lord Turnbull has been an independent non-executive director of
Prudential since May 2006, and a member of the Audit Committee since
January 2007. He entered the House of Lords as a Life Peer in 2005. In
2002, he became Secretary of the Cabinet and Head of the Home Civil
Service until he retired in 2005. Prior to that, he held a number of positions
in the Civil Service, including Permanent Secretary at HM Treasury;
Permanent Secretary at the Department of the Environment (later
Environment, Transport and the Regions); Private Secretary (Economics)
to the Prime Minister; and Principal Private Secretary to Margaret Thatcher
and then John Major. He joined HM Treasury in 1970.
Lord Turnbull is Chairman of BH Global Limited and a non-executive
director of Frontier Economics Limited and The British Land Company PLC,
and was formerly a non-executive director of the Arup Group (2006-2007).
He also works part-time as a Senior Adviser to the London partners of
Booz and Co (UK).
Governance > Governance report
Governance report
The Board is responsible to shareholders for creating
and delivering sustainable shareholder value through
the management of the Group’s business. This report
explains Prudential’s approach to governance, including
how the Board manages the business for the benefit of
shareholders, promoting long-term shareholder interest.
As a UK company listed on the Main Market of the London
Stock Exchange, Prudential is subject to the governance rules
set out in the Combined Code on Corporate Governance
(the Combined Code). The Board has approved a governance
framework which maps out the internal approvals processes
and those matters which may be delegated. These principally
relate to the operational management of the Group’s businesses
and include pre-determined authority limits delegated by the
Board to the Group Chief Executive for further delegation by
him in respect of matters which are necessary for the effective
day-to-day running and management of the business. The
chief executive of each business unit has authority for the
management of that business unit and has established a
management board comprising its most senior executives.
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.
• Group risk framework: Provides an overview of the Group-
wide philosophy and approach to risk management, and sets
out the key risk management processes which support the
Group’s compliance with internal, statutory and regulatory
requirements.
• Corporate responsibility framework: Provides an overview
of the Group-wide philosophy and approach to corporate
responsibility; supports the Group’s commercial focus and the
increasing challenges faced including changes in stakeholder
expectations. A key element is the Group Code of Business
Conduct which sets out the ethical standards the Board requires
of itself, employees, agents and others working on behalf of the
Group, in their dealings with employees, customers,
shareholders, suppliers, and competitors, in the wider
community and in respect of the environment.
The Business Review provides further detail on Prudential’s risk
appetite and exposures (pages 40 to 45) and corporate
responsibility activities (pages 69 to 74).
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Governance > Governance report > Corporate governance
Corporate governance
Corporate governance and the role of the Board
Combined Code compliance
The corporate governance rules applicable to all UK companies
admitted to the Official List of the UK Listing Authority are set
out in the Combined Code, published by the Financial Reporting
Council, the latest version of which can be viewed at
www.frc.org.uk/corporate/combinedcode.cfm
The directors believe that good corporate governance is central
to achieving the Group’s objectives and maximising shareholder
value, and are committed to high standards of governance.
The Board supports the Combined Code, and confirms that
it has complied with all of the provisions set out in Section 1
throughout the financial year ended 31 December 2009.
The principles of the Combined Code have been applied
as set out below and in the Directors’ Remuneration Report.
Board composition, appointments and election/re-election
As at 31 December 2009, the Board comprised the Chairman,
six executive directors and seven independent non-executive
directors. The biographies of all current directors are set out
on pages 77 and 78.
The following changes occurred during the year: Tidjane Thiam,
who had been Chief Financial Officer from 25 March 2008,
succeeded Mark Tucker as Group Chief Executive on 1 October
2009, Mark Tucker having resigned from the Board with effect
from 30 September 2009. Nic Nicandrou succeeded Tidjane
as executive director and Chief Financial Officer with effect
from 28 October 2009. Following his decision to join Lloyds
Banking Group as its Chairman, Sir Win Bischoff resigned as
a non-executive director with effect from 15 September 2009.
Rob Devey was appointed as executive director and Chief
Executive Officer, Prudential UK and Europe on 16 November
2009, replacing Nick Prettejohn, who resigned as director and
Chief Executive Officer, Prudential UK and Europe, with effect
from 30 September 2009.
The Board, or the members in a general meeting, may appoint
directors up to a maximum total number of 20, as set out in the
Company’s Articles of Association. Any director appointed by
the Board will retire at the first Annual General Meeting following
his or her appointment and offer himself or herself for election by
shareholders. Accordingly, Nic Nicandrou and Rob Devey will
retire and offer themselves for election at the Annual General
Meeting on 19 May 2010.
Under the Company’s Articles of Association and in line with
the Combined Code, all directors must retire as directors every
three years, and accordingly Michael Garrett, Bridget Macaskill,
Clark Manning and Barry Stowe will retire and offer themselves
for re-election at the Annual General Meeting on 19 May 2010.
Non-executive directors are usually appointed for an initial
three-year term, commencing with their election by shareholders
at the first Annual General Meeting following their appointment.
Each appointment is reviewed towards the end of the three-year
term against performance and the requirements of the Group’s
businesses. The terms and conditions of all directors’
appointments are available for inspection at the Company’s
registered office during normal business hours and at the
Annual General Meeting.
Non-executive directors are typically expected to serve for two
terms of three years from their initial election by shareholders,
although the Board may invite them to serve for an additional
period. Both Bridget Macaskill and Kathleen O’Donovan have
been invited to serve another three-year term, having served for
six years as non-executive directors since their initial election by
shareholders.
The removal and resignation of the Company’s directors is
governed by the relevant provisions of the Companies Act 2006,
the Combined Code, and the Company’s Articles of Association.
The Board is actively engaged in succession planning for
both executive and non-executive roles to ensure that Board
composition is periodically renewed, and that the Board retains
its effectiveness at all times. This is delivered through an
established review process that is applied across all businesses
and covers both director and senior management succession
and development, and through the work of the Nomination
Committee, as described more fully on page 87. The Board
considers the outcome of the review annually and actions arising
from the review are implemented as part of the management
development agenda. We believe that our non-executive
directors bring a wide range of business, financial and
international experience to the Board and its committees.
Our executive directors, who head up the main businesses of
the Group, each bring an in-depth understanding to the Board
of their particular business, its markets and its challenges,
ensuring coverage of the breadth and depth of the Group’s
principal activities.
Role of the Board
The roles of Chairman and Group Chief Executive are separate
and clearly defined, and the scope of these roles has been
approved by the Board so that no individual has unfettered
decision-making powers. The Chairman is responsible for the
leadership and governance of the Board as a whole, and the
Group Chief Executive for the management of the Group and
the implementation of Board strategy and policy on the Board’s
behalf. In discharging his responsibilities, the Group Chief
Executive is advised and assisted by the Group Executive
Committee, comprising all the business unit heads and a
Group Head Office team of functional specialists.
James Ross is the Company’s Senior Independent Director, to
whom concerns may be conveyed by shareholders if they are
unable to resolve them through the existing mechanisms for
investor communications, or where such channels are
inappropriate.
The Board’s terms of reference, which are regularly reviewed,
set out those matters specifically reserved to it for decision, in
order to ensure that it exercises control over the Group’s affairs.
These include approval of the annual and interim results, strategy
and corporate objectives, operating plans, significant transactions
and matters affecting the Company’s share capital. Under the
Group’s internal governance framework all business units are
required to seek approval from the Board for a number of matters
above pre-determined authority limits.
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Prudential plc > Annual Report 2009
Powers of directors
The management and control of the business and affairs of the
Company are vested in the Board. The Board may exercise all
powers conferred on it by the Articles of Association and the
Companies Act 2006. This includes the powers of the Company
to borrow money and to mortgage or charge any of its assets
(subject to limitations in the Companies Act 2006 and the
Company’s Articles of Association) and to give a guarantee,
security or indemnity in respect of a debt or other obligation
of the Company. The Board may exercise all powers of the
Company, other than matters required by the Companies
Act 2006 to be dealt with in general meeting.
Board and committee meetings and attendance
During 2009, the Board met nine times and held one separate
strategy event. A detailed forward agenda has been in operation
for a number of years, which is kept updated to reflect not only
scheduled regular items of business but also any topical matters
arising during the year. Each year, at least one of the Board
meetings is held at one of the Group’s business operations to
facilitate a fuller understanding of that business. In June 2009,
a Board meeting was held in Chicago, where the Board met
with senior members of the US management team and attended
a series of presentations on the US business. In November 2009,
a Board meeting was held in Kuala Lumpur where the directors
met senior members of the Asian management team and
received presentations on the Asian business.
The table below details the number of Board and Committee
meetings attended by each director throughout the year. Where
directors were not able to attend a meeting, their views were
canvassed by the Chairman prior to the meeting. A further nine
ad hoc Board Committee meetings took place during the year,
which had been convened to finalise arrangements for matters
discussed by the Board, such as final approvals of periodic
financial reports, or finalising corporate transactions.
The Chairman usually meets formally, at least annually, with the
non-executive directors without the executive directors being
present. During 2009 these meetings took place in February
and July.
Number of meetings in year
Chairman
Harvey McGrath
Executive directors
Tidjane Thiam (Group Chief Executive)
Nic Nicandrou (Chief Financial Officer)note 1
Rob Devey note 2
Clark Manning
Michael McLintock
Nick Prettejohn note 3
Barry Stowe
Mark Tucker note 4
Non-executive directors
Sir Win Bischoff note 5
Keki Dadisethnote 6
Michael Garrett note 7
Ann Godbehere
Bridget Macaskill
Kathleen O’Donovan
James Ross (Senior Independent Director) note 8
Lord Turnbull
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Board
Meetings
9
9 (9)
9 (9)
2 (2)
1 (1)
9 (9)
9 (9)
7 (7)
9 (9)
6 (7)
6 (6)
7 (9)
9 (9)
9 (9)
9 (9)
9 (9)
9 (9)
9 (9)
Audit Remuneration
Committee
Meetings
Committee
Meetings
Nomination
Committee
Meetings
8
–
–
–
–
–
–
–
–
–
–
–
–
8 (8)
–
8 (8)
–
8 (8)
11
–
–
–
–
–
–
–
–
–
–
10 (11)
6 (11)
–
11 (11)
–
10 (11)
–
6
6 (6)
–
–
–
–
–
–
–
–
–
–
–
–
6 (6)
–
5 (6)
–
Figures in brackets indicate the maximum number of meetings which the individual could have attended in the period in which they were a Board or
Committee member.
Notes
1
2
3
4
5
6 Was not able to attend all Board and Remuneration Committee meetings due to prior commitments, but his views were sought prior to those meetings
Appointed as a director on 28 October 2009.
Appointed as a director on 16 November 2009.
Ceased to be a director with effect from 30 September 2009.
Ceased to be a director with effect from 30 September 2009.
Ceased to be a director with effect from 15 September 2009.
he could not attend.
7 Was not able to attend all Remuneration Committee meetings due to prior commitments, in particular those meetings which were scheduled at short
notice, but his views were sought prior to those meetings he could not attend.
8 Was unable to attend one Remuneration Committee meeting and one Nomination Committee meeting due to prior commitments, but his views were
sought prior to the meetings he could not attend.
81
Governance > Governance report > Corporate governance > continued
Board independence
The Company follows the Combined Code when determining
the independence of its non-executive directors, and in addition
to that guidance Prudential is required to affirm annually the
independence of its Audit Committee members under the United
States Sarbanes-Oxley legislation. Where necessary, the Board
ensures that appropriate processes are in place to manage any
potential conflicts of interest.
In line with the provisions of the Combined Code, the Chairman
in office during the year was independent on appointment.
Throughout the year all non-executive directors were considered
by the Board to be independent in character and judgement,
and independent in accordance with the Combined Code.
Keki Dadiseth and Barry Stowe also serve as non-executive
directors of ICICI Prudential Life Insurance Company Limited, an
Indian company which is owned 26 per cent by Prudential, and 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 per cent by Prudential. The Board does not
consider that these appointments in any way affect Keki’s status
as an independent director of Prudential.
Prudential is one of the UK’s largest institutional investors and
the Board does not believe that this situation compromises the
independence of those non-executive directors who are also on
the boards of companies in which the Group has a shareholding.
The Board also believes that such shareholdings should not
preclude the Company from having the most appropriate and
highest calibre non-executive directors.
Other commitments and conflicts of interest
Other commitments
The Board was satisfied during 2009 that the Chairman’s other
commitments did not interfere with the day-to-day performance
of his duties for the Group, and that he had the commitment and
capability to make himself available under unforeseen
circumstances, should the need arise. The major commitments
of the Chairman, including changes during the year where
applicable, are detailed in his biography on page 77.
Directors may, from time to time, hold directorships or other
significant interests with companies outside of the Prudential
Group, which may have business relationships with the Group.
Executive directors may accept external directorships and retain
any fees earned from those directorships, subject to prior
discussion with the Group Chief Executive, and always provided
this does not lead to any conflicts of interest. In line with the
Combined Code, executive directors would be expected to hold
no more than one non-executive directorship of a FTSE 100
company. Tidjane Thiam was a non-executive director of Arkema
in France until November 2009. Some of our other executive
directors hold directorships or trustee positions of unquoted
companies or institutions. Details of any fees retained are included
in the Directors’ Remuneration Report on page 104, and major
commitments of our executive directors are detailed in their
biographies on page 77.
Non-executive directors may serve on a number of other boards,
provided that they are able to demonstrate satisfactory time
commitment to their role at Prudential, and that they discuss
any new appointment with the Chairman prior to accepting. This
ensures that they do not compromise their independence and that
any potential conflicts of interest and any possible issues arising
out of the time commitments required by the new role can be
identified and addressed appropriately. The major commitments
of our non-executive directors are detailed in their biographies
set out on page 78.
Conflicts of interest
Directors have a statutory duty to avoid conflicts of interest with
the Company. The Company’s Articles of Association allow the
directors to authorise conflicts of interest, and the Board has
adopted a policy and effective procedures on managing and,
where appropriate, approving conflicts or potential conflicts
of interest. Under these procedures, directors are required to
declare all directorships or other appointments to companies
which are not part of the Prudential Group, and which could
result in conflicts or potential conflicts of interest, as well as
other situations which could give rise to a potential conflict.
The Nomination Committee or the Board evaluates and
approves each such situation individually where applicable.
Induction, development and performance evaluation
Induction
The Company Secretary supports the Chairman in providing
tailored induction programmes for new directors and on-going
training for all directors. Upon appointment, all directors embark
upon a wide-ranging induction programme covering, amongst
other things, the principal bases of accounting for the Group’s
results, the role of the Board and its key committees, and the
ambit of the internal audit and risk management functions.
In addition, they receive detailed briefings on the Group’s
principal businesses, its product range, the markets in which it
operates and the overall competitive environment. Other areas
addressed include legal issues affecting directors of financial
services companies, the Group’s governance arrangements, its
investor relations programme, as well as its remuneration policies.
Ongoing development
Throughout their period in office, directors are regularly updated
on the Group’s businesses and the regulatory and industry-
specific environments in which it operates, as well as on their legal
and other duties and obligations as directors where appropriate.
These updates can be in the form of written reports to the Board,
or presentations by senior executives or external sources where
appropriate. Non-executive directors serving on key committees
are also updated regularly on matters specific to the relevant
committee in order to enhance their knowledge and effectiveness
throughout their term in office, and receive presentations from
senior executives on topics of interest to them.
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Prudential plc > Annual Report 2009
Directors’ interests
Details of each director’s interests in shares of the Company
are set out in the Directors’ Remuneration Report on page 106.
Directors’ indemnities and protections
The Company has arranged appropriate insurance cover in
respect of legal action against directors and senior managers of
companies within the Prudential Group. In addition, the Articles
of Association of the Company permit the directors and officers
of the Company to be indemnified in respect of liabilities incurred
as a result of their office. Prudential also provides protections for
directors and senior managers of companies within the Group
against personal financial exposure they may incur in their capacity
as such. These include qualifying third party indemnity provisions
(as defined where relevant by the Companies Act 1985 and the
Companies Act 2006) for the benefit of directors of Prudential plc
and other such persons, including, where applicable, in their
capacity as directors of other companies within the Group. These
indemnities were in force during 2009 and remain in force.
Governance, internal control and risk management
The Board is responsible for establishing a system of internal
control, and for reviewing its effectiveness. To achieve this, the
Board has established frameworks for internal governance, risk
and corporate responsibility. This system is designed to manage
rather than eliminate the risk of failure to achieve business
objectives, and can only provide reasonable and not absolute
assurance against material misstatement or loss.
Further details on the procedures for the management of risk
and the systems of internal control operated by the Group are
given in the section on Risk Governance on pages 90 and 91.
The governance framework principally relates to the operational
management of the Group’s businesses and includes pre-
determined authority limits delegated by the Board in respect
of matters which are necessary for the effective day-to-day
running and management of the business. The Group Chief
Executive has been delegated management authority by the
Board, and in turn grants authority to the executive, including
the chief executive officers of each business unit, who report to
him for the management of that business unit. In addition, each
of those chief executives has established a management board
comprising the business unit’s most senior executives.
The system is regularly reviewed and complies with the revised
guidance on the Combined Code issued in October 2005 (the
Turnbull guidance). The Board last reviewed the effectiveness
of the system of internal control in February 2010, covering all
material controls, including financial, operational and compliance
controls, and risk management systems. The Board confirms
that there is an ongoing process for identifying, evaluating and
managing the significant risks faced by the Group, which has
been in place throughout the period covered by this report
and up to 8 March 2010.
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A programme of on-going professional development was
undertaken for all directors in 2009, which covered a number of
sector-specific and business issues as well as legal, accounting and
regulatory changes and developments. The business unit chief
executive officers together with relevant senior managers gave
presentations to the Board during the course of the year on the
challenges and opportunities currently faced by their business
unit. In addition, senior managers within certain head office
functions presented to the Board on the key issues currently facing
their function. Non-executive directors received an update on key
actuarial topics during the year. In addition, members of the Audit
Committee have the option to attend meetings of the business unit
audit committees, to aid their understanding of topical matters of
interest to them and how they are handled by the Group.
Performance evaluation
Prudential continued its programme of annual evaluations of the
performance of the Board and its committees in respect of 2009,
in line with the requirements of the Combined Code. The aim is
to continue to improve the effectiveness of the Board and its
committees, and enhance the Group’s performance.
In respect of 2009, the evaluation of the Board as a whole was
carried out internally led by the Company Secretary in consultation
with the Chairman, the Senior Independent Director and the
Group Chief Executive. The Company Secretary prepared a report
based on the findings of the review, which will be presented to and
discussed by the Board in March 2010, and an action plan will be
agreed. The use of external providers for future evaluations is kept
under review by the Board.
In addition, the performance of the non-executive directors and
the Group Chief Executive was evaluated by the Chairman in
individual meetings. The non-executive directors, led by the
Chairman, evaluated the performance of the executives, and, led
by the Senior Independent Director, will evaluate the performance
of the Chairman in March.
Executive directors are subject to regular review, and the Group
Chief Executive individually appraised the performance of each
of the executive directors as part of the annual Group-wide
performance evaluation of all staff. The Audit Committee carried
out a separate evaluation in 2009, and the results were reported
to the Board in February 2010.
Internal and external support
All directors have direct access to the services of the Company
Secretary who advises them on all corporate governance matters,
on Board procedures, and on compliance with applicable rules and
regulations. In order to ensure good information flows, full Board
and Committee papers are provided to the directors by the
Company Secretary in the ordinary course approximately one
week before each Board or Committee meeting.
The Board has approved a procedure whereby directors have the
right to seek independent professional advice at the Company’s
expense where this is appropriate to enable the directors, either
individually or as a group, to properly fulfil their obligations.
Copies of any instructions and advice given by an independent
professional adviser to a director are supplied by the director to
the Company Secretary who will, where appropriate, circulate
to other directors sufficient information to ensure that other
members of the Board are kept informed on issues arising
which affect the Company or any of its subsidiaries.
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Governance > Governance report > Corporate governance > continued
The chief executive and chief financial officer of each business
unit certified compliance with the Group’s governance, internal
control and risk management requirements. The risk management
function reviewed any matters identified by business units in their
certification, and also assessed the risk and control issues that
arose and were reported during the year. This included routine
and exception-based risk reporting, matters identified and
reported by other Group Head Office oversight functions, and the
findings from the work of the internal audit function, who execute
risk-based audit plans throughout the Group. The results were
reported to and reviewed by the Group Audit Committee, the role
of which is described on pages 84 to 87 and by the Board where
appropriate.
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.
The internal control and risk management systems described
above, and also under the sections on Risk Governance on pages
90 and 91 and the Group Audit Committee on page 85, cover the
Company’s financial reporting process and the Group’s process
for the preparation of consolidated financial statements.
Disclosure of information to auditor
The directors who held office at the date of approval of this
directors’ report confirm that, so far as they are each aware, there
is no relevant audit information of which the Company’s auditor is
unaware; and each director has taken all the steps that he or she
ought to have taken as a director to make himself or herself aware
of any relevant audit information and to establish that the
Company’s auditor is aware of that information. This confirmation
is given and should be interpreted in accordance with the
provisions of section 418 of the Companies Act 2006.
Board Committees
The Board has established audit, remuneration and nomination
committees as standing committees of the Board with written
terms of reference, which are kept under regular review. Following
recent reviews of the governance of UK companies, the Board
intends to establish a separate risk committee responsible for
monitoring and overseeing risk, which will become operational
in 2010. These committees are key elements of the Group’s
corporate governance framework, and reports on each
committee currently in operation are included below:
Audit Committee Report
This report sets out the responsibilities of the Group Audit
Committee (the Committee) and the activities carried out by
the Committee during the year to meet its objectives.
Role of the Committee
The Committee’s principal responsibilities consist of oversight
over financial reporting, internal controls and risk management,
and monitoring auditor independence. Its duties include gaining
assurance on the control over financial processes and the integrity
of the Group’s financial reports, monitoring the performance,
objectivity and independence of the external auditor, and
reviewing the work of the internal auditor. Once the Board has
established a separate risk committee with responsibility for risk
monitoring and oversight, the Committee’s role will change
accordingly.
In performing its duties, the Committee has access to employees
and their financial or other relevant expertise across the Group,
and to the services of the Group-wide Internal Audit Director and
the Company Secretary. The Committee may also seek external
professional advice at the Group’s expense.
The Committee’s terms of reference, which are set by the
Board and kept under regular review, are available on
our website at www.prudential.co.uk/prudential-plc/
aboutpru/corporategovernance Alternatively, copies may be
obtained upon request from the Company Secretary, at the
Company’s registered office.
Membership
The Committee is comprised exclusively of independent
non-executive directors of the Company, as set out below:
Ann Godbehere FCGA (Chairman)
Kathleen O’Donovan ACA
Lord Turnbull KCB CVO
Membership is selected to provide a broad set of financial,
commercial and other relevant experience to meet the
Committee’s objectives.
The Board has determined that Kathleen O’Donovan has recent
and relevant financial experience for the purposes of the
Combined Code. The Board has further determined that
Ann Godbehere, who has a long-standing career in the
financial services industry with notable insurance sector
experience, brings additional recent and relevant financial
experience to the Committee. In May 2009 the Board
designated Kathleen O’Donovan as its audit committee financial
expert for Sarbanes-Oxley Act purposes. This will be reviewed
during 2010 in conjunction with the publication of Form 20-F.
Full biographical details of the members of the Committee,
including their relevant experience are set out in their biographies
on page 78.
Meetings
The Committee met eight times during the year, and all meetings
were attended by all Committee members. By invitation, the
Chairman of the Board, the Chief Financial Officer, the Group
General Counsel and Company Secretary, the Group-wide Internal
Audit Director, the Group Chief Risk Officer, and other senior staff
from the group finance, internal audit, risk, compliance and
security functions where appropriate, as well as the lead partner
of the external auditor attended meetings. Other partners of the
external auditor also attended some of the meetings to contribute
to the discussions relating to their area of expertise.
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Prudential plc > Annual Report 2009
A detailed forward agenda has been in operation for a number of
years which is continually updated to ensure all matters for which
the Committee is responsible are addressed at the appropriate
time of year. The Committee’s principal business during the year
consisted of the following:
• review of half-year and full-year results, the annual report
and accounts, and other significant announcements, where
appropriate;
• examination of critical accounting policies and key judgmental
areas;
• review of changes in and implementation of Group Accounting
Policies in compliance with International Financial Reporting
Standards and practices;
• review of the Group’s tax matters;
• approval of the external auditor’s management representation
letter, review of the external auditor’s full-year memorandum
and external audit opinion;
• review of US filings and related external audit opinions;
• monitoring of auditor independence and the external auditor’s
plans and audit strategy, the effectiveness of the external audit
process, the external auditor’s qualifications, expertise and
resources, and making recommendations for the re-
appointment of the external auditor;
• monitoring of the framework and effectiveness of the Group’s
systems of internal control, including the Turnbull compliance
statement and Sarbanes-Oxley procedures;
• monitoring the effectiveness of both the Group’s risk framework
and the management of key financial and operational risks;
• review of the internal audit plan and resources, and monitoring
of the audit framework and internal audit effectiveness;
• monitoring the effectiveness of compliance processes and
controls, and performance against the Group’s compliance plan;
• review of anti-money laundering procedures, and allegations
received via the employee confidential reporting lines; and
• review of its own effectiveness and terms of reference.
In addition, the Committee received in-depth presentations on
a range of topics.
The Chairman reported to the Board on matters of particular
significance after each Committee meeting, and the minutes
of Committee meetings were circulated to all Board members.
The Committee recognises the need to meet without the
presence of executive management. Such sessions were held in
March 2009 with the external and internal auditors, in July 2009
with the external audit partners and the head of the security
function, and in December 2009 with the external and internal
auditors. At all other times, management and auditors have open
access to the Chairman.
Financial reporting
As part of its review of financial statements prior to recommending
their publication to the Board, the Committee focused on: critical
accounting policies and practices and any changes, decisions
requiring a major element of judgement, unusual transactions,
clarity of disclosures, significant audit adjustments, the going
concern assumption, compliance with accounting standards, and
compliance with obligations under the Combined Code and other
applicable laws and regulations.
In addition, the Committee is regularly briefed by senior
management on developments in International Financial
Reporting Standards.
Confidential reporting
One of the standing agenda items of the Committee is to review
a report on calls to the confidential reporting line, which is made
available to employees to enable them to communicate
confidentially on matters of concern, and actions taken in response
to these calls. The Committee also considered whether any
internal control implications arose from communications received.
No material control implications were raised from calls to the
confidential helpline. During the year, the Chairman reviewed the
procedures adopted by the Company on the methods of handling
calls to the confidential reporting line across the Group with the
Group-wide Internal Audit Director and the head of the security
function. An external review of the method of handling calls to
the confidential reporting line was also carried out by the external
auditor during the year.
Business unit audit committees
Each business unit has its own audit committee whose members
and chairmen comprise primarily of senior management and are
independent of the respective business unit. The chairmen of
these committees report regularly to the Committee, and their
meetings are attended by senior management of the respective
business unit, including the business units’ heads of finance, risk,
compliance and internal audit. Business unit audit committees
have adopted standard terms of reference across the Group, with
only minor variations to address overseas requirements or
particular requirements of the business. The terms of reference of
those committees were reviewed during the year, and all include
escalation of significant matters to the Committee, approval of the
business unit internal audit plans and overseeing the adequacy of
internal audit resources. Also included are presentations from the
external auditor. During the year, the business unit audit
committees reviewed and approved their respective internal audit
plans, resources and the results of internal audit work, and both
external and internal auditors were able to discuss any relevant
matters with the Chairman and members of the Committee
as required.
Internal control and risk management
The Committee reviewed the Group’s statement on internal
control systems prior to its endorsement by the Board. It also
reviewed the policies and processes for identifying, assessing and
managing business risks. Throughout the year, the Committee
received the minutes of the Disclosure Committee and the Group
Operational Risk Committee and noted their activities. Further
information on the Disclosure Committee and on risk governance
appears on pages 89 and 90 to 91 respectively.
Pursuant to the requirements of section 404 of the Sarbanes-Oxley
Act, the Group must undertake an annual assessment of the
effectiveness of internal control over financial reporting. Further
details are provided on page 89.
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Governance > Governance report > Corporate governance > continued
Internal audit
The Committee regards its relationship with the internal audit
function as pivotal to the effectiveness of its own activities.
Group-wide Internal Audit plays an important role in supporting
the Committee to fulfil its responsibilities under the Combined
Code and the Sarbanes-Oxley Act, and provides independent
assurance on the Company’s processes of identification and
control of risk. The Committee agreed the work programme of the
internal audit function to be undertaken during 2009. Each of the
Group’s business units has an internal audit team, the heads of
which report to the Group-wide Internal Audit Director. Internal
audit resources, plans and work are overseen by the Committee
and by business unit audit committees. Across the Group, total
internal audit headcount stands at 117. The Group-wide Internal
Audit Director reports functionally to the Committee and for
management purposes to the Chief Financial Officer.
Formal reports are submitted to Committee meetings, with
interim updates where appropriate, and views are also sought
at the private meetings between the Committee and the internal
auditors, as well as during regular private meetings between
the Chairman of the Committee and the Group-wide Internal
Audit Director.
The Committee assesses the effectiveness of the internal audit
function by means of regular reviews, some of them carried out by
external advisers, and through ongoing dialogue with the Group-
wide Internal Audit Director. External reviews of internal audit
arrangements and standards were last conducted in 2006 and
2007 to ensure that the activities and resources of internal audit
are most effectively organised to support the oversight
responsibilities of the Committee. These reviews, performed by
Deloitte, confirmed that the internal audit function complies with
the Institute of Internal Auditors’ international standards for the
professional practice of internal auditing and was operating
effectively. An internal assessment of the internal audit function
was performed by the Group-wide Internal Audit Director in 2008
and 2009, based on internal audit’s ongoing self-assessment
processes and using a maturity model derived from the review
criteria used by Deloitte. The assessment confirmed that the
internal audit function conforms to the Institute of Internal
Auditors’ international standards and continues to operate
effectively in all areas of professional practice. The results of
the assessment were reported in detail to the Committee in
February 2010.
External audit
The Committee has a key oversight role in relation to the external
auditor, KPMG Audit Plc, whose primary relationship is with the
Committee. The Group’s Auditor Independence Policy ensures
that the independence and objectivity of the external auditor is not
impaired. The policy sets out four key principles which underpin
the provision of non-audit services by the external auditor, namely
that the auditor should not:
• audit its own firm’s work;
• make management decisions for the Group;
• have a mutuality of financial interest with the Group; or
• be put in the role of advocate for the Group.
All services provided by the auditor in accordance with this policy
are provided in accordance with a pre-approved budget and are
reviewed by the Committee and approved where necessary.
The Committee regularly reviews and updates the policy to
ensure alignment with the latest standards and best practice in
establishing, maintaining and monitoring auditor independence
and objectivity.
Fees payable to the auditor
For the year ended 31 December 2009, the Committee approved
fees of £10 million to its auditor, KPMG Audit Plc, for audit services
and other services supplied pursuant to relevant legislation. In
addition, the Committee approved fees of £2.4 million to KPMG
for services not related to audit work, which accounted for 19 per
cent of total fees paid to the external auditor in the year. Non-audit
services primarily related to services for corporate transactions and
basic tax compliance work. In accordance with the Group’s
Auditor Independence Policy, all services were approved prior to
work commencing, and each of the non-audit services was
confirmed to be permissible for the external auditor to undertake,
as defined by the Sarbanes-Oxley Act. The Committee reviewed
the non-audit services being provided to the Group by KPMG at
regular intervals during 2009. A summary of audit fees is provided
in Note I5 of the Group Financial Statements.
Auditor performance and independence
As part of its work during 2009, the Committee assessed the
performance of the external auditor, its independence and
objectivity, and the effectiveness of the audit process. In addition
to questioning the external auditor and the Chief Financial Officer,
which is a regular feature of meetings, the review of the
effectiveness of the external audit process was conducted through
a questionnaire-based exercise administered by Group-wide
Internal Audit, supplemented by interviews with senior finance
staff and Committee members. The Committee reviewed the
external audit strategy and received reports from the auditor on its
own policies and procedures regarding independence and quality
control, including an annual confirmation of its independence in
line with industry standards.
Re-appointment of auditor
The Group operates a policy under which at least once every five
years a formal review is undertaken by the Committee to assess
whether the external audit should be re-tendered. The external
audit was last put out to competitive tender in 1999 when the
present auditor was appointed. Since 2005 the Committee has
annually considered the need to re-tender the external audit
service. It again considered this in 2009 and concluded that
there was nothing in the performance of the auditor requiring
a change. In 2007, a new lead audit partner was appointed by
KPMG Audit plc, in line with the Auditing Practices Board
Ethical Statements and the Sarbanes-Oxley Act.
Following its review of the external auditor’s effectiveness and
independence, the Committee has recommended to the Board
that KPMG Audit Plc be re-appointed as auditor of the Company,
and a resolution for the re-appointment of KPMG Audit Plc as
auditor of the Company to hold office until the end of the 2011
Annual General Meeting will be put to a shareholder vote at the
Annual General Meeting on 19 May 2010.
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Prudential plc > Annual Report 2009
Review of Committee effectiveness
During the year, the Committee undertook an in-depth
performance assessment in-house by way of a detailed
questionnaire, administered by the Secretariat, addressing both
compliance with various regulations and codes of conduct, and
qualitative aspects of the Committee’s performance during the
year. The results were discussed at a Committee meeting in
December 2009 and reported to the Board in February 2010.
Recommendations to improve processes identified by the review
are being implemented, and the Committee is satisfied, based on
the findings of this review, that it had been operating as an
effective audit committee throughout the year, meeting all
applicable legal and regulatory requirements. Further reviews of
the effectiveness of the Committee will be undertaken regularly
and will, from time to time, be conducted by external consultants.
Remuneration Committee Report
Role of the Committee
The Remuneration Committee (the Committee) determines the
remuneration packages of the Chairman and executive directors.
It also agrees the principles and monitors the level and structure
of remuneration for a defined population of senior management
as determined by the Board. In framing its remuneration policy,
the Committee has given full consideration to the provisions of
Schedule A to the Combined Code. The Directors’ Remuneration
Report prepared by the Board is set out in full on pages 96 to 114.
In preparing the report, the Board has followed the provisions
of the Combined Code, the Listing Rules of the Financial Services
Authority, and the Companies Act 2006.
Except in relation to the remuneration of the Group Chief
Executive, when only the Chairman is consulted, the Committee
consults the Chairman and the Group Chief Executive about the
Committee’s proposals relating to the remuneration of all
executive directors. The Committee has access to professional
advice inside and outside the Company.
The Committee’s terms of reference, which are set by the
Board and kept under regular review, are available on our
website at www.prudential.co.uk/prudential-plc/
aboutpru/corporategovernance
Alternatively, copies may be obtained upon request from the
Company Secretary, at the Company’s registered office.
The terms of reference comply with all significant aspects of
relevant investor guidelines, and require the Committee to ensure
that when setting remuneration policy, the Company provides
reward for enhancing shareholder value responsibly in relation to
executive directors’ individual contributions, which we believe is
the appropriate policy to support our business.
Membership
The Committee is comprised exclusively of independent non-
executive directors of the Company, as set out below.
Bridget Macaskill (Chairman)
Keki Dadiseth FCA
Michael Garrett
James Ross
Full biographical details of the members of the Committee,
including their relevant experience are set out in their biographies
on page 78.
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 2009, a total of 11 Committee meetings were held. Details
of Committee members’ attendance are set out on page 81.
Nomination Committee Report
Role of the Committee
The Nomination Committee (the Committee), in consultation
with the Board, evaluates the balance of skills, knowledge and
experience on the Board and identifies the role and capabilities
required at any given time, taking into account the Group’s
business. Candidates are considered on merit against those
criteria, and the Committee makes recommendations to the Board
regarding suitable candidates for appointments. In appropriate
cases, search consultants are used to identify candidates. The
Committee also reviews conflicts of interest or potential conflicts
of interest raised by directors between Board meetings or for
prospective new Board members. In cases where there might be
an actual or potential conflict of interest, the Committee has
powers to authorise any such actual or potential conflict situation
on behalf of the Board, imposing any terms and conditions it
deems appropriate, or to make recommendations to the Board as
to whether the conflict or potential conflict should be authorised,
and on what terms.
The Committee’s terms of reference, which are set by the
Board and kept under regular review, are available on our
website at www.prudential.co.uk/prudential-plc/
aboutpru/corporate governance Alternatively, copies may be
obtained upon request from the Company Secretary, at the
Company’s registered office.
Membership
The Committee is comprised of independent non-executive
directors and the Chairman, as set out below:
Harvey McGrath (Chairman)
Bridget Macaskill
James Ross
Meetings
The Committee meets as required to consider candidates for
appointment to the Board and to make recommendations to the
Board in respect of those candidates. The Group Chief Executive
is closely involved in the work of the Committee and is invited to
attend and contribute to meetings.
During 2009, the Committee met six times and recommended
to the Board the appointments of Tidjane Thiam as Group Chief
Executive as of 1 October 2009, Nic Nicandrou as executive
director and Chief Financial Officer as of 28 October 2009 and
Rob Devey as executive director and Chief Executive, Prudential
UK and Europe, as of 16 November 2009. Full biographical details
of those directors are set out on page 77. Details of Committee
members’ attendance at meetings are set out on page 81.
The process of evaluating the skills and composition of the Board
is ongoing, and is kept under regular review in order to ensure
appropriate plans for succession to the Board are in place.
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Governance > Governance report > Corporate governance > continued
Relations with shareholders
Communication with shareholders
As a major institutional investor, the Company is very aware of the
importance of maintaining good relations with its shareholders.
We regularly hold discussions with major shareholders and a
programme of meetings took place during 2009. A perception
survey into the views of the Company’s major investors is
undertaken on an annual basis by an independent firm, and the
results of this survey are presented to the Board. Board members
also regularly receive copies of the latest analysts’ and brokers’
reports on the Company and the sector, to further develop their
knowledge and understanding of external views about the
Company. The Chairman and the non-executive directors
provided feedback to the Board on topics raised with them by
major shareholders. Should major shareholders wish to meet
newly appointed directors, or any of the directors generally,
they are welcome to do so.
The Group maintains a corporate website www.prudential.co.uk
containing a wide range of information of interest to private and
institutional investors, including the Group’s financial calendar.
The shareholder information section on pages 348 and 349
contains further details which may be of interest to shareholders.
Annual General Meeting
The Annual General Meeting will be held in the Churchill
Auditorium at The Queen Elizabeth II Centre, Broad Sanctuary,
Westminster, London SW1P 3EE on 19 May 2010 at 11.00am.
The Company believes the Annual General Meeting is an
important forum for both institutional and private shareholders
and encourages all its shareholders to vote. Shareholders are
given the opportunity during annual general meetings to put
questions to the Board on matters relating to the Group’s
operations and performance.
At its Annual General Meeting in 2009, the Company continued
its practice of calling a poll on all resolutions. The voting results,
which included all votes cast for and against each resolution at
the meeting, and all proxies lodged prior to the meeting, were
indicated at the meeting and published on the Company’s website
as soon as practicable after the meeting. The Company also
disclosed the number of votes withheld at the meeting and on
its website. This practice provides shareholders present with
sufficient information regarding the level of support and
opposition to each resolution, and ensures all votes cast either
at the meeting or through proxies are included in the result.
Company constitution
The Company is governed by the Companies Act 2006 and
other applicable legislation, and by its Articles of Association.
The Articles of Association are available on our website at
www.prudential.co.uk/prudential-plc/aboutpru/memorandum
Any change to the Articles must be approved by special resolution
of the shareholders in accordance with the provisions of the
Companies Act.
Share capital
On 31 December 2009, the Company’s issued share capital, which
is set out in Note H11 on page 264, consisted of 2,532,227,471
ordinary shares of 5 pence each, all fully paid up and listed on the
Main Market of the London Stock Exchange. The number of
accounts on the share register at 31 December 2009 was 71,700
(2008: 75,435). The Company is listed on the New York Stock
Exchange in the form of American Depositary Shares, referenced
to its ordinary shares, under a depositary agreement with
J.P. Morgan.
Rights and obligations
The rights and obligations attaching to the Company’s shares are
set out in full in the Company’s Articles of Association. There are
currently no voting restrictions on the ordinary shares, all of which
are fully paid, and each share carries one vote on a poll. If votes are
cast on a show of hands, each shareholder present in person or by
proxy, or in the case of a corporation, each of its duly authorised
corporate representatives, has one vote, unless the proxy is
appointed by more than one member in which case the proxy has
one vote for and one vote against if the proxy has been instructed
by one or more members to vote for the resolution and by one or
more members to vote against the resolution.
Where, under an employee share plan operated by the Company,
participants are the beneficial owners of the shares but not the
registered owners, the voting rights are normally exercisable by
the registered owner, in accordance with the relevant plan rules.
Trustees may vote at their discretion, but do not vote on any
unawarded shares held as surplus assets.
As at 8 March 2010, trustees held 0.17 per cent of the issued
share capital of the Company under the various plans in operation.
Rights to dividends under the various schemes are set out in
Note I3 on pages 285 to 288.
Restrictions on transfer
In accordance with English company law, shares may be
transferred by an instrument of transfer or through an electronic
system (currently CREST), and transfer is not restricted except
that the directors may in certain circumstances refuse to register
transfers of shares, but only if such refusal does not prevent
dealings in the shares from taking place on an open and proper
basis. If the directors make use of that power, they must send
the transferee notice of the refusal within two months.
Certain restrictions may be imposed from time to time by
applicable laws and regulations (for example, insider trading
laws), and pursuant to the Listing Rules of the Financial Services
Authority and Prudential’s own share dealing rules whereby
certain employees of the Company require the approval of the
Company to deal in the Company’s ordinary shares.
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Prudential plc > Annual Report 2009
US corporate governance and regulations
As a result of the listing of its securities on the New York Stock
Exchange, the Company is required to comply with the relevant
provisions of the Sarbanes-Oxley Act 2002 (the Act) as they apply
to foreign private issuers, and has adopted procedures to ensure
this is the case.
In particular in relation to the provisions of section 302 of that Act,
which covers disclosure controls and procedures, a Disclosure
Committee has been established reporting to the Group Chief
Executive, chaired by the Chief Financial Officer and comprising
members of senior management. The objectives of this committee
are to:
• assist the Group Chief Executive and the Chief Financial Officer
in designing, implementing and periodically evaluating the
Company’s disclosure controls and procedures;
• monitor compliance with the Company’s disclosure controls
and procedures;
• review and provide advice to the Group Chief Executive and
Chief Financial Officer with regard to the scope and content
of all public disclosures made by the Company which are of
material significance to the market or investors; and
• review and consider, and where applicable follow up on,
matters raised by other components of the disclosure process.
These may include, to the extent they are relevant to the
disclosure process, any matters to be raised with the Group
Audit Committee, the internal auditors or the external auditor
of the Company’s internal controls.
In discharging these objectives, the committee helps to support
the certifications by the Group Chief Executive and the Chief
Financial Officer of the effectiveness of disclosure procedures
and controls required by section 302 of the Act.
The provisions of section 404 of the Act require the Company’s
management to report on the effectiveness of internal controls
over financial reporting in its annual report on Form 20-F, which is
filed with the US Securities and Exchange Commission. To comply
with this requirement to report on the effectiveness of internal
control, the Group has documented and tested its internal controls
over financial reporting in the format required by the Act. The
annual assessment and related report from the external auditor will
be included in the Group’s annual report on Form 20-F, which will
be published in the coming months.
In addition, the Disclosure Committee has regard to the UK Listing
Regime, and evaluates whether or not a particular matter requires
disclosure to the market.
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Some of the Company’s employee share plans include restrictions
on transfer of shares while the shares are subject to the plan. As
described in the Directors’ Remuneration Report, non-executive
directors use a proportion of their fees to purchase shares in the
Company which may not normally be transferred during a
director’s period of office. In addition, all directors are required
to obtain a number of qualification shares within one year of
appointment, which they would also be expected to retain
during their tenure of office.
Significant shareholdings
As at 8 March 2010, the Company had received notification in
accordance with Rule 5.1.2 R of the Disclosure and Transparency
Rules of the Financial Services Authority from Capital Research
and Management Company, BlackRock Inc., Legal and General
Group Plc, and Norges Bank that they held 10.03 per cent,
6.39 per cent, 4.45 per cent and 3.08 per cent respectively of the
Company’s issued ordinary share capital at the time of notification.
Powers of directors to issue shares
The directors require authority from shareholders in relation to the
issue of shares by the Company. Whenever shares are issued, the
Company has to offer the shares to existing shareholders pro rata
to their holdings, unless it has been given authority by
shareholders to issue shares without offering them first to existing
shareholders. The Company seeks authority from its shareholders
on an annual basis to issue shares, up to a maximum amount, and
to issue up to five per cent of its issued share capital without
observing pre-emption rights, in line with relevant regulations and
best practice. Dis-application of statutory pre-emption procedures
is also sought for rights issues. The Company’s existing authorities
to issue shares and to do so without observing pre-emption rights
are due to expire at the end of this year’s Annual General Meeting.
An ordinary resolution and a special resolution to approve the
renewal of these authorities respectively will be put to
shareholders at the Annual General Meeting on 19 May 2010.
Details of shares issued during 2008 and 2009 are given in Note H11
on page 264. No shares were issued in 2007 dis-applying pre-
emption rights, and the total number of shares issued dis-applying
pre-emption rights by the Company over the last three years
amounted to less than 7.5 per cent of the Company’s aggregate
issued share capital over that period.
Powers of directors to buy back shares
The directors also require authority from shareholders in relation
to the buying back of shares by the Company. The Company seeks
authority by special resolution on an annual basis for the buyback
of its own shares in accordance with the relevant provisions of the
Companies Act 2006 and other related guidance. The Company
has not made use of that authority since it was last granted at its
Annual General Meeting in 2009. This existing authority is due to
expire at the end of this year’s Annual General Meeting. A special
resolution to approve the renewal of this authority will be put to
shareholders at the Annual General Meeting on 19 May 2010.
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Governance > Governance report > Risk governance
Risk governance
Risk governance framework
Risk management
Risk oversight
Independent assurance
Prudential plc
Board
Group
Chief Executive
Group Executive
Committee
Chief Financial
Officer
Group Executive
Risk Committee
Group Operational
Risk Committee
Balance Sheet and
Capital Management
Committee
Group
Security
Group
Compliance
Group Chief
Risk Officer
Group Risk
function
Group Audit
Committee
Group-wide
Internal Audit
Business unit
chief executives
Business unit risk and
oversight functions
Business unit
audit committees
Board/Board committees
Management committees
Personnel
Functions
Direct reporting line
Provides support to committees
Regular dialogue and reporting
Regular communication and escalation
Organisation
Prudential’s risk governance framework requires that all of
the Group’s businesses and functions establish processes for
identifying, evaluating and managing the key risks faced by the
Group. The framework is based on the concept of ‘three lines of
defence’: risk management, risk oversight and independent
assurance.
The diagram above outlines the Group-level framework.
Risk management: As described in the corporate governance
report above, primary responsibility for strategy, performance
management and risk control lies with the Board, the Group
Chief Executive and the chief executives of each business unit.
Risk oversight: Risk exposures are monitored and reviewed by
Group-level risk committees, chaired by the Group Chief Risk
Officer or the Chief Financial Officer:
• Group Executive Risk Committee: meets monthly to oversee
the Group’s risk exposures (market, credit, liquidity, insurance
and operational risks) and monitor capital.
• Balance Sheet and Capital Management Committee: meets
monthly to monitor the Group’s liquidity and oversee the
activities of the Prudential Capital business unit.
• Group Operational Risk Committee: reports to the Group
Executive Risk Committee and meets quarterly to oversee the
Group’s non-financial risk (operational, business environment
and strategic risks) exposures.
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The committees’ oversight is supported by the Group Chief Risk
Officer, with functional oversight provided by:
• Group Security: develop and deliver appropriate security
measures to protect the Group’s staff, physical assets and
intellectual property.
• Group Compliance: verify compliance with regulatory
standards and inform the Group’s senior management and the
Board on key regulatory issues affecting the Group.
• Group Risk: establish and embed a capital management and
risk oversight framework and culture consistent with
Prudential’s risk appetite that protects and enhances the
Group’s embedded and franchise value.
Independent assurance: As described in the corporate
governance report above, the Group Audit Committee, supported
by Group-wide Internal Audit, provides independent assurance
and oversight of the effectiveness of the Group’s system of
internal control and risk management.
Principles and objectives
Risk is defined as the uncertainty that Prudential faces in
successfully implementing its strategies and objectives. This
includes all internal or external events, acts or omissions that have
the potential to threaten the success and survival of Prudential.
The control procedures and systems established within the Group
are designed to manage, rather than eliminate, the risk of failure to
meet business objectives. They can only provide reasonable and
not absolute assurance against material misstatement or loss, and
focus on aligning the levels of risk-taking with the achievement of
business objectives.
Material risks will only be retained where this is consistent with
Prudential’s risk appetite framework, i.e.:
• The retention of the risk contributes to value creation.
• The Group is able to withstand the impact of an adverse
outcome.
• The Group has the necessary capabilities, expertise, processes
and controls to manage the risk.
The Group has five objectives for risk and capital management:
a Framework: design, implement and maintain a capital
management and risk oversight framework consistent with
the Group’s risk appetite and Risk-Adjusted Profitability
(RAP) model.
b Monitoring: establish a ‘no surprises’ risk management culture
by identifying the risk landscape, assessing and monitoring risk
exposures and understanding change drivers.
c Control: implement risk mitigation strategies and remedial
actions where exposures are deemed inappropriate and
manage the response to extreme events.
d Communication: communicate the Group risk, capital and
profitability position to internal and external stakeholders and
rating agencies.
e Culture: foster a risk management culture, providing quality
assurance and facilitating the sharing of best practice risk
measurement and management across the Group and industry.
Reporting
The Group Executive Committee and the Board are provided with
regular updates on the Group’s economic capital position, overall
position against risk limits and RAP. They also receive the annual
financial condition reports prepared by the Group’s insurance
operations.
The Group Audit Committee is provided with minutes of the
Group Operational Risk Committee, and regular updates on
financial and operational risk exposures.
Group Head Office oversight functions have clear escalation
criteria and processes for the timely reporting of risks and
incidents by business units. As appropriate, these risks and
incidents are escalated to the various Group-level risk committees
and the Board.
Internal business unit routine reporting requirements vary
according to the nature of the business. Each business unit is
responsible for ensuring that its risk reporting framework meets
both the needs of the business unit (for example, reporting to the
business unit risk and audit committees) and the minimum
standards set by the Group (for example, to meet Group-level
reporting requirements).
Business units review their risks as part of the annual preparation
of their business plans, and review opportunities and risks against
business objectives regularly with Group Head Office. Group Risk
reviews, and reports to Group Head Office, on the impact of large
transactions or divergences from business plan.
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Governance > Governance report > Corporate responsibility governance
Corporate responsibility governance
The Board is committed to achieving the highest standards of
corporate responsibility in directing and controlling the business.
In terms of the governance of our corporate responsibility strategy,
Harvey McGrath, Chairman, has Board level responsibility for
social, environmental and ethical risk management. The Board
discusses Prudential’s performance in these areas at least once
a year and also reviews and approves Prudential’s corporate
responsibility report and strategy on an annual basis.
Below Board level, the Responsibility Committee is a specialist
Group-wide committee. This committee is responsible for
reviewing Prudential’s business conduct and social and
environmental policy, and ensures consistency of approach
across the Group’s international businesses. Consideration of
environmental, social and community matters is embedded in
our Code of Business Conduct and supported by our corporate
responsibility philosophy and programme, which takes into
account local cultures and requirements across our businesses.
The Corporate Responsibility team, which is located in our
Group Head Office, develops Prudential’s corporate
responsibility strategy and works closely with individual
business units to provide advice. The team also assists with
the development and adaptation of Group-wide initiatives so
that they not only fit with our overall Group principles but are
also adapted to meet local needs.
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Prudential plc > Annual Report 2009
Governance > Additional disclosures
Additional disclosures
The following additional disclosures are made in compliance with
the Companies Act 2006, the Disclosure and Transparency Rules
and the Combined Code.
Post-balance sheet events
Important events affecting the Company after the end of the
financial year are detailed in Note I11 on page 291.
Significant agreements that take effect, alter or terminate
upon a change of control of the Company following a
takeover bid
Under the agreements governing Prudential Corporation Holdings
Limited’s life insurance and fund management joint ventures with
China International Trust & Investment Corporation (CITIC), if
there is a change of control of the Company, CITIC may terminate
the agreements and either (i) purchase the Company’s entire
interest in the joint venture or require the Company to sell its
interest to a third party designated by CITIC, or (ii) require the
Company to purchase all of CITIC’s interest in the joint venture.
The price of such purchase or sale is to be the fair value of the
shares to be transferred, as determined by the auditor of the
joint venture.
Essential contracts or arrangements
There are a number of significant relationships with third parties,
which have value to the business. No single relationship, however,
is considered to be essential to the Group as a whole.
Compensation for loss of office
None of the terms of employment of the Company’s directors
include provisions for payment of compensation for loss of office
or employment that occurs because of a takeover bid. Terms
applying on a termination of their office are set out in the Directors’
Remuneration Report. In the US senior executives participate on a
discretionary basis in a plan which entitles them to compensation,
in the event that their employment is terminated or adversely
affected as a result of a takeover.
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Financial reporting
The directors have a duty to report to shareholders on the
performance and financial position of the Group and are
responsible for preparing the financial statements on pages 119 to
301 and the supplementary information on pages 304 to 340. It is
the responsibility of the auditor to form independent opinions,
based on its audit of the financial statements and its review of the
EEV basis supplementary information; and to report its opinions to
the Company’s shareholders and to the Company. Its opinions are
given on pages 303 and 342.
Company law requires the directors to prepare financial
statements for each financial year which give a true and fair view of
the state of affairs of the Company and of the Group. The criteria
applied in the preparation of the financial statements are set out in
the statement of directors’ responsibilities on page 302.
The directors are further required to confirm that the directors’
report includes a fair review of the development and performance
of the business, with a description of the principal risks and
uncertainties. Such confirmation is included in the statement
of directors’ responsibilities on page 302.
The Chief Financial Officer‘s Review includes, on pages 40 to 45,
a description of the Group’s risk and capital management, which
includes a description of the Group’s liquidity position. These risks
are also discussed in Note C to the financial statements on pages
162 to 165. The Group has considerable internal and external
financial resources and the directors believe that the Group is
well placed to manage its business risks successfully.
Going concern
After making enquiries, the directors have a reasonable
expectation that the Company and the Group have adequate
resources to continue their operations for the foreseeable future.
In support of this expectation, the Company’s business activities,
together with the factors likely to affect its future development,
successful performance and position in the current economic
climate are set out in the Business Review on pages 24 to 74.
The risks facing the Group’s capital and liquidity positions and
their sensitivities are referred to above in the Chief Financial
Officer’s Review. Specifically, the Group’s borrowings are
detailed in Note H13, the market risk and liquidity analysis
associated with the Group’s assets and liabilities can be found
in Note G2, the policyholder liability maturity profile by business
units is set out in Notes D2, D3 and D4 on pages 188, 205 and
213 respectively, cash flow details are given in the consolidated
statement of cash flows, and provisions and contingencies in note
H14. The directors therefore have continued to adopt the going
concern basis of accounting in preparing the financial statements.
93
Governance > Index to principal Directors’ Report disclosures
Information required to be disclosed in the directors’ report may be found in the following sections:
Information
Business review
Section in Annual Report
Page number(s)
Overview and business review
1–74
93
84
76–78, 80
2, 63
31
83
74
39
93, 291
11-12
69–74
74
88–89
80
88
81
93
93
Essential contracts or arrangements
Additional disclosures
Disclosure of information to auditor
Corporate governance
Directors in office during the year
Principal activities
Dividend recommended for the year
Board of directors
Business review
Business review
Details of qualifying third-party indemnity provisions
Corporate governance
Political and charitable donations and expenditure
Corporate responsibility review
Financial instruments/risk management objectives and policies
Business review
Post-balance sheet events
Note I11 of the Notes on the Group financial
statements and Additional disclosures
Future developments of the business of the Company
Group Chief Executive’s report
Employment policies and employee involvement
Corporate responsibility review
Creditors – policy on payment and practice
Corporate responsibility review
Structure of share capital, including restrictions on the
transfer of securities, voting rights and significant shareholders
Corporate governance
Rules governing appointments of directors
Corporate governance
Rules governing changes to the articles of association
Corporate governance
Powers of directors
Corporate governance
Significant agreements impacted by a change of control
Additional disclosures
Agreements for compensation for loss of office or
employment on takeover
Additional disclosures
In addition, the risk factors set out on pages 344 to 347 are incorporated by reference into this directors’ report.
Signed on behalf of the Board of directors
Margaret Coltman
Company Secretary
8 March 2010
94
Prudential plc > Annual Report 2009
DIRECTORS’
REMUNERATION
REPORT
96
Directors’ remuneration report
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9595
Directors’ remuneration report > For the year ending 31 December 2009
Directors’ remuneration report
Dear Shareholder
I am pleased to present the Remuneration Committee’s report
on Directors’ remuneration for the year to 31 December 2009.
The primary objectives of our remuneration policy remain
unchanged: to attract high calibre executives, to encourage
them to contribute to the success of Prudential by achieving
our business plans and returns for shareholders and to reward
them based on the Company’s success and their individual
contributions. The policy supports the Company’s strategy and
goals, and aims to comply with good practice in the UK, whilst not
losing sight of the need to take account of competitive conditions
in local markets.
During 2009 there were a number of changes to the executive
director team. Tidjane Thiam was appointed as Group Chief
Executive, succeeding Mark Tucker; Nic Nicandrou was appointed
as Chief Financial Officer, succeeding Tidjane Thiam; and Rob
Devey was appointed as Chief Executive UK & Europe,
succeeding Nick Prettejohn. These individuals bring with them a
richly deserved reputation for delivering performance and value,
and their talents and experience are well-suited to lead Prudential
in the next stage of its development. In conjunction with the
changes made to the executive team, we took the opportunity to
make some adjustments to the balance of the remuneration
elements for the executive director roles to reflect the current
needs of our business. In line with our remuneration policy, as our
team of executive directors develop and demonstrate measurable
success, we would expect to pay them at an appropriate level
against their peers to reflect their contributions to the Group.
Despite the continued turmoil in the global financial markets,
2009 was another successful year for the Group. As you will see
from the earlier sections of the Annual Report, we have delivered
outstanding performance against a backdrop of unprecedented
economic uncertainty. We have achieved record sales and driven
profitable growth, demonstrating the success of the Group’s
strategy of focusing on value over volume and capitalising on
growth opportunities in our chosen markets around the world.
The Group’s prudent but proactive risk based approach has
ensured that our capital position remains robust and resilient.
This performance has been reflected in the achievement of the key
financial measures which underpin our 2009 annual bonus plans,
resulting in the bonus awards made to our executive directors.
We have also significantly out-performed our international
peer group, which has resulted in full vesting under the Group
Performance Share Plan.
The Remuneration Committee is mindful of the commentary
around pay in the financial services sector. While there are
a number of important differences between the banking
and insurance sectors, the principles around ensuring good
remuneration governance and avoiding a focus on short-term
results at the expense of the long-term have broad relevance
across all sectors.
Taking into account the longevity of the products we offer, an
important component of our remuneration policy has always been
a focus on sustainable long-term performance. We continue to
achieve this in a number of ways including:
• an emphasis on cash generation and preservation of capital
in our annual bonus plan performance measures;
• the deferral of a proportion of the annual bonus into Company
shares for three years;
• long-term plans which reward total returns to shareholders
as well as local business performance; and
• shareholding guidelines for executives.
We will continue to review the implications of the emerging
guidelines and regulation on our current remuneration
governance structures, policies and practices and implement
any changes where appropriate.
I hope that you will endorse the policies outlined in our report.
Bridget Macaskill
Chairman, Remuneration Committee
8 March 2010
Directors’ remuneration report
The Directors’ Remuneration Report has been prepared by
the Remuneration Committee (the ‘Committee’) and has
been approved by the Board. Shareholders will be given
the opportunity to approve the report at the Annual General
Meeting on 19 May 2010.
The report has been drawn up in accordance with the
Combined Code on Corporate Governance, Schedule 8 of the
Large and Medium sized Companies and Groups (Accounts and
Reports) Regulations 2008 and the UK Listing Authority Listing
Rules. KPMG Audit Plc has audited the sections contained on
pages 107 to 114.
During the year, the Company has complied with the provisions
of Section 1 and Schedule A of the Combined Code on Corporate
Governance then in force regarding directors’ remuneration.
96
Prudential plc > Annual Report 2009
The Remuneration Committee
The Remuneration Committee is responsible for:
• Determining the remuneration policy for the Chairman and the
executive directors of the Company;
• Monitoring the remuneration of a defined population of senior
management; and
• Reviewing the remuneration arrangements for individuals
earning over £1 million per annum.
The Committee’s terms of reference are available on the
Company’s website and a copy may be obtained from the
Company Secretary. These terms of reference are reviewed
annually.
Each business unit also has its own remuneration committee
with similar terms of reference to ensure effective remuneration
governance in all our businesses.
The members of the Committee during 2009, listed below, are all
independent non-executive directors:
Bridget Macaskill (Chairman)
Keki Dadiseth
Michael Garrett
James Ross
In 2009 the Committee met 11 times. Some key activities during
the year included:
• Agreeing the remuneration arrangements for the new executive
directors on appointment and the remuneration arrangements
for departing executive directors;
• Overseeing the remuneration for the Group Leadership Team
(the most senior circa 100 roles including and immediately
below the Group Executive team) and for employees with
remuneration of over £1 million per annum; and
• Reviewing the latest governance guidelines and consultation
documents, including the Walker Review and FSA Code
of Practice.
The Chairman and the Group Chief Executive attend meetings
by invitation. The Committee also had access to advice from
the Chief Financial Officer, Chief Risk Officer, Group Human
Resources Director, and Director of Group Reward and Employee
Relations. In no case are any persons present when their own
remuneration is discussed.
In making its decisions, the Committee requested consultancy
assistance from Deloitte LLP and PricewaterhouseCoopers LLP.
Market data was sourced from Deloitte LLP, Towers Watson and
McLagan Partners. Slaughter & May and Linklaters provided
legal council, including advice on employment law and the
operation of the Company’s share plans. Some of these firms
also provided other services to the Company: Deloitte LLP,
PricewaterhouseCoopers LLP and Slaughter & May in relation
to advice on taxation and finance matters; Towers Watson in
relation to advisory work on finance matters and Slaughter & May
in relation to advice on commercial and corporate law and general
legal advice.
Remuneration policy
In determining the remuneration policy, the Committee has
applied the following principles:
• a high proportion of total remuneration will be delivered
through performance-related reward with high levels of
reward only being paid for high levels of achievement;
• a significant element of performance-related reward will be
provided in the form of shares;
• the total remuneration package for each executive director
will be set in relation to the relevant employment market;
• the performance of business unit executives will be measured
at both a business unit and Group level;
• performance measures will include absolute financial measures
and relative measures as appropriate, to provide alignment
between achieving results for shareholders and the rewards
for executives;
• reward structures will be designed to deliver fair and equitable
remuneration for all employees; and
• reward arrangements will be designed to minimise regulatory
and operational risk.
These principles help shape remuneration policies and practices
which align with our business model and ensure a strong
governance approach is adopted. These remuneration principles
are applied across all business units and therefore apply to all
employees in the Group. The Committee continues to review
these principles regularly.
97
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Directors’ remuneration report > For the year ending 31 December 2009 > continued
Main components of remuneration
The table below summarises the Company’s policies in
respect of each of the key elements of executive directors’
remuneration as they applied during the year and will apply
in 2010.
Element
Purpose
Measures
Practice
Total compensation
Provides appropriate
compensation structures
and reward payouts
which attract high calibre
executive directors.
Benchmarked against the relevant
market for the role, taking into
account the individual’s contribution
and experience.
Market data is considered from the FTSE 50 for UK roles,
UK-based asset management companies for M&G, Asia general
industry and insurance sector for the executive director with
responsibility for Asia, and US insurers for the executive director
with responsibility for the US.
Base salary
Provides part of the fixed
element of remuneration
necessary to recruit and
retain the best people
for our business.
Annual bonus
(including deferral)
Long-term incentive
Rewards the
achievement of
business results and
individual objectives
in a given year.
Deferral requirements
provide an exposure
to the long-term
performance of
the Company.
Rewards related to
achieving sustainable
long-term returns to
shareholders.
Consideration is also given to
remuneration arrangements and
levels for other Prudential employees.
Scope of role and market
position, as well as individual’s
contribution and experience, taking
into account total remuneration,
market movement of salaries in
comparator organisations and salary
increases for employees generally.
Market position compared with
companies of similar size and
complexity to Prudential in the
relevant market for the role.
The Remuneration Committee reviews salaries annually.
Any changes in basic salaries are effective from 1 January.
Details of the approach taken for base salaries in 2010 is set out
on page 100.
For other employees, base salary increases around the
Group will reflect the local market. It is anticipated that the pay
review for other employees will result in average increases of
approximately 2.5% in the UK, 3% in Asia and 3% in the US.
Group financial measures,
business unit financial measures
and individual contribution.
Executive directors have annual bonus plans based on the
achievement of financial performance measures and individual
contribution. Bonuses awarded are not pensionable.
Required to defer a portion
of annual bonus into Prudential
shares for three years.
The annual bonus for the Chief Executive of Jackson includes
a 10% share of a senior management bonus pool determined
by the performance of Jackson for the year.
Group – Relative Total Shareholder
Return (TSR) performance against
a peer group.
All executive directors participate in the Group Performance
Share Plan under which awards are based on relative TSR
performance against a peer group of international insurers.
Business unit – Typically internal
measures which contribute to the
long-term success of the business
unit and therefore the Group.
The Chief Executives of the UK & Europe, Asia and Jackson
also participate in the Business Unit Performance Plan. For Asia
and Jackson, awards are based on the growth in Shareholder
Capital Value on an European Embedded Value (EEV) basis.
For the UK & Europe, awards to be made in 2010 will be based
on relative TSR as per the Group plan above.
The Chief Executive of M&G also participates in the
M&G Executive Long-term Incentive Plan (LTIP).
All-employee share plans
Allow for all employees to
participate in the success
of the Company.
The structure of plans are
determined by market practice
and local legislation.
Executive directors are eligible to participate in all-employee plans
on the same basis as other employees.
Benefits
Provide part of the fixed
element of remuneration
set at an appropriate level
compared with peers.
Determined by market practice.
Executive directors receive certain benefits, for example
participation in medical insurance schemes, the use of a car and
driver and security arrangements. No benefits are pensionable.
Executive directors are also entitled to participate in certain M&G
investment products on the same basis as other members of staff.
98
Prudential plc > Annual Report 2009
Element
Purpose
Measures
Practice
Pension and
long-term savings
Provide income in
retirement in a cost
efficient manner.
Determined by market practice.
Policy for new appointments (since
June 2003) is to provide a pension
contribution as a fixed percentage
of salary.
It is the Company’s policy to provide efficient pension vehicles to
allow executive directors to save for their retirement and to make
appropriate contributions to their retirement savings plans.
The level of Company contribution is related to competitive
practice in the executive directors’ employment markets.
In 2010, the Long Term Savings Plan (LTSP) and the Alternative
Retirement Benefit Scheme (ARBS) will be established as
long-term savings vehicles for executive directors and
other employees.
Shareholding guidelines
Encourage executives to
build up an interest in the
Company’s shares and
support alignment with
shareholder interests.
Determined by market practice.
The Group Chief Executive and Chief Executive of M&G
are required to hold shares equal to 200% of salary.
A policy of 100% of salary applies for other executive
director roles.
The following table summarises the remuneration structure for each executive director for 2010. The balance of remuneration
elements for the Group Chief Executive, Group Financial Officer, Chief Executive UK & Europe and Chief Executive Asia roles
has been adjusted. The incentive opportunity continues to be primarily based on long-term performance.
Director
Role
Base salary at
1 January 2010
Maximum
% of salary
Deferral
requirement
Maximum
% of salary
Maximum Maximum
% of salary
% of salary
Long-term incentive (LTI)
Group
Performance Business Unit
Share Plan Performance
Plan (BUPP)
(GPSP)
Total
LTI
Annual bonus
Rob Devey
Chief Executive
UK & Europe
Chief Executive Jackson
Clark Manning
Michael McLintock Chief Executive M&G
£550,000
$1,050,000
£350,000
160%
c.320% 1
note 2
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Chief Financial Officer
Chief Executive Asia
Group Chief Executive
£550,000
HK$8,000,000
£900,000
160%
160%
180%
40% of total bonus
30% of total bonus
50% of total bonus
awarded above £500,000
40% of total bonus
40% of total bonus
50% of total bonus
100%
230%
100%
200%
100%
300%
100%
230%
note 2
–
100%
–
200%
460%
note 2
200%
200%
300%
Notes
1
Clark Manning’s annual bonus figure includes a notional figure for his 10 per cent share of the Jackson senior management bonus pool based on the
performance of Jackson.
2 Michael McLintock’s annual bonus and long-term incentive opportunity under the M&G Executive LTIP are based on M&G’s performance both in
absolute terms and relative to its peers. The annual bonus and long-term incentive opportunities are determined by an assessment of market
competitive rewards for median and superior performance. In line with practice in the asset management sector, there is no specified maximum
incentive award. Michael’s total remuneration is subject to an overriding cap such that his total remuneration should not be greater than three per
cent of M&G’s annual IFRS profits.
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Directors’ remuneration report > For the year ending 31 December 2009 > continued
2010 remuneration policy
Proportions of fixed and variable remuneration
On a policy basis, the distribution between fixed and variable
and short and long-term remuneration for our executive directors
is as follows:
Chief Executive, Asia
Chief Executive, UK & Europe
Chief Executive, M&G
Chief Executive, Jackson
Chief Financial Officer
Group Chief Executive
Superior
Good
Superior
Good
Superior
Good
Superior
Good
Superior
Good
Superior
Good
0
20
40
60
80
100
%
Base salary
Annual bonus
Long-term incentive
The assumptions used are:
• Good performance leads to plan bonus and threshold vesting under
long-term incentive plans.
• Superior performance leads to maximum annual bonus and maximum
long-term incentive vesting.
Components of remuneration
Base salary
The Committee normally reviews base salaries on an annual
basis, taking into account the relevant market for the role, total
remuneration and the individual’s contribution and experience.
No increases to base salaries were made for executive directors
or senior executives in 2009.
Following a review of base salaries during the year, changes have
been made to the base salaries for 2010 for some of the executive
director roles.
With effect from 1 January 2010, Tidjane Thiam’s salary has been
increased from £875,000 to £900,000 to reflect better the market
competitive rate for the role.
Michael McLintock’s salary has been increased from £320,000
to £350,000. Michael’s last increase in base salary was in
January 2004. Michael’s remuneration structure and quantum
is determined annually on a total compensation basis and
therefore the increase to base salary will not increase his annual
or long-term incentive opportunity.
At the time of his appointment in November 2006, Barry Stowe’s
base salary was denoted in sterling, and delivered in Hong Kong
dollars using the prevailing exchange rate. This resulted in a high
level of volatility in compensation, particularly in 2008. During
2009 it was considered appropriate to use a fixed exchange rate
for 2009 based on the actual average exchange rate for 2008, and
to move to a Hong Kong dollar denominated salary from 2010.
From 1 January 2010, Barry’s salary will be HK$8,000,000. This
reflects the exchange rate at the time Barry was appointed.
No adjustment has been made to the base salaries for Clark
Manning, Rob Devey or Nic Nicandou at 1 January 2010.
The base salaries for executive directors for 2010 are set out
on page 99.
Annual bonus
The 2009 annual bonus plans for the majority of executive
directors included performance measures at a Group and
business unit level based on:
• IFRS profit;
• EEV profit;
• Cash flow; and
• Insurance Group Directive (IGD) Capital Surplus.
Michael McLintock’s business unit annual bonus plan includes
growth in third party funds, M&G investment performance and
M&G IFRS profit. The performance measures for Jackson are
different and are identified later in this section.
A proportion of the annual bonus for all executive directors is
based on individual strategic goals. These include the executive
director’s contribution to Group strategy as a member of the
plc Board, and specific goals related to their functional and/or
business unit roles. In addition, all employees have a requirement
to comply with the regulatory, governance and risk management
practices and policies as it applies to their role and business area.
Specifically all business units must remain within the Group’s
risk appetite.
The proportions of financial and individual performance for each
executive director are:
Financial measures
Group
Business
unit
20%
25%
10%
80%
20%
80%
60%
65%
75%
–
60%
–
Individual
strategic goals
20%
10%
15%
20%
20%
20%
Rob Devey
Clark Manningnote 1
Michael McLintock
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Note
1
The proportions for Clark Manning’s annual bonus include a Jackson
senior management bonus pool which is based on Jackson financial
performance. The proportions shown in the table incorporate a
notional level for this pool.
The proportions and measures for the 2010 bonus plans will be as
set out above.
100 Prudential plc > Annual Report 2009
Despite the continued turbulence in the financial markets,
Prudential has achieved strong results against each of the annual
bonus plan measures for 2009. In determining 2009 annual bonus
awards, the Committee took into account the Group’s and/or
business units’ absolute financial results achieved both
in relation to targets set and against 2008 performance levels.
Market expectations against all performance measures were
also considered.
2009 Group performance against the IFRS profit, EEV profit and
IGD Capital Surplus was strong. Holding company Cash flow was
also at a level which resulted in a payment being made for this
performance measure.
Under the UK annual bonus plan, IFRS profit, Cash flow and IGD
Capital Surplus performance against targets set was strong. EEV
profit performance was also above the target set which resulted
in a payment being made for this performance measure.
Under the Asia annual bonus plan, IFRS profit, Cash flow and IGD
Capital Surplus performance against targets set was strong. EEV
profit was below plan performance, and as a result no bonus
payment was made for this performance measure.
In addition to IFRS profit, M&G’s annual bonus plan performance
measures include growth in third party funds under management
and comparative fund investment performance. Performance
achieved against IFRS profit was lower than in 2008, primarily due
to a lower FTSE All Share index in 2009. This result was partially
offset by additional income earned on the higher than anticipated
inflows as well as an improved return on the Corporate Bond
and investment book. Performance achieved against both the
growth in third party funds and investment performance measures
was strong.
Clark Manning’s annual bonus plan includes the Group
performance measures noted above and also a share of the
Jackson senior management bonus pool based on Jackson
IFRS pre-tax operating income and EEV new business profit.
The 2009 pool is higher than the pool for 2008 reflecting overall
strong performance.
The annual bonus payments included in the table on page 107 are
summarised in the table below:
Rob Devey†
Clark Manning
Michael McLintock
Nic Nicandrou†
Nick Prettejohn
Barry Stowe
Tidjane Thiam
Mark Tucker
% of 2009 salary*
109%
291%
547%
100%
104%
96%
139%
115%
*Unless otherwise stated, the base salary figures used in the table above
represent the actual levels paid to executive directors in 2009 as found
in the table on page 107.
†In order to provide a meaningful comparison, the base salary figures
used in the table above for Nic Nicandrou and Rob Devey have
been annualised.
The maximum award levels under the annual bonus plans for 2010
are set out on page 99.
Long-term incentive
All executive directors participate in the Group Performance Share
Plan (GPSP) under which awards are based on relative Total
Shareholder Return (TSR) performance against a peer group of
international insurers.
Executive directors with regional responsibility also participate in
plans linked to the relevant business unit’s success.
The Committee will continue to keep the performance measures
used in the long-term incentive plans under review to ensure their
continued relevance.
The 2010 award levels under the two plans are set out on page 99.
Group Performance Share Plan (GPSP) –
all executive directors
The GPSP delivers shares to participants subject to performance
over a three year period. The performance measure for this plan
is TSR. Prudential’s TSR performance is measured over the
performance period compared with the TSR performance of an
index comprised of peer companies. TSR is measured on a local
currency basis which is considered to have the benefits of
simplicity and directness of comparison.
The companies in the index for 2010 include Aegon, Allianz,
Aviva, Axa, Generali, ING, Legal & General, Manulife, Old Mutual
and Standard Life. The companies in the index for awards made
in 2008 and 2009 included the companies above and also Friends
Provident, which was removed from the comparator group
for both set of awards with effect from November 2009 as
a result of its delisting.
The vesting schedule for awards under the GPSP is set out in the
table below.
Prudential’s TSR relative to the index
at the end of the performance period
Less than index return
Index return
Index return x 110%
Index return x 120%
% of award
which vests*
0%
25%
75%
100%
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TSR vs Index
% of award which vests
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50
25
0
100%
110%
120%
Performance achievement
101
Directors’ remuneration report > For the year ending 31 December 2009 > continued
For any GPSP award to vest, the Committee must also be
satisfied that the quality of the Company’s underlying financial
performance justifies the level of award delivered at the end of the
performance period and may adjust the vesting level accordingly
at its discretion. To ensure close alignment with our shareholders’
long-term interests, participants receive the value of reinvested
dividends over the performance period for those shares that vest.
In order to achieve modest tax and national insurance savings for
both the Company and the individual, from 2010 a portion of the
award will be delivered using an HM Revenue & Customs (HMRC)
approved schedule for UK based employees.
Business Unit Performance Plan (BUPP) –
executive directors with regional responsibilities
For executive directors with regional responsibilities, the BUPP
delivers shares subject to performance over a three year
performance period.
For outstanding awards, the performance measure under the
BUPP is Shareholder Capital Value (SCV) which is shareholders’
capital and reserves on a European Embedded Value (EEV) basis
for each regional business unit. Vesting depends on the increase in
SCV over the performance period, and the required growth rates
are different for each of Prudential’s business regions in order to
reflect the relative maturity of each market and business
environment.
The vesting schedules for outstanding BUPP awards are set out
in the table below. The unvested portion of any award lapses.
% of award which vests*
UK & Europe
Jackson
Asia
Compound annual growth in
SCV over three years
0%
30%
75%
100%
< 8%
8%
11%
14%
< 8%
8%
10%
12%
< 15%
15%
22.5%
30%
*Straight line vesting occurs between the performance levels
provided above.
For the awards to be made in 2010, the performance measure and
targets for the Jackson and Asia BUPP will remain as set out above.
For the UK & Europe BUPP, the 2010 award will be based on the
same relative TSR measure as applies under the GPSP.
For any BUPP award to vest, the Committee must also be satisfied
that the quality of underlying financial performance of each
business unit justifies the level of award delivered at the end of the
performance period and may adjust vesting levels accordingly at
its discretion. To ensure close alignment with our shareholders’
long-term interests, participants receive the value of reinvested
dividends over the performance period for those shares that vest.
M&G Executive Long-Term Incentive Plan –
Michael McLintock
Under the M&G Executive Long-Term Incentive Plan an award of
phantom shares is made with a notional starting share price of £1.
The phantom share price at vesting will be determined by the
increase or decrease in M&G’s IFRS profits over the three year
performance period. The number of phantom shares subject
to the award will be adjusted at the end of the three year
performance period to take account of the performance of
M&G both in terms of levels of profitability and fund investment
performance as follows:
Profit growth
• Awards will be scaled back based on profit performance
achieved if profits in the third year are less than the average
of the profits over the performance period;
• No adjustment will be made if the profits at the end of the third
year are at least equal to the average of the profits over the
performance period;
• No award will vest in the event of a loss or zero profit,
irrespective of fund performance; and
• Between the two points above, the scaling back will be on
a straight line basis from 0 per cent to 100 per cent of the award.
Investment performance
• Where investment performance over the three-year
performance period is in the top two quartiles, the number of
phantom shares vesting will be enhanced. A sliding scale will
apply up to 200 per cent of the annual award, which is awarded
when top quartile performance is achieved; and
• Awards will be forfeited if investment performance is in the
fourth quartile, irrespective of any profit growth.
102 Prudential plc > Annual Report 2009
The value of the vested phantom shares will be paid in cash after
the end of the three year performance period.
The number of phantom shares in the award depends on the
performance of M&G in the financial year in respect of which
the award is made and an assessment of Michael McLintock’s
contribution. Therefore the base value of the award to be made
in 2010 relates to M&G’s performance in 2009. The expected
value of the award is determined by an independent third party
(PricewaterhouseCoopers LLP). Based on 2009 performance,
an award of 987,179 phantom shares of £1 with an anticipated
value of £1,925,000 will be made in 2010. The ultimate value of
the award will be based on the profit and investment performance
of M&G over three years.
All-employee plans
Save As You Earn (SAYE) schemes
UK based executive directors are eligible to participate in the
Prudential HMRC approved SAYE scheme and the Asia based
executive director can participate in the equivalent International
SAYE scheme. These schemes allow employees to save towards
the exercise of options over Prudential plc shares, at an option
price set at the beginning of the savings period at a discount of up
to 20 per cent to the market price.
Savings contracts may be up to £250 per month for three or five
years. On maturity at the end of the set term, participants may
exercise their options within six months of the end of the savings
period and purchase Prudential plc shares. If an option is not
exercised within six months, participants are entitled to a refund
of their cash savings plus interest if applicable under the rules.
Shares are issued to satisfy options that are exercised. No options
may be granted under the schemes if the grant would cause the
number of shares which have been issued, or which remain
issuable pursuant to options granted in the preceding 10 years
under the scheme and other share option schemes operated by
the Company, or which have been issued under any other share
incentive scheme of the Company, to exceed 10 per cent of the
Company’s ordinary share capital at the proposed date of grant.
Share Incentive Plan (SIP)
UK-based executive directors are also eligible to participate in
the Company’s HMRC approved SIP which allows all UK based
employees to purchase shares of Prudential plc (partnership
shares) on a monthly basis out of gross salary. For every four
partnership shares bought, an additional matching share is
awarded, which is purchased by Prudential on the open market.
Dividend shares accumulate while employees participate in the
plan. Partnership shares may be withdrawn from the scheme
at any time. If the employee withdraws from the plan within five
years, the matching shares are forfeited and if within three years,
dividend shares are also forfeited.
Pensions and long-term savings policy
It is the Company’s policy to provide efficient pension vehicles to
allow executive directors to save for their retirement and to make
appropriate contributions to their retirement savings plans.
For executive directors hired after 30 June 2003, the Company’s
policy is to provide a supplement of 25 per cent of salary. This
includes, where relevant, any Company contributions to the staff
defined contribution pension plan, which UK executive directors
may choose to join. This plan has no salary cap.
This approach applies to Rob Devey, Nic Nicandrou, Barry Stowe
and Tidjane Thiam.
Clark Manning is eligible to participate in Jackson's Defined
Contribution Retirement Plan, a qualified 401(k) retirement plan,
on the same basis as all other US based employees. The Company
provides matching contributions of six per cent of base salary. He
is also eligible to participate in the profit sharing element of the
plan that provides eligible participants with an annual profit
sharing contribution, depending on the financial results of
Jackson for the plan year, with a maximum of six per cent of
base salary.
Michael McLintock participates in a contributory defined benefit
scheme that provides a target pension of two thirds of final
pensionable earnings on retirement at age 60. Participation is on
the same basis as other employees who joined at the same date.
Benefits under the plan are subject to a notional scheme earnings
cap, set at £117,600 and £123,600 for the 2008/09 and 2009/10
tax years respectively. Michael is entitled to supplements based
on his salary above the notional earnings cap.
In 2010, the Long Term Savings Plan (LTSP) and the Alternative
Retirement Benefit Scheme (ARBS) will be established to provide
long-term savings vehicles for executive directors and other
employees. The LTSP will be established under ordinary UK tax
legislation for Employee Benefit Trusts, and the ARBS will be
established under specific UK tax legislation relating to Employer
Financed Retirement Benefits Schemes. If the Trustees accept
annual discretionary contributions to either of these plans, no
cash supplement for pension purposes will be paid to UK based
executive directors.
Executive directors’ joining and
leaving arrangements in 2009
Mark Tucker
The 2008 Directors’ Remuneration Report provided details
of the remuneration arrangements that would apply to Mark
Tucker subsequent to his resignation as Group Chief Executive.
These arrangements were implemented as intended by the
Committee. In January 2010, a payment equivalent to three
months salary and benefits was made to Mark relating to
restrictions on employment.
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Directors’ remuneration report > For the year ending 31 December 2009 > continued
Tidjane Thiam
The 2008 Directors’ Remuneration Report provided details of the
remuneration arrangements that would apply to Tidjane Thiam
on appointment as Group Chief Executive from 1 October 2009.
To reflect the transition of responsibilities from Mark Tucker,
the Committee decided that it was appropriate that Tidjane’s
arrangements be implemented with effect from 1 July 2009.
Nick Prettejohn
Nick Prettejohn resigned from the position of Chief Executive
UK & Europe and left the Group on 30 September 2009. The
remuneration arrangements on leaving that were approved by the
Committee included:
• A payment equivalent to nine months’ salary and benefits,
paid in instalments in October 2009 and January 2010 relating
to restrictions on employment up to 1 April 2010;
• Prorated 2009 annual bonus (9/12ths) based on his length of
service during the year and fully paid in cash in March 2010;
• Outstanding deferred share awards were released in
accordance with the scheme rules; and
• The long-term incentive plan awards for 2007, 2008 and 2009
will vest at the end of each relevant three year performance
period pro-rated based on service, i.e. 33/36ths, 21/36ths
and 9/36ths respectively. Vesting will remain dependent on
performance achieved over the relevant performance periods
and any shares released will occur at the same time as for all
other participants in the GPSP and BUPP.
Rob Devey
Rob Devey’s remuneration structure on appointment to Chief
Executive UK & Europe is summarised on page 99. Rob’s deferred
share and long-term incentive award buyout arrangements, that
were approved by the Committee in order to compensate him for
losses incurred as a result of leaving his previous employer, can
be found under ‘Other share awards’ on page 111.
In order for Rob to take up the position with Prudential, he was
required to relocate. To facilitate this move, the Committee
approved the payment of stamp duty and other incidental moving
costs of £131,310. Should Rob leave the Group within two years,
or give notice of intention to leave, these payments would be
clawed back. Further details of these benefits can be found on
page 107.
Nic Nicandrou
Nic Nicandrou’s remuneration structure on appointment to Chief
Financial Officer is summarised on page 99. Nic’s deferred share
and long-term incentive award buyout arrangements, that were
approved by the Committee in order to compensate him for losses
incurred as a result of leaving his previous employer, can be found
under ‘Other share awards’ on page 111.
In order for Nic to take up the position with Prudential, he was
required to relocate. To facilitate this move, the Committee
approved payment of stamp duty and payment of the subsidy
on the interest due on his mortgage. Should Nic leave the
Group within two years, or give notice of intention to leave,
these payments would be clawed back. Nic has not yet moved
house and therefore he has not yet been reimbursed for any
relocation costs.
Service Contracts
Chairman’s letter of appointment and benefits
Harvey McGrath joined as a non-executive director on
1 September 2008 and became Chairman from 1 January 2009.
He is paid an annual fee of £500,000 which is fixed for three years.
A contractual notice period of 12 months by either party applies.
Harvey is provided with life assurance cover of four times his
annual fees in lieu of death in service benefit, and the use of
a car and driver. No pension allowance is paid and he is not a
member of any Group pension scheme. Harvey is also entitled
to participate in a medical insurance scheme but did not take up
this benefit.
Directors’ service contracts and letters of appointment
Executive directors have contracts that terminate on their normal
retirement date. The normal retirement date for Clark Manning
and Barry Stowe is the date of their 60th birthdays. For other
executive directors, the normal retirement date is the date of their
65th birthdays.
The normal notice of termination the Company is required to
give executive directors is 12 months. Accordingly, in normal
circumstances the director would be entitled to one year’s salary
and benefits in respect of the notice period on termination.
Additionally, outstanding awards under annual and long-term
incentive plans may vest depending on the circumstances and
according to the rules of the plans. When considering any
termination of a service contract, the Committee will have regard
to the specific circumstances of each case, including a director’s
obligation to mitigate his loss. Payments additionally would be
phased over the notice period.
Policy on external appointments
Subject to the Group Chief Executive’s or Chairman’s approval,
executive directors are able to accept external appointments as
non-executive directors of other organisations. Any fees paid
may be retained by the executive director. In 2009, Tidjane Thiam
earned 15,000 euros and Michael McLintock earned £42,500
from external companies. Other directors served as non-executive
directors on the boards of companies in the educational and
cultural sectors without receiving a fee for such services.
Non-executive directors’ letters of appointment
Non-executive directors do not have service contracts but are
appointed pursuant to letters of appointment with notice periods
of six months without liability for compensation.
Under the terms of their letters of appointment, the non-executive
directors serve for an initial term of three years following their
election by shareholders at the Annual General Meeting after
their appointment by the Board. Thereafter, the Board may invite
the directors to serve for an additional period.
104 Prudential plc > Annual Report 2009
Rob Devey
Clark Manningnote 1
Michael McLintock
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Date of contract
Notice period
to the Company
Notice period
from the Company
1 July 2009
7 May 2002
21 November 2001
26 April 2009
18 October 2006
20 September 2007
12 months
12 months
6 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
Note
1
The contract for Clark Manning is a renewable one year fixed term contract. The contract is renewable automatically upon the same terms and
conditions unless the Company or Clark Manning gives at least 90 days’ notice prior to the end of the relevant term.
Keki Dadiseth
Michael Garrett
Ann Godbehere
Bridget Macaskill
Kathleen O’Donovan
James Ross
Lord Turnbull
Date of initial
appointment
by the Board
Commencement
date of
current term
1 April 2005
1 September 2004
2 August 2007
1 September 2003
8 May 2003
6 May 2004
18 May 2006
AGM 2008
AGM 2008
AGM 2008
AGM 2007
AGM 2007
AGM 2008
AGM 2009
Expiry date
of current
term
AGM 2011
AGM 2011
AGM 2011
AGM 2010
AGM 2010
AGM 2011
AGM 2012
Non-executive directors’ remuneration
Non-executive directors are not eligible to participate in
annual bonus plans, long-term incentive plans or pension
arrangements. Their fees are determined by the Board and reflect
their individual responsibilities, including committee membership
as appropriate. The Board reviews fees annually and the last fee
change was effective 1 July 2008.
The annual fees which were paid in 2009 for non-executive
directors’ board and committee membership are detailed in the
table below.
Basic fee
Audit Committee Chairman – additional fee
Audit Committee member – additional fee
Remuneration Committee Chairman – additional fee
Remuneration Committee member – additional fee
Senior Independent Director – additional fee
From
1 July 2008
£
66,500
50,000
20,000
22,500
10,000
30,000
Currently the non-executive directors use the net value of £25,000
of their total annual fees to purchase shares in the Company.
Shares are purchased each quarter and are held at least until
retirement from the Board.
Annual
fee as at
1 January 2009
(or on appointment if later)
Sir Winfried Bischoff note 1
Keki Dadiseth
Michael Garrett
Ann Godbehere note 2
Bridget Macaskill
Kathleen O’Donovan note 3
James Ross
Lord Turnbull
£
66,500
76,500
76,500
86,500
89,000
116,500
106,500
86,500
Annual
fee as at
1 January 2010
£
n/a
76,500
76,500
116,500
89,000
86,500
106,500
86,500
Notes
1
Sir Winfried Bischoff left the Company on 15 September 2009.
2 Ann Godbehere became Chairman of the Audit Committee on
3
1 October 2009; she was previously a member of the Audit Committee.
Kathleen O’Donovan ceased to be Chairman of the Audit Committee
on 30 September 2009 but remains a member of the Audit Committee.
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Directors’ remuneration report > For the year ending 31 December 2009 > continued
Keki Dadiseth
Rob Devey
Michael Garrett
Ann Godbehere
Bridget Macaskill
Clark Manning
Harvey McGrath
Michael McLintock
Nic Nicandrou
Kathleen O’Donovan
James Ross
Barry Stowenote 1
Tidjane Thiam
Lord Turnbull
1 January
2009*
31 December
2009
24,004
–
26,731
7,333
19,842
113,155
292,888
458,650
–
17,059
15,371
108,433
205,067
9,038
27,489
50,575
32,425
11,518
23,970
277,273
296,785
663,818
114,653
20,621
18,643
125,519
291,901
12,562
8 March
2010
27,489
50,575
32,425
11,518
23,970
277,273
296,785
663,818
114,653
20,621
18,643
125,519
291,901
12,562
*Or date of appointment if later.
Note
1
Part of Barry Stowe’s interests in shares are made up of 30,339 ADRs
(representing approximately 60,678 ordinary shares). 8,513.73 of the
ADRs are held within an investment account which secures premium
financing for a life assurance policy.
TSR performance graph
The line graph below shows the TSR of the Company during the
five years from 1 January 2005 to 31 December 2009 against the
FTSE 100. This comparison was selected as Prudential is a major
company in the FTSE 100.
Shareholding guidelines
As a condition of serving, all executive and non executive directors
are currently required to have beneficial ownership of 2,500
ordinary shares in the Company. This interest in shares must be
acquired within 12 months of appointment to the Board if the
director does not have such an interest upon appointment.
Executive directors should have a substantial shareholding which
should be built up over a period of five years. Shares earned and
deferred under the annual bonus plan are included in calculating
the executive director’s shareholding.
Until the guideline is met, at least half the shares released from
long-term incentive awards after tax should be retained by the
executive director.
Rob Devey
Clark Manning
Michael McLintock
Nic Nicandrou
Barry Stowe note 2
Tidjane Thiam
Guideline
shareholding
policy – after
five years
Shareholding at
8 March 2010
as a % of
salary
note 1
1 x salary
1 x salary
2 x salary
1 x salary
1 x salary
2 x salary
59%
265%
1214%
133%
122%
208%
Notes
1
2
Based on the share price as at 31 December 2009 (£6.40).
Shareholdings for Barry Stowe include American Depositary
Receipts (ADR’s). One ADR is equivalent to two
Prudential plc shares.
Directors’ shareholdings
The interests of directors in ordinary shares of the Company are
set out below. This includes deferred annual bonus awards and
interests in shares awarded on appointment detailed in the table
on ‘Other Share Awards’ on page 111.
The interests of directors in shares of the Company include
changes between 31 December 2009 and 8 March 2010.
All interests are beneficial.
TSR over the performance period is the growth in value of a share
plus the value of dividends paid, assuming that the dividends are
reinvested in the Company’s shares on the day on which they
were paid.
106 Prudential plc > Annual Report 2009
Directors’ remuneration for 2009
Salary/Fees
Bonus
Benefits*
Chairman
Harvey McGrath
David Clementi (until 31 December 2008)
Executive directors
Phillip Broadley (until 15 May 2008)
Rob Devey (from 16 November 2009)note 1
Clark Manning note 2
Michael McLintock note 3
Nic Nicandrou (from 28 October 2009)note 4
Nick Prettejohnnote 5
Barry Stowenote 6
Tidjane Thiamnote 7
Mark Tucker note 8
500
69
696
320
98
488
646
763
731
Total executive directors
3,811
600
2,028
1,750
550
505
618
1,056
841
7,948
42
138
29
53
5
40
262
49
99
675
Non-executive directors
Sir Winfried Bischoff note 9
Keki Dadisethnote 10
Michael Garrett
Ann Godbehere
Bridget Macaskill
HarveyMcGrath (until 31 Dec 2008)
Kathleen O’Donovan
James Ross
Lord Turnbull
Total non-executive directors
47
86
77
94
89
109
107
87
696
Cash
supplements
Total
for pension Other cash Emoluments
2009
purposes† payments
Total
Emoluments
Value of
anticipated
releases from
2008 LTIPs in respect
including cash of performance
supplements periods ending
31 December
2009§
for pension
purposes‡
£000
1
–
6
1
63
162
87
183
503
607
308
915
1,223
2,572
763
1,098
1,731
7,387
542
808
2,753
2,129
654
1,703
1,688
1,955
2,162
715
440
1,768
2,154
1,444
1,207
1,244
2,227
13,852
10,484
47
86
77
94
89
109
107
87
696
63
73
73
81
86
167
108
101
81
833
Overall total
5,007
7,948
717
503
915
15,090
12,032
7,387
* Benefits include where provided the use of a car and driver, medical insurance, security arrangements and expatriate benefits.
† Pension supplements that are paid in cash are included in the table. The policy on pensions is described in the section on ‘Pensions and long-term savings
policy’ on page 103. The pension and long-term savings arrangements for current executive directors are described in the section on ‘Directors’ pensions
and life assurance’ on page 113.
‡ 2009 figures include deferred share awards made from 2009 annual bonus plans which are detailed in the section ‘Other share awards’ on page 111.
§ Value of anticipated LTIP releases is the total of cash paid plus, for shares released, the value of the released shares based on the share price at
31 December 2009. All executive directors participate in long-term incentive plans and the details of share releases from awards with a performance
period ending 31 December 2009 are provided in the footnote to the tables on share awards on pages 109 to 110. Executive directors’ participation
in all-employee plans are detailed on page 113.
Notes
1
As part of Rob Devey’s appointment terms, it was agreed that any bonus award for Rob would be assessed as if he had been in employment for the
whole of 2009. It is anticipated that a deferred share award from the 2009 annual bonus valued at £240,000 will be made to Rob. This is included in
the 2009 bonus figure. Actual costs reimbursed to Rob as part of his relocation arrangements as detailed on page 104 are included in the benefits
figure. It should be noted that Rob elected not to receive his cash supplement for pension purposes in full during 2009. It is anticipated that the
Company will make a request to the Trustees of the Alternative Retirement Benefit Scheme during 2010 to accept a contribution for an amount
equivalent to this supplement.
2 Clark Manning’s bonus figure excludes a contribution of $14,700 from a profit sharing plan which has been made into a 401(k) retirement plan.
This is included in the table on pension contributions on page 114. It is anticipated that a deferred share award from the 2009 annual bonus valued
at $476,250 will be made to Clark. This is included in the 2009 bonus figure.
It is anticipated that for Michael McLintock a deferred share award from the 2009 annual bonus valued at £625,000 will be made. This is included
in the 2009 bonus figure.
3
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Notes continued
4 As part of Nic Nicandrou’s appointment terms, it was agreed that any bonus award for Nic would be assessed as if Nic had been in employment for
the whole of 2009. It is anticipated that a deferred share award from the 2009 annual bonus valued at £220,000 will be made to Nic. This is included in
the 2009 bonus figure. As detailed on page 104, Nic has not yet been reimbursed for any relocation expenses. It should be noted that Nic elected not
to receive his cash supplement for pension purposes in full during 2009. It is anticipated that the Company will make a request to the Trustees of the
Long Term Savings Plan during 2010 to accept a contribution for an amount equivalent to this supplement.
6
5 As outlined on page 104, Nick Prettejohn’s 2009 annual bonus payment has been prorated for length of service during the year and is based on
performance outcomes achieved at the end of 2009. This bonus will be fully paid in cash in March 2010. The figure in the ‘Other cash payments’
column reflects a termination payment that was agreed as part of his leaving arrangements which was paid in instalments on 13 October 2009 and
11 January 2010 as detailed on page 104.
It is anticipated that for Barry Stowe a deferred share award from the 2009 annual bonus valued at HK$2,248,852 will be made. This is included in the
2009 bonus figure. Barry’s benefits primarily relate to his expatriate status including costs of £148,051 for housing, £41,528 for children’s education
and £32,607 for home leave.
Tidjane Thiam’s 2009 annual bonus outcome was determined taking into account the period of time he was remunerated as Chief Financial Officer
and Group Chief Executive. It is anticipated that for Tidjane a deferred share award from the 2009 annual bonus valued at £528,137 will be made.
This is included in the 2009 bonus figure.
7
8 As part of Mark Tucker’s remuneration arrangements following his resignation from Prudential, it was agreed that his 2009 annual bonus payment
would be prorated based on length of service during the year and paid at a target level of performance. The figure in the ‘Other cash payments’
column reflects a termination payment that was agreed as part of his leaving arrangements as detailed on page 103 and paid on 11 January 2010.
Sir Winfried Bischoff left the Company on 15 September 2009.
9
10 Keki Dadiseth was paid allowances totalling £5,398 in 2009 in respect of his accommodation expenses in London whilst on the Company's business
as is the usual practice for directors who are not resident in the UK.
Summary of remuneration provided for 2009
The chart opposite summarises the remuneration received by
executive directors in 2009. This includes actual base salary
payments made during the year, total annual bonus awards
for 2009 performance including deferrals into shares, and
long-term incentive plan releases in respect of awards made
in 2007. Tidjane Thiam, Rob Devey and Nic Nicandrou did
not have long-term incentive awards for 2007.
108 Prudential plc > Annual Report 2009
Directors’ outstanding long-term incentive awards
Share-based long-term incentive awards
The section below sets out the outstanding share awards under the Restricted Share Plan (RSP), the Group Performance Share Plan
(GPSP) and the Business Unit Performance Share Plan (BUPP).
Year of
initial
award
2009
2009
2006
2006
2007
2007
2008
2008
2009
2009
2006
2007
2008
2009
2009
2006
2006
2007
2007
2008
2008
2009
2009
2007
2007
2008
2008
2009
2009
2008
2009
2005
2006
2007
2008
Plan name
Rob Devey
GPSP
BUPP
Total
Clark Manning
GPSP
BUPP
GPSP
BUPP
GPSP
BUPP
GPSP
BUPP
Total
Michael McLintock
GPSP
GPSP
GPSP
GPSP
Total
Nic Nicandrou
GPSP
Total
Nick Prettejohn
GPSP
BUPP
GPSP
BUPP
GPSP
BUPP
GPSP
BUPP
Total
Barry Stowe
GPSP
BUPP
GPSP
BUPP
GPSP
BUPP
Total
Tidjane Thiam
GPSP
GPSP
Total
Mark Tucker
RSP
GPSP
GPSP
GPSP
Total
Conditional
share
awards
outstanding
at 1 January
2009
(Number
of shares)
241,415
120,707
191,140
95,570
182,262
91,131
Conditional
awards
in 2009
(Number
of shares)
120,898
120,897
241,795
468,476
468,476
Market
price at
date of
original
award
(pence)
639
639
591.5
591.5
745
745
674.5
674.5
455.5
455.5
Scrip
dividend
equivalents
on vested
shares
(Number
of shares
released)
Conditional
share
awards
outstanding at
31 December
Rights
exercised
in 2009
Rights
lapsed
in 2009
2009 Date of end of
performance
period
(Number
of shares)
120,898 1
120,897 1
31 Dec 11
31 Dec 11
241,795
18,259
0
223,067
0
18,348
120,707
0
0
31 Dec 08
31 Dec 08
191,140 2 31 Dec 09
95,570 3 31 Dec 09
31 Dec 10
31 Dec 10
31 Dec 11
31 Dec 11
182,262
91,131
468,476 1
468,476 1
922,225
936,952
18,259
223,067
139,055 1,497,055
64,199
52,040
48,330
164,569
149,964
74,982
130,071
65,035
127,622
63,811
92,022
92,022
316,328
316,328
242,997
242,997
591.5
745
674.5
455.5
639
591.5
591.5
745
745
674.5
674.5
455.5
455.5
4,852
59,319
4,880
31 Dec 08
52,040 2 31 Dec 09
48,330
31 Dec 10
92,022 1
31 Dec 11
4,852
59,319
4,880
192,392
316,328 1
31 Dec 11
316,328
11,341
0
138,566
0
11,398
74,982
0
0
31 Dec 08
31 Dec 08
130,071 2 31 Dec 09
65,035 3 31 Dec 09
31 Dec 10
31 Dec 10
31 Dec 11
31 Dec 11
127,622
63,811
242,997 1
242,997 1
611,485
485,994
11,341
138,566
86,380
872,533
105,706
52,853
107,988
53,994
196,596
196,596
320,541
393,192
314,147
299,074
314,147
299,074
223,011
337,044
295,067
294,512
1,149,634
745
745
674.5
674.5
455.5
455.5
674.5
455.5
501
591.5
745
674.5
105,706 2 31 Dec 09
52,853 2 31 Dec 09
107,988
31 Dec 10
53,994
31 Dec 10
196,596 1
31 Dec 11
196,596 1
31 Dec 11
713,733
314,147
299,074 1
31 Dec 10
31 Dec 11
613,221
223,011
0
31 Dec 07
31 Dec 08
295,067 2 31 Dec 09
294,512
31 Dec 10
25,493
311,428
25,616
25,493
311,428
25,616
812,590
109
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Directors’ remuneration report > For the year ending 31 December 2009 > continued
Cash rights granted under the Business Unit Performance Plan
Plan name
Clark Manning
BUPP
BUPP
BUPP
Nick Prettejohn
BUPP
BUPP
BUPP
Barry Stowe
BUPP
BUPP
Conditional
awards
outstanding
at 1 January
2009
£000
Conditional
awards
in 2009
£000
Cash rights
lapsed
in 2009
£000
Conditional
awards
outstanding at
31 December Date of end of
performance
period
2009
£000
577
6243
652
374
4003
423
3253
358
577
374
0
624
652
0
400
423
325
358
31 Dec 08
31 Dec 09
31 Dec 10
31 Dec 08
31 Dec 09
31 Dec 10
31 Dec 09
31 Dec 10
Year of
initial
award
2006
2007
2008
2006
2007
2008
2007
2008
Notes
1
2009 awards made under the GPSP and the BUPP have a performance period from 1 January 2009 to 31 December 2011. In determining the 2009
conditional share awards the shares were valued at the average share price for the 30 days immediately following the announcement of Prudential’s
2008 results, and the price used to determine the number of shares was 347.74 pence.
The awards for Clark Manning and Barry Stowe were made in ADRs (one ADR is equivalent to two Prudential plc shares or $10.31). The figures
in the table are represented in terms of Prudential shares.
2 At 31 December 2009 Prudential’s TSR performance was 143.72 per cent of the TSR performance of the index. Hence it is anticipated that awards
granted under this scheme in 2007 will vest in full. This results in 270,478 shares for Mark Tucker; 191,140 shares for Clark Manning; 52,040 shares
for Michael McLintock; 119,231 shares for Nick Prettejohn and 105,706 shares for Barry Stowe. In accordance with the plan rules, the anticipated
number of shares released for Mark Tucker and Nick Prettejohn as a result of their resignation from Prudential will be prorated accordingly.
3 At 31 December 2009, Shareholder Capital Value performance under the 2007 BUPPs was as follows:
Jackson
UK
Asia
% compound
growth in SCV
No. of shares released from
2007 BUPP share award
Anticipated value of
2007 BUPP cash award release
4.1%
0.3%
20.6%
nil
nil
33,615
nil
nil
£206,700
Business-specific cash-based long-term incentive plans
Details of all outstanding awards under cash-based long-term incentive plans up to and including 2009 are set out in the table below.
The performance period for all awards is three years.
Michael McLintock
Phantom M&G options
Phantom M&G options
Phantom M&G shares
Phantom M&G shares
M&G Executive LTIP
M&G Executive LTIP
Total cash payments made in 2009
Face value
of conditional
awards
outstanding
at 1 January
2009
£000
368
368
225
1,333
1,141
Year of
initial
award
2005
2006
2006
2007
2008
2009
Conditionally
awarded
in 2009
£000
Payments
made
in 2009
£000
Face value
of conditional
awards
outstanding at
31 December
2009
£000
Date of
end of
performance
period
394
254
380
1,028
0
0
0
1,333
1,141
1,830
31 Dec 07
31 Dec 08
31 Dec 08
31 Dec 09
31 Dec 10
31 Dec 11
1,830
Notes
Michael McLintock’s 2005 and 2006 cash long-term incentive awards were under the M&G Chief Executive Long-Term Incentive Plan that provides a cash
reward through phantom M&G share awards and options. For both these awards, the phantom share price at the beginning of the performance period
was £1. The change in the phantom share price equals the change in M&G profit, modified up or down by the investment performance of M&G over the
performance period. For each year the face value of the share award was £225,000 and the phantom option award had a face value of £367,800. Provided
the phantom share options have value, they may be exercised in part or in full during annual exercise periods (three to seven years after the start of the
performance period).
For the 2005 phantom option award of 367,800 units, the option price at the end of the performance period was £1.07. This resulted in a payment of
£393,546 to Michael McLintock. For the 2006 award, the phantom share price at the end of the performance period was £1.69 and the phantom option
price was £0.69. This resulted in a payment from the phantom share award of £380,250 and the phantom option award of £253,782.
The 2008 Directors’ Remuneration Report stated that an award of 2,282,353 phantom shares of £1 with an anticipated value of £1,940,000 was made
in 2009. Following a re-evaluation of the per unit expected value calculation, the number of units required to deliver this anticipated value has been
reduced to 1,830,189. The anticipated value of this award remains unchanged.
110 Prudential plc > Annual Report 2009
Other share awards
The table below sets out the share awards that have been made to executive directors under their appointment terms and those
deferred from annual bonus plan payouts. The number of shares is calculated using the average share price over the three business
days commencing on the day of the announcement of the Group’s annual financial results for the relevant year. For the awards from
the 2008 annual bonus, made in 2009, the average share price was 308.63 pence.
Conditional
share
awards out-
standing
at 1 January
2009
(Number
of shares)
Year of
initial
grant
Condi-
tionally
awarded
in 2009
(Number
of shares)
Scrip
dividends
accumu-
lated
(Number
of shares)
Shares
released
in 2009
(Number
of shares)
Conditional
share
awards out-
standing at
31 December
2009
(Number
of shares)
Date of
end of
restricted
period
Market
Market
price at
price at
original
date of
date of vesting or
release
Date of
award
(pence)
release (pence)
Rob Devey
Awards under
appointment terms
2009
50,575
50,575 1 31 Mar 12
Clark Manning
Deferred
2006 annual
bonus award
Deferred
2007 annual
bonus award
Michael McLintock
Deferred
2006 annual
bonus award
Deferred
2007 annual
bonus award
Deferred
2008 annual
bonus award
Nick Prettejohn
Deferred
2006 annual
bonus award
Deferred
2007 annual
bonus award
Deferred
2008 annual
bonus award
Nic Nicandrou
Awards under
2007
9,600
2008
17,003
464
822
10,064
31 Dec 09
17,825
31 Dec 10
2007
85,929
4,161
90,090
31 Dec 09
2008
106,895
5,176
112,071
31 Dec 10
2009
207,368
10,042
217,410
31 Dec 11
2007
12,487
604
13,091
0 2 31 Dec 09
01Oct 09
723
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51,380
2,488
53,868
0 2 31 Dec 10
01Oct 09
635
592
2009
105,304
5,099 110,403
0 2 31 Dec 11
01Oct 09
349.5
592
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appointment terms
2009
10,616
5,889
13,898
16,059
68,191
10,616 3 31 Mar 10
5,8893 31 Mar 10
13,8983 31 Mar 11
16,0593 31 Mar 11
68,1913 31 Mar 12
111
Directors’ remuneration report > For the year ending 31 December 2009 > continued
Other share awards continued
Conditional
share
awards out-
standing
at 1 January
2009
(Number
of shares)
Year of
initial
grant
Condi-
tionally
awarded
in 2009
(Number
of shares)
Scrip
dividends
accumu-
lated
(Number
of shares)
Shares
released
in 2009
(Number
of shares)
Conditional
share
awards out-
standing at
31 December
2009
(Number
of shares)
Date of
end of
restricted
period
Market
Market
price at
price at
original
date of
date of vesting or
release
Date of
award
(pence)
release (pence)
Barry Stowe
Awards under
appointment terms
2006
7,088
28,706
7,088
2,110
7,088
28,706
0 01 May 09 15 May 09
0 01 Sept 09 01 Sept 09
702
702
437
525.5
7,088
01 Jan 10
2,110 01 May 10
Deferred
2007 annual
bonus award
Deferred
2008 annual
bonus award
Tidjane Thiam
Awards under
2008
41,755
2,022
43,777
31 Dec 10
2009
20,092
972
21,064
31 Dec 11
appointment terms
2008
16,336
41,148
48,362
41,135
49,131
16,336
41,148
0
0
48,362
41,135
49,131
31 Mar 09 31 Mar 09
31 Mar 09 31 Mar 09
31 Mar 10
31 Mar 10
31 Mar 11
662
662
337
337
Deferred
2008 annual
bonus award
Mark Tucker
Deferred
2006 annual
bonus award
Deferred
2007 annual
bonus award
2009
105,304
5,099
110,403
31 Dec 11
2007
76,288
3,694
79,982
04 31 Dec 09
01 Oct 09
723
592
2008
75,761
3,669
79,430
04 31 Dec 10
01 Oct 09
635
592
Notes
1
In order to secure the appointment of Rob Devey and to compensate him for the loss of outstanding long-term remuneration, Rob was awarded rights
to Prudential shares as set out in the table.
2 Under the terms agreed on his leaving the Company, the outstanding deferred awards to Nick Prettejohn have been released to him.
3
In order to secure the appointment of Nic Nicandrou and to compensate him for the loss of outstanding long-term remuneration, Nic was awarded
rights to Prudential shares as set out in the table.
4 Under the terms agreed on his leaving the Company, the outstanding deferred awards to Mark Tucker have been released to him.
112
Prudential plc > Annual Report 2009
Outstanding share options
Options outstanding under the SAYE scheme are set out below. The SAYE is open to all UK and certain overseas employees. Options
under this scheme up to HMRC limits are granted at a 20 per cent discount and cannot normally be exercised until a minimum of three
years has elapsed. No payment has been made for the grant of any options. The price to be paid for exercise of these options is shown
in the table below. No variations to any outstanding options have been made.
Year of
initial
grant
2006
2008
2005
Nick Prettejohn
Tidjane Thiam
Mark Tucker
Options
out-
standing
at
1 January Exercised
in 2009
2009
Market
price on
exercise
date
(pence)
661
1,705
2,297
forfeit
in 2009
661
2,297
Options Options
Options
out-
standing
Market
price
at Original
at 31 December exercise
price
2009
(pence)
(pence)
granted 31 December
2009
in 2009
Exercise
price
adjusted
for 2004
Rights
Issue
(pence)
Earliest
exercise
date
Latest
exercise
date
0
1,705
0
640
565
551
407
01 Jun 09
01 Jun 11
30 Nov 09
n/a
n/a
30 Nov 11
n/a 01 Dec 08 31 May 09
Gains of £0 were made by directors in 2009 on the exercise of share options (2008: £15,420).
Notes
1
2 No price was paid for the award of any option.
3
The highest and lowest share prices during 2009 were 650.5 pence and 207 pence respectively.
Dilution
From 2010 onwards, shares releases from Prudential’s GPSP and BUPP will be satisfied by using new issue shares as the primary vehicle
to satisfy these arrangements rather than purchasing shares in the open market. Shares relating to options granted under all-employee
share plans are also satisfied by new issue shares. The combined dilution from all outstanding shares and options at 31 December 2009
was 0.2% of the total share capital at the time. Deferred shares will continue to be satisfied by the purchase of shares in the open market.
Directors’ pensions and life assurance
The pensions policy is set out on page 103. Prudential’s current practice in respect of pension arrangements for the current executive
directors is set out below.
Michael McLintock participates in a contributory scheme that provides a target pension of 2/3rds of Final Pensionable Earnings on
retirement at age 60 for an employee with 30 years or more potential service, for which his contribution is four per cent of basic salary.
In both cases Final Pensionable Earnings are capped by a notional scheme earnings cap which replicates the HMRC earnings cap in
force before A-Day (6 April 2006). Michael McLintock is entitled to supplements based on the portion of his basic salary not covered
for pension benefits under a HMRC approved scheme. He is also provided with life assurance cover of four times salary.
Clark Manning participates in a US tax-qualified defined contribution plan (a 401K plan). He is also provided with life assurance cover
of two times salary. Company matching contributions of six per cent of base salary up to a maximum of $14,700 were made in 2009.
In addition, an annual profit sharing contribution of $14,700 was made in 2009.
Rob Devey, Nic Nicandrou, Tidjane Thiam and Barry Stowe are entitled to a total salary supplement of 25 per cent of base salary. They
are all provided with life assurance cover of four times salary. All these executive directors, expect Barry Stowe, have opted to become
members of the staff defined contribution pension plan.
Where supplements for long-term saving and pension purposes are paid in cash, the amounts are included in the table on page 107.
113
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Directors’ remuneration report > For the year ending 31 December 2009 > continued
Details of directors’ pension entitlements under HMRC approved defined benefit schemes and supplements that are in the form of
contributions to pension arrangements paid by the Company are set out in the following table.
Additional pension
earned during year
ended 31 December 2009
Transfer value of accrued
benefit at 31 December
note 3
Age at
Years of
pensionable
service at
Ignoring
Allowing
inflation for inflation
on pension
earned to
31 December 31 December 31 December 31 December 31 December
2008
note 2
£000
on pension
earned to
Accrued
benefit at
2008
note 1
£000
£000
2009
2009
2009
Amount of
(B-A) less Contributions
to pension
contributions
and life
made by
assurance
directors
2008 A during 2009 arrangements
note 4
£000
£000
£000
2009 B
£000
Rob Devey
Clark Manning
Michael McLintock
Nic Nicandrou
Nick Prettejohn
Barry Stowe
Tidjane Thiam
Mark Tucker
41
51
48
44
49
52
47
52
17
47
5
5
755
426
3295
0
21
89
0
59
2
113
16
As required by Stock Exchange Listing rules.
Notes
1
2 As required by the Companies Act remuneration regulations.
3
4
5 A number of factors operating together have resulted in the increase in transfer value over the year. This includes increases due to changes in market
conditions from inflation rates rising and interest rates falling, an extra year of service accruing, an increase in the HMRC earnings cap and Michael
drawing one year closer to retirement.
The transfer value equivalent has been calculated in accordance with Actuarial Guidance Note GN11.
Supplements in the form of cash are included in the table on page 107.
No enhancements to the retirement benefits paid to or receivable by directors or former directors other than the discretionary pension
increases awarded to all pensioners have been made during the year.
Total contributions to directors’ pension arrangements including cash supplements for pension purposes were £876,466 (2008:
£1,027,267) of which £298,586 (2008: £268,668) related to money purchase schemes.
Signed on behalf of the Board of directors
Bridget Macaskill
Chairman, Remuneration Committee
8 March 2010
Harvey McGrath
Chairman
8 March 2010
114
Prudential plc > Annual Report 2009
FINANCIAL
STATEMENTS
116
118
119
120
FINANCIAL STATEMENTS AND EUROPEAN
EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY
INFORMATION
Summary of statutory and supplementary IFRS
and EEV basis results
Index to Group financial statements
Consolidated income statement
Consolidated statement of comprehensive
income
Consolidated statement of changes in equity
Consolidated statement of financial position
Consolidated statement of cash flows
Notes on the Group financial statements
Balance sheet of the parent company
121
123
125
126
292
293 Notes on the parent company financial statements
302
Statement of directors’ responsibilities in respect
of the Annual Report and the financial statements
Independent auditor’s report to the members of
Prudential plc
304
EEV basis supplementary information
308 Notes on the EEV basis supplementary
303
341
342
information
Statement of directors’ responsibilities in respect
of the EEV basis supplementary information
Independent auditor’s report to Prudential plc
on the EEV basis supplementary information
F
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Summary of statutory and supplementary IFRS and EEV basis results >
Year ended 31 December 2009
The following tables and referenced disclosure notes show the results reported in the statutory financial statements on pages 119 to 301
and supplementary EEV basis results on pages 304 to 340. This page does not form part of the statutory financial statements.
International Financial Reporting Standards (IFRS) basis results
Statutory IFRS basis results
Profit (loss) after tax attributable to equity
holders of the Company
Basic earnings (loss) per share
Dividends per share declared and paid in reporting period
Shareholders’ equity, excluding minority interests
IFRS income statement
IFRS income statement
IFRS note B3
IFRS statement of financial position
119
119
149
124
£676m
27.0p
19.20p
£6,271m
£(396)m
(16.0)p
18.29p
£5,058m
Primary statement or note reference
Page
2009
2008
Supplementary IFRS basis information
Primary statement or note reference
Page
2009
2008
Operating profit based on longer-term investment returns
Short-term fluctuations in investment returns
Shareholders’ share of actuarial and other gains and losses on
defined benefit pension schemes
Loss on sale and results for Taiwan agency business
Profit (loss) from continuing operations before tax attributable
to shareholders (including actual investment returns)
Operating earnings per share after related tax and minority interests
Dividends per share in respect of the reporting period
(including interim dividend of 6.29p (2008: 5.99p)
and final dividend of 13.56p (2008: 12.91p) declared
after the end of the reporting period)
Supplementary European Embedded Value (EEV) basis results
IFRS note B1
IFRS note B1
IFRS note B2
144
144
144
144
144
148
£1,405m
£1,283m
£36m £(1,721)m
£(74)m
£(621)m
£(13)m
£1m
£746m
43.4p
£(450)m
39.9p
IFRS note B3
149
19.85p
18.90p
Primary statement or note reference
Page
2009
2008
EEV income
statement
305
305
305
305
305
305
£3,090m
£2,865m
£351m £(4,967)m
£656m
£(795)m
£(84)m
£(14)m
£(910)m
£91m
£(398)m
£(248)m
305
£1,743m £(2,106)m
EEV note 12
EEV earnings per share
EEV statement of financial position
326
305
307
88.8p
49.8p
£15,273m
85.1p
(54.1)p
£14,956m
Operating profit based on longer-term investment returns
Short-term fluctuations in investment returns
Mark to market value movements on core borrowings
Shareholders’ share of actuarial and other gains and losses
on defined benefit pension schemes
Effect of changes in economic assumptions and time value of
cost of options and guarantees
Profit on sale and results for Taiwan agency business
Profit (loss) from continuing operations before tax
(including actual investment returns)
Operating earnings per share after related tax
and minority interests
Basic earnings (loss) per share
Shareholders’ equity, excluding minority interests
116
Prudential plc > Annual Report 2009
Notes
Results summary
*Basis of preparation
Results bases
With the exception of the presentation of the results for the Taiwan agency business, for which (as described below) the sale process was completed in
June 2009, the basis of preparation of statutory IFRS basis results and supplementary IFRS basis information is consistent with that applied for the 2008
results and financial statements. The EEV basis results have been prepared in accordance with the European Embedded Value Principles issued by the
CFO Forum of European Insurance Companies in May 2004 and expanded by the Additional Guidance on European Embedded Values Disclosures issued
in October 2005.
Life insurance products are, by their nature, long-term and the profit on this business is generated over a significant number of years. Accounting
under IFRS alone does not, in Prudential’s opinion, fully reflect the value of future profit streams. Prudential considers that embedded value reporting
provides investors with a measure of the future profit streams of the Groups long-term businesses and is a valuable supplement to statutory accounts.
Operating profit based on longer-term investment returns
Consistent with previous reporting practice, the Group provides supplementary analysis of the IFRS profit before tax attributable to shareholders analyses
its EEV basis results so as to distinguish operating profit based on longer-term investments returns from other elements of total profit. On both the IFRS
and EEV bases, operating earnings per share are calculated using operating profits based on longer-term investment returns, after related tax and minority
interests. These profits exclude short-term fluctuations in investment returns and the shareholders’ share of actuarial and other gains and losses on
defined benefit pension schemes. Under the EEV basis, where additional profit and loss effects arise, operating profit based on longer term investment
returns also excludes the mark to market value movements on core borrowings and the effect of changes in economic assumptions and changes in the
time value of cost of options and guarantees arising from changes in economic factors.
In 2009, as a result of the exceptional dislocated market conditions, the Group incurred non-recurrent cost of £235 million for hedging its Insurance
Group’s Directive (IGD) capital surplus. These costs have been shown separately from operating profit based on longer-term investment returns as part
of the short-term fluctuations in investment returns.
Also, in June 2009 the Group completed the previously announced sale of its Taiwan agency business. In order to facilitate comparisons of the
Group’s businesses, the effect of disposal and the results of the Taiwan agency business are shown separately from operating profit based on longer-term
investment returns. The presentation of the comparative results for 2008 has been adjusted accordingly as described in notes 18 and I1 of the EEV
and IFRS financial statements, respectively.
After adjusting for related tax and minority interests, the amounts excluded from operating profit based on longer-term investment returns are
included in the calculation of basic earnings per share.
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Section H: Other information on statement of
financial position items
H1:
Intangible assets attributable to shareholders
H2:
Intangible assets attributable to with-profits funds
H3: Reinsurers’ share of insurance contract liabilities
H4: Tax assets and liabilities
H5: Accrued investment income and other debtors
H6: Property, plant and equipment
H7:
H8:
H9: Properties held for sale
H10: Cash and cash equivalents
H11: Shareholders’ equity: Share capital, share premium
Investment properties
Investments in associates and joint ventures
and reserves
H12: Insurance contract liabilities and unallocated surplus
of with-profits funds
H13: Borrowings
H14: Provisions and contingencies
H15: Other liabilities
Section I: Other notes
I1:
Sale of legacy agency book and agency force
in Taiwan to China Life Insurance Company
of Taiwan
Staff and pension plans
Share-based payments
I2:
I3:
I4: Key management remuneration
I5:
Fees payable to auditor
I6: Related party transactions
I7:
I8:
I9: Discontinued operations
I10: Cash flows
I11:
Subsidiary undertakings
Commitments
Post balance sheet events
253
256
257
258
259
259
260
261
263
263
264
265
266
268
272
273
274
285
288
289
289
289
290
290
291
291
Parent company financial statements
292
293
Balance sheet of the parent company
Notes on the parent company financial statements
Statement of directors’ responsibilities and
independent auditor’s report
302
303
Statement of directors’ responsibilities in respect
of the Annual Report and the financial statements
Independent auditor’s report to the members of
Prudential plc
European Embedded Value (EEV) basis
supplementary information
304
305
305
305
306 Movement in shareholders’ equity (excluding minority
Operating profit based on longer-term investment returns
Summarised consolidated income statement – EEV basis
Earnings per share – EEV basis
Dividends per share
307
308
341
342
interests) – EEV basis
Summary statement of financial position – EEV basis
Notes on the EEV basis supplementary information
Statement of directors’ responsibilities in respect
of the European Embedded Value (EEV) basis
supplementary information
Independent auditor’s report to Prudential plc
on the European Embedded Value (EEV) basis
supplementary information
Index to Group financial statements
Primary statements
119
120
121
123
125
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated statement of changes in equity
Consolidated statement of financial position
Consolidated statement of cash flows
Notes on the Group financial statements
126
126
126
132
142
144
148
149
150
150
153
162
166
173
189
206
214
223
224
225
225
225
226
228
229
230
230
235
236
237
245
249
252
252
Section A: Background and accounting policies
A1: Nature of operations
A2: Basis of preparation
A3: Critical accounting policies, estimates and
judgements
A4: Significant accounting policies
A5: New accounting pronouncements
Segment disclosure – income statement
Section B: Summary of results
B1:
B2: Earnings per share
B3: Dividends
B4: Exchange translation
B5: New business
B6: Group statement of financial position
Section C: Group risk management
C:
Group risk management
Section D: Life assurance businesses
D1: Group overview
D2: UK insurance operations
D3: US insurance operations
D4: Asian insurance operations
D5: Capital position statement for life
assurance businesses
Section E: Asset management (including
US broker dealer) and other operations
E1:
Income statement for asset management operations
E2: Statement of financial position for asset management
operations
E3: Regulatory capital positions
E4: Sensitivity of profit and equity to market
and other financial risk
E5: Other operations
Section F: Income statement notes
F1:
Segmental information
F2: Revenue
F3: Acquisition costs and other operating expenditure
F4: Finance costs: Interest on core structural borrowings
of shareholder-financed operations
F5: Tax
F6: Allocation of investment return between
policyholders and shareholders
F7: Benefits and claims and movements in unallocated
surplus of with-profits funds, net of reinsurance
Section G: Financial assets and liabilities
G1: Financial instruments – designation and fair values
G2: Market risk
G3: Derivatives and hedging
G4: Derecognition and collateral
G5:
Impairment of financial assets
118
Prudential plc > Annual Report 2009
Consolidated income statement
Year ended 31 December 2009
Gross premiums earned
Outward reinsurance premiums
Earned premiums, net of reinsurance
Investment return
Other income
Total revenue, net of reinsurance
Benefits and claims
Outward reinsurers’ share of benefits and claims
Movement in unallocated surplus of with-profits funds
Benefits and claims and movements in unallocated surplus of with-profits funds, net of reinsurance
Acquisition costs and other operating expenditure
Finance costs: interest on core structural borrowings of shareholder-financed operations
Loss on sale of Taiwan agency business
Total charges, net of reinsurance
Profit (loss) before tax (being tax attributable to shareholders’ and policyholders’ returns)*
Tax (charge) credit attributable to policyholders’ returns
Profit (loss) before tax attributable to shareholders
Tax (charge) credit
Less: tax attributable to policyholders’ returns
Tax (charge) credit attributable to shareholders’ returns
Profit (loss) from continuing operations after tax
Discontinued operations (net of tax)
Profit (loss) for the year
Attributable to:
Equity holders of the Company
Minority interests
Profit (loss) for the year
Earnings per share (in pence)
Basic:
F2
F2
F2
F1,F2
H12
F3
F4
I1
F1
B1
F5
F5
I9
Based on profit (loss) from continuing operations attributable to the equity holders of the Company B2
Based on loss from discontinued operations attributable to the equity holders of the Company
B2
Diluted:
Based on profit (loss) from continuing operations attributable to the equity holders of the Company B2
Based on loss from discontinued operations attributable to the equity holders of the Company
B2
* This measure is the formal profit (loss) before tax measure under IFRS but is not the result attributable to shareholders.
Note
2009 £m
2008 £m
20,299
(323)
19,976
26,889
1,234
48,099
(39,901)
265
(1,559)
(41,195)
(4,572)
(209)
(559)
(46,535)
1,564
(818)
746
(873)
818
(55)
691
(14)
677
676
1
677
27.6p
(0.6)p
27.0p
27.6p
(0.6)p
27.0p
18,993
(204)
18,789
(30,202)
1,146
(10,267)
4,620
389
5,815
10,824
(2,459)
(172)
–
8,193
(2,074)
1,624
(450)
1,683
(1,624)
59
(391)
–
(391)
(396)
5
(391)
(16.0)p
–
(16.0)p
(16.0)p
–
(16.0)p
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
s
t
a
t
e
m
e
n
t
s
P
r
i
m
a
r
y
119
Consolidated statement of comprehensive income*
Year ended 31 December 2009
Profit (loss) for the year
Other comprehensive income (loss):
Exchange movements on foreign operations and net investment hedges:
Exchange movements arising during the year
Related tax
Available-for-sale securities:
Unrealised valuation movements on securities of US insurance operations classified as
available-for-sale:
Unrealised holding gains (losses) arising during the year
Add back net losses included in the income statement on disposal and impairment
Total
Related change in amortisation of deferred income and acquisition costs
Related tax
Note
2009 £m
2008 £m
677
(391)
B4
D3(a)
H1
(206)
11
(195)
391
119
510
2,249
420
2,669
(1,069)
(557)
1,043
(2,482)
378
(2,104)
831
442
(831)
Other comprehensive income (loss) for the year, net of related tax
848
(321)
Total comprehensive income (loss) for the year
Attributable to:
Equity holders of the Company
Minority interests
Total comprehensive income (loss) for the year
1,525
(712)
1,524
1
1,525
(717)
5
(712)
* This consolidated statement of comprehensive income has been introduced as a result of the adoption of amendments to IAS 1 ‘Presentation of Financial
Statements: A Revised Presentation’. See note A5.
120 Prudential plc > Annual Report 2009
Consolidated statement of changes in equity
Share
Share Retained
capital premium earnings
Note
2009 £m
Available-
Trans-
for-sale
lation securities
reserve
reserve
Share-
holders’ Minority
interests
equity
Total
equity
–
–
–
–
–
–
–
–
2
–
–
–
–
–
–
–
–
–
–
–
139
–
–
–
29
–
–
(136)
136
–
–
3
(3)
676
–
(195)
–
–
676
(195)
–
1,043
1,043
(195) 1,043
848
676
(481)
(195) 1,043
–
–
1,524
(481)
29
1
–
–
–
1
–
–
677
(195)
1,043
848
1,525
(481)
29
–
–
–
–
–
–
–
–
–
–
–
–
–
(24)
(24)
141
–
3
(3)
–
–
–
–
141
–
3
(3)
Year ended 31 December 2009
Reserves
Profit for the year
Other comprehensive income (loss):
Exchange movements on foreign operations
and net investment hedges, net of related tax
Unrealised valuation movements, net of
related change in amortisation of deferred
income and acquisition costs and related tax
Total other comprehensive income (loss)
Total comprehensive income (loss) for the year
Dividends
Reserve movements in respect of share-based
B3
payments
Change in minority interests arising principally
from purchase and sale of property
partnerships of the PAC with-profits fund
and other consolidated investment funds
Share capital and share premium
New share capital subscribed
Transfer to retained earnings in respect of
shares issued in lieu of cash dividends
H11
H11
Treasury shares
Movement in own shares held in respect of
share-based payment plans
Movement in Prudential plc shares purchased
by unit trusts consolidated under IFRS
Net increase (decrease) in equity
At beginning of year
At end of year
2
125
127
H11
3
1,840
360
3,604
(195) 1,043
398
1,213
(909) 5,058
(23) 1,190
5,113
55
1,843
3,964
203
134
6,271
32
6,303
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
s
t
a
t
e
m
e
n
t
s
P
r
i
m
a
r
y
121
Consolidated statement of changes in equity > continued
Share
Share Retained
capital premium earnings
Note
2008 £m
Available-
Trans-
for-sale
lation securities
reserve
reserve
Share-
holders’ Minority
interests
equity
Total
equity
(396)
–
Reserves
Loss for the year
Other comprehensive income (loss):
Exchange movements on foreign operations
and net investment hedges, net of related tax
Unrealised valuation movements, net of
related change in amortisation of deferred
income and acquisition costs and related tax
Total other comprehensive income (loss)
Total comprehensive income (loss) for the year
Dividends
Reserve movements in respect of share-based
payments
Change in minority interests arising principally
from purchase and sale of property
partnerships of the PAC with-profits fund
and other consolidated investment funds
Share capital and share premium
New share capital subscribed
Transfer to retained earnings in respect of
shares issued in lieu of cash dividends
Treasury shares
Movement in own shares held in respect of
share-based payment plans
Movement in Prudential plc shares purchased
by unit trusts consolidated under IFRS
Net increase (decrease) in equity
At beginning of year
At end of year
–
–
–
–
–
–
–
–
2
–
–
–
B3
H11
H11
–
–
–
–
–
–
–
–
168
–
–
–
–
–
(396)
(453)
18
–
–
3
(25)
(697)
4,301
3,604
(156)
156
–
–
(831)
(831)
(831)
–
–
–
–
–
–
–
(396)
510
(831)
(321)
(717)
(453)
18
5
–
–
–
5
(2)
–
(391)
510
(831)
(321)
(712)
(455)
18
–
(50)
(50)
170
–
3
(25)
–
–
–
–
170
–
3
(25)
510
–
510
510
–
–
–
–
–
–
–
2
123
125
12
1,828
1,840
H11
510
(112)
(831)
(78)
(1,004)
6,062
(47)
102
(1,051)
6,164
398
(909)
5,058
55
5,113
As a result of the introduction of the consolidated statement of comprehensive income there has been a reclassification of £240 million of exchange losses
from the Available-for-sale securities reserve to the Translation reserve in the 2008 comparative as explained in note A5.
122 Prudential plc > Annual Report 2009
Consolidated statement of financial position > Assets
31 December 2009
Intangible assets attributable to shareholders:
Goodwill
Deferred acquisition costs and other intangible assets
Total
Intangible assets attributable to with-profits funds:
In respect of acquired subsidiaries for venture fund and other investment purposes
Deferred acquisition costs and other intangible assets
Total
Total
Other non-investment and non-cash assets:
Property, plant and equipment
Reinsurers’ share of insurance contract liabilities
Deferred tax assets
Current tax recoverable
Accrued investment income
Other debtors
Total
Investments of long-term business and other operations:
Investment properties
Investments accounted for using the equity method
Financial investments:
Loans
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments
Deposits
Total
Properties held for sale
Cash and cash equivalents
Total assets
Note
2009 £m
2008 £m
H1(a)
H1(b)
H2(a)
H2(b)
H6
H3
H4
H4
G1,H5
G1,H5
H7
H8
G1
H9
G1,H10
1,310
4,049
5,359
124
106
230
1,341
5,349
6,690
174
126
300
5,589
6,990
367
1,187
2,708
636
2,473
762
8,133
10,905
6
8,754
69,354
101,751
5,132
12,820
208,722
3
5,307
635
1,240
2,886
657
2,513
1,232
9,163
11,992
10
10,491
62,122
95,224
6,301
7,294
193,434
–
5,955
B6
227,754
215,542
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
s
t
a
t
e
m
e
n
t
s
P
r
i
m
a
r
y
123
Consolidated statement of financial position > Equity and liabilities
31 December 2009
Equity
Shareholders’ equity
Minority interests
Total equity
Liabilities
Policyholder liabilities and unallocated surplus of with-profits funds:
Insurance contract liabilities
Investment contract liabilities with discretionary participation features
Investment contract liabilities without discretionary participation features
Unallocated surplus of with-profits funds
Total
Core structural borrowings of shareholder-financed operations:
Subordinated debt
Other
Total
Other borrowings:
Operational borrowings attributable to shareholder-financed operations
Borrowings attributable to with-profits funds
Other non-insurance liabilities:
Obligations under funding, securities lending and sale and repurchase agreements
Net asset value attributable to unit holders of consolidated unit trusts and similar funds
Deferred tax liabilities
Current tax liabilities
Accruals and deferred income
Other creditors
Provisions
Derivative liabilities
Other liabilities
Total
Total liabilities
Total equity and liabilities
Note
2009 £m
2008 £m
H11
H12
G1
G1
H12
H13
H13
G1,H13
G1,H13
G1,H13
G1
G1
H4
H4
G1
H14
G1,G3
G1,H15
B6
6,271
32
6,303
5,058
55
5,113
145,713
24,880
15,805
10,019
196,417
136,030
23,446
14,501
8,414
182,391
2,691
703
3,394
2,751
1,284
3,482
3,809
3,872
1,215
594
1,612
643
1,501
877
1,987
971
2,958
1,977
1,308
5,572
3,843
3,229
842
630
1,496
461
4,832
890
17,605
221,451
227,754
21,795
210,429
215,542
The consolidated financial statements on pages 119 to 291 were approved by the Board of directors on 8 March 2010 and
signed on its behalf.
Harvey McGrath
Chairman
Tidjane Thiam
Group Chief Executive
Nic Nicandrou
Chief Financial Officer
124 Prudential plc > Annual Report 2009
Consolidated statement of cash flows
Year ended 31 December 2009
Note
2009 £m
2008 £m
Cash flows from operating activities
Profit (loss) before tax (being tax attributable to shareholders’ and policyholders’ returns)*
Loss before tax from discontinued operations
I9
Total profit (loss) before tax
Changes in operating assets and liabilities:
Investments†
Other non-investment and non-cash assets†
Policyholder liabilities (including unallocated surplus)
Other liabilities (including operational borrowings)
Interest income and expense and dividend income included in result before tax†
Other non-cash items (including £559 million in 2009 for the loss on disposal of Taiwan agency business)
Operating cash items:
Interest receipts†
Dividend receipts
Tax paid
Net cash flows from operating activities
Cash flows from investing activities
Purchases of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Completion adjustment for previously disposed business
Disposal of Taiwan agency business
Net cash flows from investing activities
Cash flows from financing activities
Structural borrowings of the Group:
Shareholder-financed operations:
Issue of subordinated debt, net of costs
Redemption of senior debt
Interest paid
With-profits operations:
Interest paid
Equity capital:‡
Issues of ordinary share capital
Dividends paid
Net cash flows from financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at end of year
H6
I9
I1
I10
H11
B3
H10
* This measure is the formal profit (loss) before tax measure under IFRS but it is not the result attributable to shareholders.
† Reclassification adjustments have been made in respect of the 2008 comparatives for these line items as explained in note I10.
‡ Cash movements in respect of equity capital exclude scrip dividends.
1,564
(14)
1,550
(26,388)
(384)
24,932
(299)
(7,267)
650
(2,074)
–
(2,074)
32,424
(828)
(26,987)
(631)
(7,927)
(74)
5,734
1,780
(200)
108
(91)
54
(20)
(497)
(554)
822
(249)
(207)
(9)
3
(344)
16
(430)
5,955
(218)
5,307
5,875
2,019
(653)
1,144
(240)
11
–
–
(229)
–
–
(167)
(9)
12
(297)
(461)
454
4,951
550
5,955
125
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
s
t
a
t
e
m
e
n
t
s
P
r
i
m
a
r
y
Notes on the Group financial statements > A: Background and accounting policies
A1: Nature of operations
Prudential plc (the Company) together with its subsidiaries (collectively, the Group or Prudential) is an international financial services
group with its principal operations in the UK, the US and Asia. The Group operates in the UK through its subsidiaries, primarily The
Prudential Assurance Company Limited (PAC), Prudential Annuities Limited (PAL), Prudential Retirement Income Limited (PRIL) and
M&G Investment Management Limited.
In the US, the Group’s principal subsidiary is Jackson National Life Insurance Company (Jackson). The Group also has operations
in Hong Kong, Malaysia, Singapore, Indonesia and other Asian countries.
Prudential offers a wide range of retail financial products and services and asset management services throughout these territories.
The retail financial products and services principally include life insurance, pensions and annuities as well as collective investment
schemes.
Long-term business products written in the UK and Asia are principally with-profits deposit administration, other conventional and
unitised with-profits policies and non-participating pension annuities in the course of payment. Long-term business also includes linked
business written in the UK and Asia. The principal products written by Jackson are interest-sensitive deferred annuities and whole-life
policies, variable annuities, guaranteed investment contracts, fixed index deferred annuities and term life insurance.
Prudential plc is a public limited company incorporated and registered in England and Wales. The registered office is:
Laurence Pountney Hill
London
EC4R 0HH
Registered number: 1397169
A2: Basis of preparation
The consolidated financial statements consolidate the Group and the Group’s interest in associates and jointly-controlled entities.
The parent company financial statements present information about the Company as a separate entity and not about the Group.
The consolidated financial statements have been prepared and approved by the directors in accordance with International Financial
Reporting Standards (IFRS) as adopted by the European Union (EU). The Company has elected to prepare its parent company financial
statements in accordance with UK Generally Accepted Accounting Practice (GAAP). These are presented on pages 292 to 301.
The Group has applied all IFRS standards and interpretations adopted by the EU that are effective for financial years commencing
on or before 1 January 2009. Further details on the new accounting pronouncements are provided in note A5.
A3: Critical accounting policies, estimates and judgements
a Critical accounting policies
Prudential’s discussion and analysis of its financial condition and results of operations are based upon Prudential’s consolidated financial
statements, which have been prepared in accordance with IFRS adopted for use in the EU. Were the Group to apply IFRS as published by
the IASB, as opposed to EU-adopted IFRS, no additional measurement adjustments or disclosures would be required.
The preparation of these financial statements requires Prudential to make estimates and judgements that affect the reported
amounts of assets, liabilities, and revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis,
Prudential evaluates its estimates, including those related to long-term business provisioning, the fair value of assets and the declaration
of bonus rates. Prudential bases its estimates on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgements about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions
or conditions.
Critical accounting policies are defined as those that are reflective of significant judgements and uncertainties, and potentially give
rise to different results under different assumptions and conditions. Prudential believes that its critical accounting policies are limited to
those described below.
The critical accounting policies in respect of the items discussed below are critical for the Group’s results insofar as they relate to
the Group’s shareholder-financed business. In particular this applies for Jackson which is the largest shareholder-backed business in
the Group. The policies are not critical in respect of the Group’s with-profits business. This distinction reflects the basis of recognition
of profit and accounting treatment of unallocated surplus of with-profits funds. Additional explanation is provided later in this note
and cross-referenced notes as to why the distinction between with-profits business and shareholder-backed business is relevant.
The items discussed below and in cross-referenced notes explain the effect of changes in estimates and the effect of reasonably
likely changes in the key assumptions underlying these estimates as of the latest statement of financial position date so as to provide
analysis that recognises the different accounting effects on profit and loss or equity. In order to provide relevant analysis that is
appropriate to the circumstances applicable to the Group’s businesses, the explanations refer to types of business, fund structure, the
relationship between asset and policyholder liability measurement, and the differences in the method of accounting permitted under
IFRS 4 for accounting for insurance contract assets, policyholder liabilities and unallocated surplus of the Group’s with-profits funds.
Insurance contract accounting
With the exception of certain contracts described in note D1, the contracts issued by the Group’s life assurance business are classified
as insurance contracts and investment contracts with discretionary participating features. As permitted by IFRS 4, assets and liabilities
of these contracts are accounted for under previously applied GAAP. Accordingly, except as described below, the modified statutory
basis (MSB) of reporting as set out in the revised Statement of Recommended Practice (SORP) issued by the Association of British
Insurers (ABI) has been applied.
126 Prudential plc > Annual Report 2009
In 2005 the Group chose to improve its IFRS accounting for UK regulated with-profits funds by the voluntary application of the UK
accounting standard FRS 27, ‘Life Assurance’. Under this standard, the main accounting changes that were required for UK with-profits
funds were:
• derecognition of deferred acquisition costs and related deferred tax; and
• replacement of MSB liabilities with adjusted realistic basis liabilities.
The results included in the financial statements for 2009 and 2008 reflect this basis.
Unallocated surplus represents the excess of assets over policyholder liabilities for the Group’s with-profits funds that have yet to be
appropriated between policyholders and shareholders. The Group has opted to account for unallocated surplus wholly as a liability with
no allocation to equity. This treatment reflects the fact that shareholders’ participation in the cost of bonuses arises only on distribution.
Shareholder profits on with-profits business reflect one-ninth of the cost of declared bonus.
For Jackson, applying the MSB as applicable to overseas operations which permits the application of local GAAP in some
circumstances, the assets and liabilities of insurance contracts are accounted for under insurance accounting prescribed by US GAAP.
For the assets and liabilities of insurance contracts of Asian operations, the local GAAP is applied with adjustments, where necessary, to
comply with UK GAAP. For the operations in Taiwan, Vietnam and Japan, countries where local GAAP is not appropriate in the context
of the previously applied MSB, accounting for insurance contracts is based on US GAAP. For participating business the liabilities include
provisions for the policyholders’ interest in realised investment gains and other surpluses that, where appropriate, and in particular for
Vietnam, have yet to be declared as bonuses.
The usage of these bases of accounting has varying effects on the way in which product options and guarantees are measured. For
UK regulated with-profits funds, options and guarantees are valued on a market consistent basis. The basis is described in note D2(f)(ii).
For other operations a market consistent basis is not applied under the accounting basis described in note A4. Details of the guarantees,
basis of setting assumptions, and sensitivity to altered assumptions are described in notes D3 and D4.
Valuation and accounting presentation of fair value movements of derivatives and debt securities of Jackson
Under IAS 39, derivatives are required to be carried at fair value. Unless net investment hedge accounting is applied, value movements
on derivatives are recognised in the income statement. With the exception of value movements on derivatives held for variable annuity
and other equity related hedging activities, the value movements on derivatives held by Jackson are separately identified within the
short-term fluctuations in investment returns identified as part of the Group’s segment results described below and in note B1.
Derivative value movements in respect of equity risk within variable annuity business and other equity related hedging activities are
included within the operating profit based on longer-term investment returns.
For derivative instruments of Jackson, the Group has considered whether it is appropriate to undertake the necessary operational
changes to qualify for hedge accounting so as to achieve matching of value movements in hedging instruments and hedged items in
the performance statements. In reaching the decision a number of factors were particularly relevant. These were:
• IAS 39 hedging criteria have been designed primarily in the context of hedging and hedging instruments that are assessable as
financial instruments that are either stand-alone or separable from host contracts, rather than, for example, duration characteristics
of insurance contracts;
• the high hurdle levels under IAS 39 of ensuring hedge effectiveness at the level of individual hedge transactions;
• the difficulties in applying the macro hedge provisions under IAS 39 (which are more suited to banking arrangements) to Jackson’s
derivative book;
• the complexity of asset and liability matching of US life insurers such as those with Jackson’s product range; and finally
• whether it is possible or desirable, without an unacceptable level of costs and constraint on commercial activity, to achieve the
accounting hedge effectiveness required under IAS 39.
Taking account of these considerations the Group has decided that, except for certain minor categories of derivatives, it is not
appropriate to seek to achieve hedge accounting under IAS 39. As a result of this decision the total income statement results are more
volatile as the movements in the value of Jackson’s derivatives are reflected within it.
Under IAS 39, unless carried at amortised cost (subject to impairment provisions where appropriate) under the held-to-maturity
category, debt securities are also carried at fair value. The Group has chosen not to classify any financial assets as held-to-maturity. Debt
securities of Jackson are designated as available-for-sale with value movements, unless impaired, being recorded as movements within
other comprehensive income. Impairments are recorded in the income statement.
Presentation of results before tax
The total tax charge for the Group reflects tax that in addition to relating to shareholders’ profits is also attributable to policyholders
and unallocated surplus of with-profits funds and unit-linked policies. This is explained in more detail in note F5. However, pre-tax
profits are determined after transfers to or from unallocated surplus of with-profits funds. These transfers are in turn determined after
taking account of tax borne by with-profits funds. Consequently reported profit before the total tax charge is not representative of
pre-tax profits attributable to shareholders. In order to provide a measure of pre-tax profits attributable to shareholders the Group
has chosen to adopt an income statement presentation of the tax charge and pre-tax results that distinguishes between policyholder
and shareholder components.
127
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Notes on the Group financial statements > A: Background and accounting policies > continued
A3: Critical accounting policies, estimates and judgements continued
Segmental analysis of results and earnings attributable to shareholders
The Group uses operating profit based on longer-term investment returns as the segmental measure of its results. The basis of
calculation is disclosed in note A4(d).
For shareholder-backed business, with the exception of debt securities held by Jackson and assets classified as loans and
receivables, all financial investments and investment property are designated as assets at fair value through profit and loss. Short-term
fluctuations in investment returns on such assets held by with-profits funds, do not affect directly reported shareholder results. This is
because (i) the unallocated surplus of with-profits funds is accounted for as liabilities and (ii) excess or deficits of income and expenditure
of the funds over the required surplus for distribution are transferred to or from unallocated surplus. However, for shareholder-backed
businesses the short-term fluctuations affect the result for the year and the Group provides additional analysis of results to provide
information on results before and after short-term fluctuations in investment returns.
b Critical accounting estimates and judgements
Investments
Determining the fair value of financial investments when the markets are not active
The Group holds certain financial investments for which the markets are not active. These can include financial investments which
are not quoted on active markets and financial investments for which markets are no longer active as a result of market conditions
e.g. market illiquidity. When the markets are not active, there is generally no or limited observable market data to account for financial
investments at fair value. The determination of whether an active market exists for a financial investment requires management’s
judgement.
If the market for a financial investment of the Group is not active, the fair value is determined by using valuation techniques. The
Group establishes fair value for these financial investments by using quotations from independent third-parties, such as brokers or
pricing services or by using internally developed pricing models. Priority is given to publicly available prices from independent sources,
when available but overall, the source of pricing and/or the valuation technique is chosen with the objective of arriving at a fair value
measurement which reflects the price at which an orderly transaction would take place between market participants on the measurement
date. The valuation techniques include the use of recent arm’s length transactions, reference to other instruments that are substantially
the same, discounted cash flow analysis, option adjusted spread models and, if applicable, enterprise valuation and may include a
number of assumptions relating to variables such as credit risk and interest rates. Changes in assumptions relating to these variables
could positively or negatively impact the reported fair value of these financial investments.
The financial investments measured at fair value are classified into the following three level hierarchy on the basis of the lowest
level of inputs that is significant to the fair value measurement of the financial investment concerned:
Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities
Level 2: Inputs other than quoted prices included within level 1 that are observable either directly or indirectly (i.e. derived
from prices).
Level 3: Significant inputs for the asset or liability that are not based on observable market data (unobservable inputs).
At 31 December 2009, £5,557 million of the financial investments (net of derivative liabilities) valued at fair value were classified as
level 3. Of these £1,684 million are held to back shareholder non-linked business and so changes to these valuations will directly impact
shareholders’ equity. Further details of the classification of financial instruments are given in note G1.
Determining impairments relating to financial assets
Available-for-sale securities
Financial investments carried on an available-for-sale basis are represented by Jackson’s debt securities portfolio. The consideration of
evidence of impairment requires management’s judgement. In making this determination the factors considered include, for example,
• Whether the decline of the financial investment’s fair value is substantial.
A substantial decline in fair value might be indicative of a credit loss event that would lead to a measurable decrease in the estimated
future cash flows.
• 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.
This factor provides an indication of how the contractual cash flows and effective interest rate of a financial asset compares with the
implicit market estimate of cash flows and the risk attaching to a ‘fair value’ measurement. The length of time for which that level of
difference has been in place may also provide further evidence as to whether the market assessment implies an impairment loss
has arisen.
• The financial condition and prospects of the issuer or other observable conditions that indicate the investment may be impaired.
If a loss event that will have a detrimental effect on cash flows is identified an impairment loss in the income statement is recognised.
The loss recognised is determined as the difference between the book cost and the fair value of the relevant impaired securities.
This loss comprises the effect of the expected loss of contractual cashflows and any additional market-price-driven temporary
reductions in values.
128 Prudential plc > Annual Report 2009
For Jackson’s residential mortgage-backed and other asset-backed securities, all of which are classified as available-for-sale, the model
used to analyse cash flows, begins with the current delinquency experience of the underlying collateral pool for the structure, by
applying assumptions about how much of the currently delinquent loans will eventually default, and multiplying this by an assumed loss
severity. Additional factors are applied to anticipate ageing effect. After applying a cash flow simulation an indication is obtained as to
whether or not the security has suffered, or is anticipated to suffer, contractual principal or interest payment shortfall. If a shortfall applies
an impairment charge is recorded. The difference between the fair value and book cost for unimpaired securities accounted for as
available-for-sale, falls to be accounted for as unrealised gains or losses, with the movements in the accounting period being accounted
for in other comprehensive income.
The Group’s review of fair value involves several criteria, including economic conditions, credit loss experience, other issuer-specific
developments and future cash flows. These assessments are based on the best available information at the time. Factors such as market
liquidity, the widening of bid/ask spreads and a change in cash flow assumptions can contribute to future price volatility. If actual
experience differs negatively from the assumptions and other considerations used in the consolidated financial statements, unrealised
losses currently in equity may be recognised in the income statement in future periods. The preceding note in this section provides
explanation on how fair value is determined when the markets for the financial investments are not active. Further, additional details
on the impairments of the available-for-sale securities of Jackson are described in notes D3 and G5.
Assets held at amortised cost
Financial assets classified as loans and receivables under IAS 39 are carried at amortised cost using the effective interest rate method.
The loans and receivables include loans collateralised by mortgages, deposits and loans to policyholders. 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.
The risks inherent in reviewing the impairment of any investment include the risk that market results may differ from expectations;
facts and circumstances may change in the future and differ from estimates and assumptions; or the Group may later decide to sell the
asset as a result of changed circumstances.
Insurance contracts
Product classification
IFRS 4 requires contracts written by insurers to be classified as either ‘insurance contracts’ or ‘investment contracts’ depending on the
level of insurance risk transferred. Insurance risk is a pre-existing risk, other than financial risk, transferred from the contract holder to
the contract issuer. If significant insurance risk is transferred by the contract then it is classified as an insurance contract. Contracts that
transfer financial risk but not significant insurance risk are termed investment contracts. Furthermore, some contracts, both insurance
and investment, contain discretionary participating features representing the contractual right to receive additional benefits as a
supplement to guaranteed benefits:
a that are likely to be a significant portion of the total contract benefits;
b whose amount or timing is contractually at the discretion of the insurer; and
c that are contractually based on asset or fund performance, as discussed in IFRS 4.
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.
Valuation assumptions
i Contracts of with-profits funds
The Group’s insurance contracts and investment contracts with discretionary participating features are primarily with-profits and other
protection type policies. For UK regulated with-profits funds, the contract liabilities are valued by reference to the UK Financial Services
Authority’s (FSA) realistic basis. In aggregate, this basis has the effect of placing a value on the liabilities of UK with-profits contracts,
which reflects the amounts expected to be paid based on the current value of investments held by the with-profits funds and current
circumstances.
The basis of determining liabilities for the Group’s with-profits business has little or no effect on the results attributable to
shareholders. This is because movements on liabilities of the with-profits funds are absorbed by the unallocated surplus. Except through
indirect effects, or in remote circumstances as described below, changes to liability assumptions are therefore reflected in the carrying
value of the unallocated surplus, which is accounted for as a liability rather than shareholders’ equity.
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A detailed explanation of the basis of liability measurement is contained in note D2(f)(ii).
The Group’s other with-profits contracts are written in with-profits funds that operate in some of the Group’s Asian operations.
A
The liabilities for these contracts and those of Prudential Annuities Limited, which is a subsidiary company of the PAC with-profits
funds, are determined differently. For these contracts the liabilities are estimated using actuarial methods based on assumptions
relating to premiums, interest rates, investment returns, expenses, mortality and surrenders. The assumptions to which the estimation
of these reserves is particularly sensitive are: the interest rate used to discount the provision and the assumed future mortality experience
of policyholders.
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Notes on the Group financial statements > A: Background and accounting policies > continued
A3: Critical accounting policies, estimates and judgements continued
For liabilities determined using the basis described above for UK regulated with-profits funds, and the other liabilities described in the
preceding paragraph, changes in estimates arising from the likely range of possible changes in underlying key assumptions have no
direct impact on the reported profit.
This lack of sensitivity reflects the with-profits fund structure, basis of distribution, and the application of previous GAAP to the
unallocated surplus of with-profits funds as permitted by IFRS 4. Changes in liabilities of these contracts that are caused by altered
estimates are absorbed by the unallocated surplus of the with-profits funds with no direct effect on shareholders’ equity. The
Company’s obligations and more detail on such circumstances are described in note H14.
ii Other contracts
Contracts, other than those of with-profits funds, are written in shareholder-backed operations of the Group. The significant
shareholder-backed product groupings and the factors that may significantly affect IFRS results due to experience against assumptions
or changes of assumptions vary significantly between business units. For some types of business the effect of changes in assumptions
may be significant, whilst for others, due to the nature of the product, assumption setting may be of less significance. The nature of the
products and the significance of assumptions are discussed in notes D2, D3 and D4. From the perspective of shareholder results the
key sensitivity relates to the assumption for allowance for credit risk for UK annuity business. Prior to its disposal of the Taiwan agency
business in the first half of 2009, the Group’s financial results were also sensitive to the assumed future investment returns for
that business.
Jackson
Jackson offers individual fixed annuities, fixed index annuities, immediate annuities, variable annuities, individual and variable life
insurance and institutional products. With the exception of institutional products and an incidental amount of business for annuity certain
contracts, which are accounted for as investment contracts under IAS 39, all of Jackson’s contracts are accounted for under IFRS 4 as
insurance contracts by applying US GAAP, the previous GAAP used before IFRS adoption. Under US GAAP the requirements of SFAS 60
‘Accounting and Reporting for Insurance Enterprises’ and SFAS 97 ‘Accounting and Reporting by Insurance Enterprises for certain Long-
Duration Contracts and for Realised Gains and Losses from the Sale of Investments’ apply to these contracts. The accounting
requirements under these standards and the effect of changes in valuation assumptions are considered below for fixed annuity, variable
annuity and traditional life insurance contracts.
Fixed annuity contracts, which are investment contracts under US GAAP terminology, are accounted for by applying in the first
instance a retrospective deposit method to determine the liability for policyholder benefits. This is then augmented by potentially three
additional amounts, namely deferred income, any amounts previously assessed against policyholders that are refundable on termination
of the contract, and any premium deficiency, i.e., any probable future loss on the contract. These types of contracts contain considerable
interest rate guarantee features. Notwithstanding the accompanying market risk exposure, except in the circumstances of interest rate
scenarios where the guarantee rates included in contract terms are higher than crediting rates that can be supported from assets held to
cover liabilities, the accounting measurement of Jackson’s fixed annuity products is not generally sensitive to interest rate risk. This
position derives from the nature of the products and the US GAAP basis of measurement.
Variable annuity contracts written by Jackson may provide for guaranteed minimum death, income, or withdrawal benefit features.
In general terms, liabilities for these benefits are accounted for under US GAAP by using estimates of future benefits and fees under best
estimate assumptions. For variable annuity business the key assumption is the expected long-term level of equity market returns, which
for 2009 and 2008 was 8.4 per cent per annum (gross of fund management fees) determined using a mean reversion methodology.
Under the mean reversion methodology, projected returns over the next five years are flexed (subject to capping) so that, combined with
the actual rates of return for the current and the previous two years the 8.4 per cent rate is maintained. 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(h).
These returns affect the level of future expected profits through their effects on the fee income with consequential impact on
the amortisation of deferred acquisition costs as described below and the required level of provision for guaranteed minimum death
benefit claims.
For traditional life insurance contracts, provisions for future policy benefits are determined 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.
Except to the extent of mortality experience, which primarily affects profits through variations in claim payments and the guaranteed
minimum death benefit reserves, the profits of Jackson are relatively insensitive to changes in insurance risk. This reflects the principally
spread and fee-based nature of Jackson’s business.
Asian operations
The insurance products written in the Group’s Asian operations principally cover with-profits business, unit-linked business, and other
non-participating business. The results of with-profits business are relatively insensitive to changes in estimates and assumptions that
affect the measurement of policyholder liabilities. As for the UK business, this feature arises because unallocated surplus is accounted for
by the Group as a liability. The results of Asian unit-linked business are also relatively insensitive to changes in estimates or assumptions.
Prior to its disposal in the first half of 2009, the principal non-participating business in the Group’s Asian operations, for which changes in
estimates and assumptions was important from year to year, was the traditional whole-life business written in Taiwan. Premium rates were
set to give a guaranteed minimum sum assured on death and a guaranteed surrender value on early surrender based on prevailing interest
rates at the time of policy issue. Premium rates also included an allowance for mortality and expenses. This business was therefore
especially sensitive to falling interest rates. This exposure has been removed following the disposal of the Taiwan agency business. The
remaining non-participating business in Asia remains sensitive to interest rates but this sensitivity is of a much lower order. Further details
are provided in D4(i).
130 Prudential plc > Annual Report 2009
Deferred acquisition costs
Significant costs are incurred in connection with acquiring new insurance business. Except for acquisition costs of with-profits contracts
of the UK regulated with-profits funds, which are accounted for under the realistic FSA regime as described in note A4, these costs,
which vary with, and are primarily related to, the production of new business, are capitalised and amortised against margins in future
revenues on the related insurance policies. The recoverability of the asset is measured and the asset is deemed impaired if the projected
future margins are less than the carrying value of the asset. To the extent that the future margins differ from those anticipated, then an
adjustment to the carrying value of the deferred acquisition cost asset will be necessary.
The deferral and amortisation of acquisition costs is of most relevance to the Group’s results for shareholder-financed long-term
business of Jackson and Asian operations. The majority of the UK shareholder-backed business is for individual and group annuity
business where the incidence of acquisition costs is negligible.
Jackson
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 long-term spread between the earned rate and the rate credited to policyholders, which is based on the 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 Jackson’s actual industry experience and future expectations.
A detailed analysis of actual experience is measured by internally developed mortality studies.
For variable annuity business, the key assumption is the expected long-term level of equity market returns as described above.
The level of acquisition costs carried in the statement of financial position is also sensitive to unrealised valuation movements on debt
securities held to back the liabilities and solvency capital. Further details are explained in notes D3(h) and H1.
Asian operations
In 2008, a number of changes were made to the basis of estimating the level of deferred acquisition costs, as described in note D4(h)(c).
Pensions
The Group applies the requirements of IAS 19, ‘Employee benefits’ and associated interpretations including IFRIC 14 ’IAS 19 – The Limit
on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’, to its defined benefit pension schemes. The principal
deferred benefit pension scheme is the Prudential Staff Pension Scheme (PSPS). For PSPS the terms of the trust deed restrict
shareholders’ access to any underlying surplus. Accordingly, applying the interpretation of IFRIC 14, any underlying IAS 19 basis surplus
is not recognised for IFRS reporting. The financial position for PSPS recorded in the IFRS financial statements reflects the higher of any
underlying IAS 19 deficit and any obligation for deficit funding.
The economic participation in the surplus or deficits attaching to the PSPS and the smaller Scottish Amicable Pensions Scheme
(SAPS) are shared between the PAC with-profits sub-fund (WPSF) and shareholder operations. The economic interest reflects the
source of contributions over the scheme life, which in turn reflects the activity of the members during their employment.
In the case of PSPS, movements in the apportionment of the financial position for PSPS between the WPSF and shareholders’ funds
in 2009 reflect the 70/30 ratio applied to the base deficit position as at 31 December 2005 but with service cost and contributions for
ongoing service apportioned by reference to the cost allocation for activity of current employees. For SAPS the ratio is estimated to be
50/50 between the WPSF and shareholders’ funds.
Due to the inclusion of actuarial gains and losses in the income statement rather than being recognised in other comprehensive
income, the results of the Group are affected by changes in interest rates for corporate bonds that affect the rate applied to discount
projected pension payments, changes in mortality assumptions and changes in inflation assumptions.
Deferred tax
Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all the
available evidence, it can be regarded as more likely than not that there will be suitable taxable profits against which the losses can be
relieved. The taxation regimes applicable across the Group apply separate rules to trading and capital profits and losses. The distinction
between temporary differences that arise from items of either a capital or trading nature may affect the recognition of deferred tax assets.
The judgements made, and uncertainties considered, in arriving at deferred tax balances in the financial statements are discussed in
note H4.
Goodwill
Goodwill impairment testing requires the exercise of judgement by management as to prospective future cash flows. Further information
is disclosed in note H1.
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Notes on the Group financial statements > A: Background and accounting policies > continued
A4: Significant accounting policies
a Financial instruments other than financial instruments classified as long-term business contracts
Investment classification
Under IAS 39, subject to specific criteria, financial instruments should be accounted for under one of the following categories: financial
investments at fair value through profit and loss, financial investments held on an available-for-sale basis, financial investments held-to-
maturity or loans and receivables. Upon initial recognition, financial investments are measured at fair value plus, in the case of a financial
asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of
the financial asset or financial liability. These IAS 39 classifications have been changed by IFRS 9 ‘Financial Investments: Classification and
Measurement’ which is not required to be adopted until 2013 and is still subject to EU endorsement. This standard has not been adopted
by the Group in 2009. The Group holds financial investments on the following bases:
i Financial assets and liabilities at fair value through profit and loss – this comprises assets and liabilities designated by management as
fair value through profit and loss on inception and derivatives that are held for trading. These investments are measured at fair value
with all changes thereon being recognised in investment income.
ii Financial investments on an available-for-sale basis – this comprises assets that are designated by management and/or do not fall into
any of the other categories. These investments are carried at fair value. Interest income is recognised on an effective interest basis in
the income statement. Except for foreign exchange gains and losses on debt securities, not in functional currency, which are included
in the income statement, unrealised gains and losses are recognised in other comprehensive income (i.e. outside of the income
statement). Upon disposal or impairment, accumulated unrealised gains and losses are transferred from other comprehensive income
to the income statement as realised gains or losses.
iii Loans and receivables – this comprises non-quoted investments that have fixed or determinable payments and are not designated
as fair value through profit and loss or available-for-sale. These investments include loans collateralised by mortgages, deposits, loans
to policyholders and other unsecured loans and receivables. These investments are carried at amortised cost using the effective
interest method.
As permitted under IAS 39 the Group has designated certain financial assets as fair value through profit and loss as these assets are
managed and their performance is evaluated on a fair value basis. These assets represent all of the Group’s financial assets other than
loans and receivables and debt securities held by Jackson. Debt securities held by Jackson are accounted for on an available-for-sale
basis. The use of the fair value option is consistent with the Group’s risk management and investment strategies.
The Group uses the trade date method to account for regular purchases and sales of financial assets.
Use of fair values
The Group uses current bid prices to value its investments with quoted prices. Actively traded investments without quoted prices are
valued using prices provided by third parties. If there is no active established market for an investment, the Group applies an appropriate
valuation technique such as a discounted cash flow technique. Additional details are provided in note G1.
Impairments
The Group assesses at each statement of financial position date, whether there is objective evidence that a financial asset or group of
financial assets not held at fair value through profit and loss is impaired. A financial asset or group of financial assets is impaired and
impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that have occurred after
the initial recognition of the asset (a loss event) and that a loss event (or events) has an impact on the estimated future cash flows of the
financial asset or group of financial assets that can be reliably estimated. Objective evidence that a financial asset or group of financial
assets is impaired includes observable data that comes to the attention of the Group. For assets designated as available-for-sale, the initial
impairment is the cumulative loss which is removed from the available-for-sale reserve within equity and recognised in the income
statement. Any subsequent impairment loss is measured as the cumulative loss, less any impairment loss previously recognised.
For loans and receivables carried at amortised cost, the impairment amount is the difference between carrying value and the present
value of the expected cash flows discounted at the original effective interest rate.
If, in subsequent periods, an impaired debt security held on an available-for-sale basis or an impaired loan or receivable recovers in
value (in part or in full), and this recovery can be objectively related to an event occurring after the impairment, then the previously
recognised impairment loss is reversed through the income statement (in part or in full).
Derivatives and hedge accounting
Derivative financial instruments are used to reduce or manage investment, interest rate and currency exposures, to facilitate efficient
portfolio management and for investment purposes.
The Group may designate certain derivatives as hedges. This includes fair value hedges, cash flow hedges and hedges of net
investments in foreign operations. If the criteria for hedge accounting are met then the following accounting treatments are applied
from the date at which the designation is made and the accompanying requisite documentation is in place:
i Hedges of net investments in foreign operations – the effective portion of any change in fair value of derivatives or other financial
instruments designated as net investment hedges are recognised in other comprehensive income (i.e. outside of the income
statement). The ineffective portion of changes in the fair value of the hedging instrument is recorded in the income statement. The
gain or loss on the hedging instrument recognised directly in other comprehensive income, is recognised in the income statement on
disposal of the foreign operation.
132 Prudential plc > Annual Report 2009
ii Fair value hedges – movements in the fair value of the hedged item attributable to the hedged risk are recognised in the income
statement.
iii Cash flow hedges – the effective portion of changes in the fair value of derivatives designated as cash flow hedges is recognised in
other comprehensive income (i.e. outside of the income statement). Movements in fair value relating to the ineffective portion are
booked in the income statement. Amounts recognised in other comprehensive income are recorded in the income statement in the
periods in which the hedged item affects profit or loss.
All derivatives that do not meet the relevant hedging criteria are carried at fair value with movements in fair value being recorded in the
income statement.
The primary areas of the Group’s continuing operations where derivative instruments are held are the UK with-profits funds and
annuity business, and Jackson.
For the Group’s continuing operations, hedge accounting under IAS 39 is not usually applied. The exceptions, where hedge
accounting has been applied in 2009 and 2008, are summarised in note G3.
For UK with-profits funds the derivative programme is undertaken as part of the efficient management of the portfolio as a whole.
As noted in section D2 value movements on the with-profits funds investments are reflected in changes in asset-share liabilities to
policyholders or the liability for unallocated surplus. Shareholders’ profit and equity are not affected directly by value movements on
the derivatives held.
For UK annuity business the derivatives are held to contribute to the matching as far as practical, of asset returns and duration
with those of liabilities to policyholders. The carrying value of these liabilities is sensitive to the return on the matching financial assets
including derivatives held. Except for the extent of minor mismatching, value movements on derivatives held for this purpose do not
affect shareholders’ profit or equity.
For Jackson an extensive derivative programme is maintained. Value movements on the derivatives held can be very significant in
their effect on shareholder results. The Group has chosen generally not to seek to construct the Jackson derivative programme so as to
facilitate hedge accounting where theoretically possible, under IAS 39. Further details on this aspect of the Group’s financial reporting
are described in note A3.
Embedded derivatives
Embedded derivatives are present in host contracts issued by various Group companies, in particular for Jackson. They are embedded
within other non-derivative host financial instruments and insurance contracts to create hybrid instruments. Where economic
characteristics and risks of the embedded derivatives are not closely related to the economic characteristics and risks of the host
instrument, and where the hybrid instrument is not measured at fair value with the changes in fair value recognised in the income
statement, the embedded derivative is bifurcated and carried at fair value as a derivative in accordance with IAS 39.
In addition, the Group applies the requirement of IFRS 4 to not separate and fair value surrender options embedded in host contracts
and with-profits investment contracts whose strike price is either a fixed amount or a fixed amount plus interest. Further details on the
valuation basis for embedded derivatives attaching to Jackson’s life assurance contracts are provided in note D3(f).
Securities lending including repurchase agreements
The Group is party to various securities lending agreements under which securities are loaned to third-parties on a short-term basis.
The loaned securities are not derecognised; rather, they continue to be recognised within the appropriate investment classification. The
Group’s policy is that collateral in excess of 100 per cent of the fair value of securities loaned is required from all securities’ borrowers and
typically consists of cash, debt securities, equity securities or letters of credit.
In cases where the Group takes possession of the collateral under its securities lending programme, the collateral, and
corresponding obligation to return such collateral, are recognised in the consolidated statement of financial position.
Derecognition of financial assets and liabilities
The Group’s policy is to derecognise financial assets when it is deemed that substantially all the risks and rewards of ownership have
been transferred. The Group also derecognises a financial asset when the contractual rights to the cash flows from the financial asset
expire. Where the Group neither transfers nor retains substantially all the risks and rewards of ownership, the Group will derecognise
the financial asset where it is deemed that the Group has not retained control of the financial asset.
Where the transfer does not result in the Group transferring the right to receive the cash flows of the financial assets, but does result
in the Group assuming a corresponding obligation to pay the cash flows to another recipient, the financial assets are also accordingly
derecognised providing all of the following conditions are met:
• the Group has no obligation to pay amounts to the eventual recipients unless it collects the equivalent amounts from the original asset;
• the Group is prohibited by the terms of the transfer contract from selling or pledging the original asset; and
• the Group has an obligation to remit any cash flows it collects on behalf of the eventual recipients without material delay.
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The Group derecognises financial liabilities only when the obligation specified in the contract is discharged, cancelled or has expired.
A
Borrowings
Although initially recognised at fair value, net of transaction costs, borrowings, excluding liabilities of consolidated collateralised debt
obligations, are subsequently accounted for on an amortised cost basis using the effective interest method. Under the effective interest
method, the difference between the redemption value of the borrowing and the initial proceeds (net of related issue costs) is amortised
through the income statement to the date of maturity or for hybrid debt, over the expected life of the instrument.
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A4: Significant accounting policies continued
Financial liabilities designated at fair value through profit and loss
Consistent with the Group’s risk management and investment strategy and the nature of the products concerned, the Group has
designated under IAS 39 classification certain financial liabilities at fair value through profit and loss as these instruments are managed
and their performance evaluated on a fair value basis. These instruments include liabilities related to consolidated collateralised debt
obligations and net assets attributable to unit holders of consolidated unit trusts and similar funds.
b Long-term business contracts
Income statement treatment
Premiums and claims
Premium and annuity considerations for conventional with-profits policies and other protection type insurance policies are recognised as
revenue when due. Premiums and annuity considerations for linked policies, unitised with-profits and other investment type policies are
recognised as revenue when received or, in the case of unitised or unit-linked policies, when units are issued. These amounts exclude
any taxes or duties assessed based on premiums.
Policy fees charged on linked and unitised with-profits policies for mortality, asset management and policy administration are
recognised as revenue when related services are provided.
Claims paid include maturities, annuities, surrenders and deaths. Maturity claims are recorded as charges on the policy maturity
date. Annuity claims are recorded when each annuity instalment becomes due for payment. Surrenders are charged to the income
statement when paid and death claims are recorded when notified.
For investment contracts which do not contain discretionary participating features, the accounting is carried out in accordance with
IAS 39 to reflect the deposit nature of the arrangement, with premiums and claims reflected as deposits and withdrawals and taken
directly to the statement of financial position as movements in the financial liability balance.
Acquisition costs
With the exception of costs incurred in respect of with-profits contracts valued on a realistic basis, costs of acquiring new insurance
business, principally commissions, marketing and advertising costs and certain other costs associated with policy issuance and
underwriting that are not reimbursed by policy charges, are specifically identified and capitalised as part of deferred acquisition costs
(DAC), which are included as an asset in the statement of financial position. The DAC asset in respect of insurance contracts is amortised
against margins in future revenues on the related insurance policies, to the extent that the amounts are recoverable out of the margins.
Recoverability of the unamortised DAC asset is assessed at the time of policy issue and reviewed if profit margins have declined.
Under IFRS, investment contracts (excluding those with discretionary participation features) accounted for as financial liabilities in
accordance with IAS 39 which also offers investment management services, require the application of IAS 18 for the revenue attached
to these services. The Group’s investment contracts primarily comprise certain unit-linked savings contracts in the UK and Asia and
contracts with fixed and guaranteed terms in the US (such as guaranteed investment contracts and annuity-certains) all of which offer
an investment service.
Incremental, directly attributable acquisition costs relating to the investment management element of these contracts are capitalised
and amortised in line with the related revenue. If the contracts involve up-front charges, this income is also deferred and amortised
through the income statement in line with contractual service provision.
UK regulated with-profits funds
Prudential’s long-term business written in the UK comprises predominantly life insurance policies with discretionary participating
features under which the policyholders are entitled to participate in the returns of the funds supporting these policies. Business similar
to this type is also written in certain of the Group’s Asian operations subject to local market and regulatory conditions. Such policies are
called with-profits policies. Prudential maintains with-profits funds within the Group’s long-term business funds, which segregate the
assets and liabilities and accumulate the returns related to that with-profits business. The amounts accumulated in these with-profits
funds are available to provide for future policyholder benefit provisions and for bonuses to be distributed to with-profits policyholders.
The bonuses, both annual and final, reflect the right of the with-profits policyholders to participate in the financial performance of the
with-profits funds. Shareholders’ profits with respect to bonuses declared on with-profits business correspond to the shareholders’
share of the cost of bonuses as declared by the board of directors. The shareholders’ share currently represents one-ninth of the cost
of bonuses declared for with-profits policies.
Annual bonuses are declared and credited each year to with-profits policies. The annual bonuses increase policy benefits and,
once credited, become guaranteed. Annual bonuses are charged to the profit and loss account in the year declared. Final bonuses are
declared each year and accrued for all policies scheduled to mature and for death benefits expected to be paid during the next financial
year. Final bonuses are not guaranteed and are only paid on policies that result from claims through the death of the policyholder or
maturity of the policy within the period of declaration or by concession on surrender. No policyholder benefit provisions are recorded
for future annual or final bonus declarations.
The policyholders’ liabilities of the regulated with-profits funds are accounted for under FRS 27.
Under FRS 27 for the UK with-profits funds:
• no deferred acquisition costs and related deferred tax are recognised; and
• adjusted realistic basis liabilities instead of MSB liabilities are recognised.
134 Prudential plc > Annual Report 2009
FRS 27 realistic basis liabilities are underpinned by the FSA’s Peak 2 basis of reporting. This Peak 2 basis requires the value of liabilities
to be calculated as:
• a with-profits benefits reserve (WPBR); plus
• future policy related liabilities (FPRL); plus
• the realistic current liabilities of the fund.
The WPBR is primarily based on the retrospective calculation of accumulated asset shares but is adjusted to reflect future policyholder
benefits and other outgoings.
The FPRL must include a market consistent valuation of costs of guarantees, options and smoothing, less any related charges, and
this amount is determined using either a stochastic approach, hedging costs or a series of deterministic projections with attributed
probabilities.
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
on a market consistent basis.
The cost of guarantees, options and smoothing is very sensitive to the bonus, market value reduction (MVR) and investment policies
the Group employs and therefore the stochastic modelling incorporates a range of management actions that would help to protect the
fund in adverse scenarios. Substantial flexibility has been included in the modelled management actions in order to reflect the discretion
that the Group retains in adverse investment conditions, thereby avoiding the creation of unreasonable minimum capital requirements.
The management actions assumed are consistent with management’s policy for with-profits funds and the disclosures made in the
publicly available Principles and Practices of Financial Management.
The realistic basis liabilities representing the Peak 2 basis realistic liabilities for with-profits business included in Form 19 of the FSA
regulatory returns exclude the element for the shareholders’ share of the future bonuses. For accounting purposes under FRS 27, this
latter item is reversed because, consistent with the current basis of financial reporting, shareholder transfers are recognised only on
declaration.
Unallocated surplus
The unallocated surplus represents the excess of assets over policyholder liabilities for the Group’s with-profits funds. As allowed under
IFRS 4, the Group has opted to continue to record unallocated surplus of with-profits funds wholly as a liability. The annual excess
(shortfall) of income over expenditure of the with-profits funds, after declaration and attribution of the cost of bonuses to policyholders
and shareholders, is transferred to (from) the unallocated surplus each year through a charge (credit) to the income statement. The
balance retained in the unallocated surplus represents cumulative income arising on the with-profits business that has not been allocated
to policyholders or shareholders. The balance of the unallocated surplus is determined after full provision for deferred tax on unrealised
appreciation on investments.
Other insurance contracts (i.e. contracts which contain significant insurance risk as defined under IFRS 4)
For these contracts UK GAAP has been applied, which reflects the MSB. Under this basis the following approach applies:
Other UK insurance contracts
Other UK insurance contracts that contain significant insurance risk include unit-linked, annuity and other non-profit business. For
the purposes of local regulations, segregated accounts are established for linked business for which policyholder benefits are wholly
or partly determined by reference to specific investments or to an investment-related index. The interest rates used in establishing
policyholder benefit provisions for pension annuities in the course of payment are adjusted each year. Mortality rates used in
establishing policyholder benefit are based on published mortality tables adjusted to reflect actual experience.
Overseas subsidiaries
The assets and liabilities of insurance contracts of overseas subsidiaries are determined initially using local GAAP bases of accounting
with subsequent adjustments where necessary to comply with the Group’s accounting policies.
Jackson
The future policyholder benefit provisions for Jackson’s conventional protection-type policies are determined using the net level
premium method under US GAAP principles and assumptions as of the issue date as to mortality, interest, policy lapses and expenses
plus provisions for adverse deviations. For non-conventional protection-type policies, the policyholder benefit provision included within
policyholder liabilities in the consolidated statement of financial position is the policyholder account balance.
For the business of Jackson, the determination of the expected emergence of margins, against which the amortisation profile of the
DAC asset is established, is dependent on certain key assumptions. For single premium deferred annuity business, the key assumption
is the expected long-term spread between the earned rate and the rate credited to policyholders. For variable annuity business, the
key assumption is the expected long-term level of equity market returns which, for 2009 and 2008, 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 fee
income and the required level of provision for guaranteed minimum death benefit claims.
Jackson accounts for the majority of its investment portfolio on an available-for-sale basis (see investment policies above) whereby
unrealised gains and losses are recognised in other comprehensive income. As permitted by IFRS 4, Jackson has used shadow
accounting. Under shadow accounting, to the extent that recognition of unrealised gains or losses on available-for-sale securities causes
adjustments to the carrying value and amortisation patterns of DAC and deferred income, these adjustments are recognised in other
comprehensive income to be consistent with the treatment of the gains or losses on the securities.
135
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A4: Significant accounting policies continued
Asian operations
Except for the operations in Taiwan, Vietnam and Japan, the future policyholder benefit provisions for Asian businesses are determined
in accordance with methods prescribed by local GAAP adjusted to comply, where necessary, with UK GAAP. For the Hong Kong
business, which is a branch of the PAC, and the Singapore and Malaysian operations, the valuation principles and sensitivities to changes
of assumptions of conventional with-profits and other protection-type policies are similar to those described above for equivalent
products written by the UK operations. Refinements to the local reserving methodology are generally treated as change in estimates,
dependent on the nature of the change. Such a refinement arose in 2009 in respect of Malaysia as explained in note D4(h).
For the operations in Taiwan, Vietnam and Japan, countries where local GAAP is not appropriate in the context of the previously
applied MSB, accounting for insurance contracts is based on US GAAP. For these three operations the business written is primarily non-
participating and linked business. The future policyholder benefit provisions for non-linked business are determined using the net level
premium method, with an allowance for surrenders, maintenance and claim expenses. Rates of interest used in establishing the
policyholder benefit provisions vary by operation depending on the circumstances attaching to each block of business. Where
appropriate, liabilities for participating business for these three operations include provisions for the policyholders’ interest in realised
investment gains and other surpluses that have yet to be declared as bonuses.
Although the basis of valuation of Prudential’s overseas operations is in accordance with the requirements of the Companies Act
2006 and ABI SORP, the valuation of policyholder benefit provisions for these businesses may differ from that determined on a UK MSB
for UK operations with the same features. These differences are permitted under IFRS 4.
Liability adequacy
The Group performs liability adequacy testing on its insurance provisions to ensure that the carrying amounts of provisions (less related
DAC and present value of in-force business – see policy on business acquisitions and disposals) is sufficient to cover current estimates of
future cash flows. When performing the liability adequacy test, the Group discounts all contractual cash flows and compares this amount
to the carrying value of the liability. Any deficiency is immediately charged to the income statement.
Reinsurance
In the normal course of business, the Group seeks to reduce loss exposure by reinsuring certain levels of risk in various areas of
exposure with other insurance companies or reinsurers. An asset or liability is recognised in the consolidated statement of financial
position representing premiums due to, or payments due from reinsurers and the share of benefits and claims recoverable from
reinsurers. The measurement of reinsurance assets is consistent with the measurement of the underlying direct insurance contracts.
The only material purchases of reinsurance contracts in the periods of the results in the financial statements arise in Jackson.
Gains arising on the purchase of reinsurance contracts by Jackson are deferred and amortised over the contract duration. Any loss
is recognised in the income statement immediately.
Investment contracts (contracts which do not contain significant insurance risk as defined under IFRS 4)
For investment contracts with discretionary participation features, the accounting basis is consistent with the accounting for similar with-
profits insurance contracts. Other investment contracts are accounted for on a basis that reflects the hybrid nature of the arrangements
whereby part is accounted for as a financial instrument under IAS 39 and the investment management service component is accounted
for under IAS 18.
For those investment contracts in the US with fixed and guaranteed terms, the Group uses the amortised cost model to measure the
liability. On contract inception, the liability is measured at fair value less incremental, directly attributable acquisition costs.
Remeasurement at future reporting dates is on an amortised cost basis utilising an effective interest rate methodology whereby the
interest rate utilised discounts to the net carrying amount of the financial liability.
Those investment contracts without fixed and guaranteed terms are designated at fair value through profit and loss because the
resulting liabilities are managed and their performance is evaluated on a fair value basis. Fair value is based upon the fair value of the
underlying assets of the fund. Where the contract includes a surrender option its carrying value is subject to a minimum carrying value
equal to its surrender value.
c Other assets, liabilities, income and expenditure
Basis of consolidation
The Group consolidates those entities it is deemed to control. The degree of control is determined by the ability of the Group to
govern the financial and operating policies of an entity in order to obtain benefits. Consideration is given to other factors such as
potential voting rights.
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.
136 Prudential plc > Annual Report 2009
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. 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.
Other interests in entities, where significant influence is not exercised, are carried as investments at fair value through profit and loss.
The consolidated financial statements of the Group include the assets, liabilities and results of the Company and subsidiary
undertakings in which Prudential has a controlling interest, using accounts drawn up to 31 December 2009 except where entities have
non-coterminous year ends. In such cases, the information consolidated is based on the accounting period of these entities and is
adjusted for material changes up to 31 December. Accordingly, the information consolidated is deemed to cover the same period for all
entities throughout the Group. The results of subsidiaries are included in the financial statements from the date control commences to
the date control ceases. All inter-company transactions are eliminated on consolidation. Results of asset management activities include
those for managing internal funds.
Investment properties
Investments in leasehold and freehold properties not for occupation by the Group including from 2009 properties under development
for future use as investment properties, are carried at fair value, with changes in fair value included in the income statement. Properties
are valued annually either by the Group’s qualified surveyors or by taking into consideration the advice of professional external valuers
using the Royal Institution of Chartered Surveyors (RICS) guidelines. The RICS guidelines apply separate assumptions to the value of the
land, buildings and tenancy associated with each property. Each property is externally valued at least once every three years. The cost of
additions and renovations is capitalised and considered when estimating fair value. Fair value is based on active market prices, adjusted,
if necessary, for any difference in the nature, location or condition of the specific property. If this information is not available, the Group
uses alternative valuation methods such as discounted cash flow projections or recent prices in less active markets.
Leases of investment property where the Group has substantially all the risks and rewards of ownership are classified as finance
leases (leasehold property). Finance leases are capitalised at the lease’s inception at the lower of the fair value of the leased property and
the present value of the minimum lease payments. Where a lease has a contingent rent element, the rent is calculated in accordance with
individual lease terms and charged as an expense as incurred.
Pension schemes
The Group operates a number of pension schemes around the world. The largest of these schemes is the PSPS, a defined benefit
scheme. The Group also operates defined contribution schemes. Defined contribution schemes are schemes where the Company pays
contributions into a fund and the Company has no legal or constructive obligation to pay further contributions should the assets of that
fund be insufficient to pay the employee benefits relating to employee service in both current and prior periods. Defined benefit
schemes are post-employment benefit plans that are not defined contribution 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.
The Group utilises the projected unit credit method to calculate the defined benefit obligation. Estimated future cash flows are
then discounted at a high-quality corporate bond rate, adjusted to allow for the difference in duration between the bond index and
the pension liabilities where appropriate, to determine its present value. These calculations are performed by independent actuaries.
The plan assets of the Group’s pension schemes exclude several insurance contracts that have been issued by the Group.
These assets are excluded from plan assets in determining the pension obligation recognised in the consolidated statement of
financial position.
The aggregate of the actuarially determined service costs of the currently employed personnel and the unwind of discount on
liabilities at the start of the period, less the expected investment return on scheme assets at the start of the period, is charged to the
income statement. Actuarial gains and losses as a result of changes in assumptions or experience variances are also charged or credited
to the income statement.
Contributions to the Group’s defined contribution schemes are expensed when due. Once paid, the Group has no further payment
obligations. Any prepayments are reflected as an asset on the statement of financial position.
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Share-based payments
The Group offers share award and option plans for certain key employees and a Save As You Earn (SAYE) plan for all UK and certain
overseas employees. The arrangements for distribution to employees of shares held in trust relating to share award plans and for
entitlement to dividends depend upon the particular terms of each plan. Shares held in trust relating to these plans are conditionally
gifted to employees.
A
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A4: Significant accounting policies continued
The compensation expense charged to the income statement is primarily based upon the fair value of the options granted, the vesting
period and the vesting conditions. Vesting conditions exclude the ability of an employee to voluntarily exit a scheme and such exits are
treated as an acceleration of vesting and hence a shortening of the period over which the expense is charged. The Group revises its
estimate of the number of options likely to be exercised at each statement of financial position date and adjusts the charge to the income
statement accordingly. Where the share-based payment depends upon vesting outcomes attaching to market-based performance
conditions, additional modelling is performed to estimate the fair value of the awards. No subsequent adjustment is then made to the fair
value charge for awards that do not vest on account of these performance conditions not being met.
The Company has established trusts to facilitate the delivery of Prudential plc shares under employee incentive plans and savings-
related share option schemes. None of the trusts that hold shares for employee incentive and savings plans continue to hold these shares
once they are issued to employees. The cost to the Company of acquiring these treasury shares held in trusts is shown as a deduction
from shareholders’ equity.
Tax
The Group’s UK subsidiaries each file separate tax returns. Jackson and other foreign subsidiaries, where permitted, file consolidated
income tax returns. In accordance with UK tax legislation, where one domestic UK company is a 75 per cent owned subsidiary of another
UK company or both are 75 per cent owned subsidiaries of a common parent, the companies are considered to be within the same UK
tax group. For companies within the same tax group, trading profits and losses arising in the same accounting period may be offset for
purposes of determining current and deferred taxes.
Current tax expense is charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of
taxable operations for the current year. To the extent that losses of an individual UK company are not offset in any one year, they can be
carried back for one year or carried forward indefinitely to be offset against profits arising from the same company.
Deferred taxes are provided under the liability method for all relevant temporary differences, being the difference between the
carrying amount of an asset or liability in the statement of financial position and its value for tax purposes. IAS 12, ‘Income Taxes’ does not
require all temporary differences to be provided for, in particular, the Group does not provide for deferred tax on undistributed earnings
of subsidiaries where the Group is able to control the timing of the distribution and the temporary difference created is not expected to
reverse in the foreseeable future. The tax effects of losses available for carry forward are recognised as an asset. Deferred tax assets are
only recognised when it is more likely than not, that future taxable profits will be available against which these losses can be utilised.
Deferred tax related to charges or credits taken to other comprehensive income is also credited or charged to other comprehensive
income and is subsequently recognised in the income statement together with the deferred gain or loss.
The tax charge for long-term business includes tax expense on with-profits funds attributable to both the policyholders and the
shareholders. Different tax rules apply under UK law depending upon whether the business is life insurance or pension business. Tax
on the life insurance business is based on investment returns less expenses attributable to that business. Tax on the pension business is
based on the shareholders’ profits or losses attributable to that business. The shareholders’ portion of the long-term business is taxed
at the shareholders’ rate with the remaining portion taxed at rates applicable to the policyholders.
Deferred tax is measured at the tax rates that are expected to apply to the period when the asset is realised or the liability settled,
based on tax rates (and laws) that have been enacted or are substantively enacted at the end of the reporting period.
Basis of presentation of tax charges
Tax charges in the income statement reflect the aggregate of the shareholder tax on the long-term business result and on the Group’s
other results.
Under UK Listing Authority rules, profit before tax is required to be presented. This requirement, coupled with the fact that IFRS
does not contemplate tax charges which are attributable to policyholders and unallocated surplus of with-profits funds and unit-linked
policies, necessitates the reporting of total tax charges within the presented results. The result before all taxes (i.e. ‘profit before tax’ as
shown in the income statement) represents income net of post-tax transfers to unallocated surplus of with-profits funds, before tax
attributable to policyholders and unallocated surplus of with-profits funds, unit-linked policies and shareholders. Separately within the
income statement, ‘profit before tax attributable to shareholders’ is shown after deduction of taxes attributable to policyholders and
unallocated surplus of with-profits funds and unit-linked policies. Tax charges on this measure of profit reflect the tax charges attributable
to shareholders. In determining the tax charges attributable to shareholders, the Group has applied a methodology consistent with that
previously applied under UK GAAP reflecting the broad principles underlying the tax legislation of life assurance companies.
Property, plant and equipment
All property, plant and equipment such as owner occupied property, computer equipment and furniture and fixtures, are carried at
depreciated cost. Costs including expenditure directly attributable to the acquisition of the assets are capitalised. Depreciation is
calculated and charged on a straight-line basis over an asset’s estimated useful life. The residual values and useful lives are reviewed at
each statement of financial position date. If the carrying amount of an asset is greater than its recoverable amount then its carrying value
is written down to that recoverable amount.
Leasehold improvements to owner occupied property are depreciated over the shorter of the economic life and the life of the lease.
Assets held under finance leases are capitalised at their fair value.
Business acquisitions and disposals
Business acquisitions are accounted for by applying the purchase method of accounting, which adjusts the net assets of the acquired
company to fair value at the date of purchase. The excess of the costs of acquisition over the fair value of the assets and liabilities of the
acquired entity is recorded as goodwill. Should the fair value of the identifiable assets and liabilities of the entity exceed the cost of
138 Prudential plc > Annual Report 2009
acquisition then this amount is recognised immediately in the income statement. Income and expenses of acquired entities are included
in the income statement from the date of acquisition. Income and expenses of entities sold during the period are included in the income
statement up to the date of disposal. The gain or loss on disposal is calculated as the difference between sale proceeds, net of selling
costs, less the net assets of the entity at the date of disposal.
For life insurance company acquisitions, the adjusted net assets include an identifiable intangible asset for the present value of in-
force business which represents the profits that are expected to emerge from the acquired insurance business. The present value of in-
force business is calculated using best estimate actuarial assumptions for interest, mortality, persistency and expenses and is amortised
over the anticipated lives of the related contracts in the portfolio. The net carrying amount of insurance liabilities acquired less the value
of in-force business, represents the fair value of the insurance liabilities acquired. An intangible asset may also be recognised in respect
of acquired investment management contracts representing the fair value of contractual rights acquired under these contracts.
The Company uses the economic entity method to purchase minority interests. Under the economic entity method any difference
between consideration and the share of net assets acquired is recorded directly in equity.
Goodwill
Goodwill arising on acquisitions of subsidiaries and businesses is capitalised and carried on the Group statement of financial position as
an intangible asset at initial value less any accumulated impairment losses. Goodwill impairment testing is conducted annually and when
there is an indication of impairment. For the purposes of impairment testing, goodwill is allocated to cash generating units. These cash
generating units reflect the smallest group of assets that includes the goodwill and generates cash flows that are largely independent of
the cash inflows from other groups of assets. If the carrying amount of the cash generating unit exceeds its recoverable amount then the
goodwill is considered impaired. Impairment losses are recognised immediately in the income statement and may not be reversed in
future periods.
Acquired intangible assets
Intangible assets acquired on the purchase of a subsidiary or portfolio of contracts are fair valued at acquisition and carried at cost less
amortisation and any accumulated impairment losses. Amortisation calculated is charged on a straight-line basis over the estimated
useful life of the assets. The residual values and useful lives are reviewed at each statement of financial position date.
Cash and cash equivalents
Cash and cash equivalents consist of cash at bank and in hand, deposits held at call with banks, treasury bills and other short-term highly
liquid investments with less than 90 days maturity from the date of acquisition.
Rights of offset
Assets and liabilities in the consolidated financial statements are only reported on a net basis when there is a legally enforceable right to
offset and there is an intention to settle on a net basis.
Segments
Under IFRS 8, adopted in 2009, the Group determines and presents operating segments based on the information that is internally
provided to the Group Executive Committee (‘GEC’), which is the Group’s chief operating decision maker.
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur
expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. An operating
segment’s operating results are reviewed regularly by the GEC to make decisions about resources to be allocated to the segment and
assess its performance, and for which discrete financial information is available.
The operating segments identified by the Group reflect the Group’s organisational structure, which is by both geography (Asia,
US and UK) and by product line (insurance operations and asset management).
Insurance operations principally comprise of products that contain both significant and insignificant elements of insurance risk.
The products are managed together and there is no distinction between these two categories other than for accounting purposes.
This segment also includes the commission earned on general insurance business and investment subsidiaries held for supporting
the Group’s insurance operations.
Asset management comprises both internal and third-party asset management services, inclusive of portfolio and mutual fund
management, where the Group acts as an advisor, and broker-dealer activities. The nature of the products and the managing of the
business differ from the risks inherent in the insurance operations segments, and the regulatory environment of the asset management
industry differs from that of the insurance operations segments.
The Group’s operating segments as determined under IFRS 8 are:
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Insurance operations
• Asia
• US (Jackson)
• UK
Asset management operations
• M&G
• Asian asset management
• US broker dealer and asset management (including Curian)
Prudential Capital has been incorporated into the M&G operating segment for the purposes of segment reporting.
A
139
Notes on the Group financial statements > A: Background and accounting policies > continued
A4: Significant accounting policies continued
The performance measure of operating segments utilised by the Company is IFRS operating profit attributable to shareholders based
on longer-term investment returns. This measure excludes the recurrent items of short-term fluctuations in investment returns and the
shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes. In addition, for 2009 this measure
excludes the non-recurrent cost of hedging the Group IGD capital surplus included within short-term fluctuations in investment returns
(see note B1). In 2009 the Company sold its Taiwan agency business. In order to facilitate comparisons on a like for like basis, the loss on
sale and the results of the Taiwan agency business during the period of ownership (including those for the 2008 comparatives) are shown
separately within the segmental analysis of profit. Further details on the determination of the performance measure of “operating profit
based on longer-term investment returns” is provided below in note A4 (d).
Segment results that are reported to the GEC include items directly attributable to a segment as well as those that can be allocated
on a reasonable basis. Unallocated items are mainly in relation to the Group Head Office and Asia Regional Head Office.
Shareholders’ dividends
Dividends to shareholders are recognised as a liability in the period in which they are declared. Where scrip dividends are issued, the
value of such shares, measured as the amount of the cash dividend alternative, is credited to reserves and the amount in excess of the
nominal value of the shares issued is transferred from the share premium account to retained earnings.
Share capital
Where there is no obligation to transfer assets, shares are classified as equity. The difference between the proceeds received on issue
of the shares, net of share issue costs, and the nominal value of the shares issued, is credited to share premium. Where the Company
purchases shares for the purposes of employee incentive plans, the consideration paid, net of issue costs, is deducted from retained
earnings. Upon issue or sale any consideration received is credited to retained earnings net of related costs.
Foreign exchange
The Group’s consolidated financial statements are presented in pounds sterling, the Group’s presentation currency. Accordingly, the
results and financial position of foreign subsidiaries must be translated into the presentation currency of the Group from their functional
currencies, i.e. the currency of the primary economic environment in which the entity operates. All assets and liabilities of foreign
subsidiaries are converted at year end exchange rates whilst all income and expenses are converted at average exchange rates where
this is a reasonable approximation of the rates prevailing on transaction dates. The impact of these currency translations is recorded
as a separate component in the Statement of comprehensive income.
Foreign currency borrowings that are used to provide a hedge against Group equity investments in overseas subsidiaries are
translated at year end exchange rates and movements recognised in other comprehensive income. Other foreign currency monetary
items are translated at year end exchange rates with changes recognised in the income statement.
Foreign currency transactions are translated at the spot rate prevailing at the time.
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.
The Group uses operating profit based on longer-term investment returns to measure the performance of its operational segments.
For the purposes of measuring operating profit, investment returns on shareholder-financed business are based on the expected longer-
term rates of return. This reflects the particular features of long-term insurance business where assets and liabilities are held for the long-
term and for which the accounting basis for insurance liabilities under current IFRS is not generally conducive to demonstrating trends in
underlying performance for life businesses exclusive of changes in market conditions. In determining profit on this basis the following
key elements are applied to the results of the Group’s shareholder-financed operations.
i Debt and equity securities
Longer-term investment returns comprise income and longer-term capital returns. For debt securities the longer-term capital returns
comprise two elements. These are a risk margin reserve (RMR) based charge for expected defaults, which is determined by reference to
the credit quality of the portfolio, and amortisation of interest-related realised gains and losses to operating results based on longer-term
investment returns to the date when sold bonds would have otherwise matured. The shareholder-backed operation for which the risk
margin reserve charge is most significant is Jackson National Life. The RMR charge for Jackson is based on long-term average default and
recovery data as published by Moody’s. During 2009 refinements were made to the RMR process following the National Association of
Insurance Commissioners (NAIC) issuing RBC valuation data for more than 20,000 RMBS securities. Note B1 provides further detail.
Longer-term equity returns comprise aggregate long-term income and capital returns.
ii Derivative value movements
Value movements for Jackson’s equity-based derivatives and variable annuity product embedded derivatives are included in operating
profits based on longer-term investment returns. The inclusion of these movements is so as to broadly match with the results on the
Jackson variable annuity book that pertain to equity market movements, subject to some limitations for GMDB products where US GAAP
does not fully reflect the economic features being hedged. These accounting mis-matches are magnified in periods of significant market
movements.
140 Prudential plc > Annual Report 2009
Other derivative value movements are excluded from operating results based on longer-term investment returns. These 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 income statement) and product liabilities (for which
US GAAP accounting does not reflect the economic features being hedged).
These key elements are of most importance in determining the operating results based on longer-term investment returns of
Jackson.
There are two exceptions to the basis described above for determining operating results based on longer-term investment returns.
These are for:
• Unit-linked and US variable annuity separate account business.
For such business the policyholder liabilities are directly reflective of the asset value movements. Accordingly, all asset value movements
are recorded in the operating results based on longer-term investment returns.
• Assets covering non-participating business liabilities that are interest rate sensitive.
For UK annuity business policyholder liabilities are determined by reference to current interest rates. The value movements of the assets
covering liabilities are closely correlated with the related change in liabilities. Accordingly, asset value movements are recorded within
the ‘operating results based on longer-term investment returns’. Policyholder liabilities include a margin for credit risk, as explained in
note D2(f)(iii). Variations between actual and best estimate expected impairments are recorded as a component of short-term
fluctuations in investment returns.
iii Liabilities to policyholders and embedded derivatives for product guarantees
Under IFRS, the degree to which the carrying values of liabilities to policyholders are sensitive to current market conditions varies
between territories depending upon the nature of the ‘grandfathered’ measurement basis. In general, in those instances where the
liabilities are particularly sensitive to routine changes in market conditions, the accounting basis is such that the impact of market
movements on the assets and liabilities are broadly equivalent in the income statement, and operating profit based on longer-term
investment returns is not distorted. In these circumstances there is no need for the movement in the liability to be bifurcated between
the element that relates to longer-term market conditions and short-term effects.
However, some types of business movements in liabilities do require bifurcation to ensure that at the net level (i.e. after allocated
investment return and change for policyholder benefits) the operating result reflects longer-term market returns.
Examples where such bifurcation is necessary are:
a Asia
Vietnamese participating business
For the participating business in Vietnam the liabilities include policyholders’ interest in investment appreciation and other surplus.
Bonuses paid in a reporting period and accrued policyholder interest in investment appreciation and other surpluses primarily reflect the
level of realised investment gains above contract specific hurdle levels. For this business, operating profit based on longer-term
investment returns includes the aggregate of longer-term returns on the relevant investments, a credit or charge equal to movements on
the liability for the policyholders’ interest in realised investment gains (net of any recovery of prior deficits on the participating pool), less
amortisation over five years of current and prior movements on such credits or charges.
The overall purpose of these adjustments is to ensure that investment returns included in operating results equal longer-term returns
but that in any one reporting period movements on liabilities to policyholders caused by investment returns are substantially matched in
the presentation of the segmental analysis of profit before tax attributable to policyholders.
Non-participating business
Liabilities are bifurcated so that the total movement in the carrying value of liabilities is split between that which is included in operating
results based on longer-term investment returns, and the residual element for the effect of using year end rates is included in short-term
fluctuations and in the income statement.
Guaranteed Minimum Death Benefit (GMDB) product features
For unhedged GMDB liabilities accounted for under IFRS using ‘grandfathered’ US GAAP, such as in the Japanese business, the change
in carrying value is determined under SOP 03-01, which partially reflects changes in market conditions. Under the company’s segmental
basis of reporting the operating profit reflects the change in liability based on longer-term market conditions with the difference between
the charge to the operating result and the movement reflected in the total result included in short-term fluctuations in investment
returns.
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
b US operations – embedded derivatives for variable annuity guarantee features
Under IFRS, the Guaranteed Minimum Withdrawal Benefit (GMWB) and Guaranteed Minimum Income Benefit (GMIB) reinsurance are
required to be fair valued as embedded derivatives. The movements in carrying values are affected by changes in the level of observed
implied equity volatility and changes to the discount rate applied from year to year. For these embedded derivatives, as described in note
D3(i), the discount rate applied reflects AA corporate bond curve rates. For the purposes of determining operating profit based on
longer-term investment returns, the charge for these features is determined using historical longer-term equity volatility levels and long-
term average AA corporate bond rate curves.
A
141
Notes on the Group financial statements > A: Background and accounting policies > continued
A4: Significant accounting policies continued
c UK shareholder-backed annuity business
With one exception, the operating result based on longer-term investment returns reflects the impact of all value movements on
policyholder liabilities for annuity business in PRIL and the PAC non-profit sub-fund.
The exception is for the impact on credit risk provisioning of actual downgrades during the year. As this feature arises due to short-
term market conditions the effect of downgrades, if any, in a particular year, on the overall provisions for credit risks is included in the
category of short-term fluctuations in investment returns.
The effects of other changes to credit risk provisioning are included in the operating result, as is the net effect of changes to the
valuation rate of interest applied to portfolio rebalancing to align more closely with management benchmark.
iv Fund management and other non-insurance businesses
For these businesses, the particular features applicable for life assurance noted above do not apply. For these businesses it is
inappropriate to include returns in the operating result on the basis described above. Instead it is appropriate to generally include
realised gains and losses (including impairments) in the operating result with unrealised gains and losses being included in short-term
fluctuations. For this purpose impairments are calculated as the credit loss determined by comparing the projected cash flows
discounted at the original effective interest rate to the carrying value. In some instances it may also be appropriate to amortise realised
gains and losses on derivatives and other financial instruments to operating results over a time period that reflects the underlying
substance of the arrangements.
A5: New accounting pronouncements
The following standards, interpretations and amendments have either been adopted for the first time in 2009 or have been issued but
are not yet effective in 2009, 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 are anticipated to have an impact upon the Group’s financial statements
have been discussed.
Accounting pronouncements adopted in 2009
IFRS 8, ‘Operating Segments’
IFRS 8 superseded IAS 14 ‘Segment Reporting’ for accounting periods beginning on or after 1 January 2009 and requires the Group
to adopt the ‘management approach’ to reporting the financial performance of its operating segments.
In accordance with IFRS 8, the Group determines and presents operating segments based on the information that is internally
provided to the Group Executive Committee, which is the Group’s chief operating decision maker. Further details on the operating
segments and their related performance measure are provided in note A4(c) in ‘Segments’.
The adoption of IFRS 8 has resulted in presentational and disclosure changes in the Group’s financial statements. This standard
has no impact on the results or financial position of the Group.
Amendments to IAS 1, ‘Presentation of Financial Statements: A Revised Presentation’
The revised version of IAS 1, which includes non-mandatory changes to the titles of some of the financial statements, has resulted
in a number of changes in presentation and disclosure.
As a result of the adoption of this revised IAS 1, the Group has changed the titles of its ‘consolidated balance sheet’ to ‘consolidated
statement of financial position’ and its ‘consolidated cash flow statement’ to ‘consolidated statement of cash flows’.
The Group has also introduced a consolidated statement of comprehensive income in accordance with the revised IAS 1.
Components of comprehensive income recognised outside of the income statement, for example exchange movements and the
unrealised valuation movement of Jackson’s available-for-sale debt securities, are now presented separately from changes in equity and
are disclosed in the statement of comprehensive income. Consequent to this presentational change, the Group has altered the exchange
translation method of the unrealised valuation movement of Jackson’s available-for-sale debt securities from the previous application of
closing exchange rate to the average exchange rate consistent with the translation method of foreign subsidiaries’ income statement
items. Accordingly, the Group’s 2008 comparatives in the consolidated statement of comprehensive income and the consolidated
statement of changes in equity have been altered with a reclassification of £240 million of exchange losses from the unrealised valuation
movement of Jackson’s available-for-sale debt securities, net of related change in amortisation of deferred income and acquisition costs
and tax to the exchange translation reserve. There is no impact on shareholders’ equity or the income statement from this change.
Improvements to IFRSs (2008)
The improvements issued by the IASB in May 2008 include amendments to a number of standards. The only amendment that has
impacted the Group’s financial statements is the amendment to IAS 40, ‘Investment property’ (and consequential amendments to IAS 16,
‘Property, Plant and Equipment’) which now states that property that is under construction or development for future use as investment
property is within the scope of IAS 40 and so should be measured at fair value where this is reliably measurable. Previously, these
properties were within the scope of IAS 16 and were measured at cost.
As a result of this amendment, the Group has reclassified its properties under development for future use as investment properties
from Property, Plant and Equipment to Investment properties. This amendment is effective on a prospective application basis from
1 January 2009 and accordingly, no adjustment to the 2008 comparatives has been made. At 1 January 2009, properties under
development with a cost of £131 million were reclassified to Investment properties and revalued to a fair value of £152 million.
142 Prudential plc > Annual Report 2009
The fair value adjustment of a gain of £21 million was recorded in the income statement but as the relevant properties were held by
the PAC with-profits fund, the gain was absorbed by the liability for unallocated surplus and has no direct effect on the profit or loss
attributable to shareholders or shareholders’ equity. There was no deferred tax impact on this fair value adjustment.
Amendments to IFRS 7, ‘Improving Disclosures about Financial Instruments’
In March 2009, the IASB issued amendments to IFRS 7 which require enhanced disclosures about fair value measurements and liquidity
risk. The amendments include the introduction of a three-level hierarchy for fair value measurement disclosures and require additional
disclosures about the relative reliability of fair value measurements. This has been included in note G1.
In addition, the Group has also adopted the following accounting pronouncements in 2009 but their adoption has had no material
impact on results and financial position of the Group:
• Amendment to IFRS 2, ‘Share-based Payment: Vesting Conditions and Cancellations’
• Amendment to IAS 23, ‘Borrowing costs’
• Amendments to IAS 32 and IAS 1, ‘Puttable Financial Instruments and Obligations Arising on Liquidation’
• IFRIC 16, ‘Hedges of a Net Investment in A Foreign Operation’
Accounting pronouncements endorsed by the EU but not yet effective
The following accounting pronouncements potentially relevant to the Group have been issued and endorsed for use in the EU but are
not mandatory for adoption for the 31 December year end.
Revised IFRS 3, ‘Business Combinations’ and Amendments to IAS 27, ‘Consolidated and Separate Financial Statements’
The revised IFRS 3 and amended IAS 27 are the outcomes of the second phase of the IASB’s and the US Financial Accounting Standards
Board’s (FASB) joint business combination project. The more significant changes from the revised IFRS 3 include:
• The immediate expensing of acquisition-related costs rather than inclusion in goodwill; and
• recognition and measurement at fair value of contingent consideration at acquisition date with subsequent changes to income.
The amendments to IAS 27 reflect changes to the accounting for non-controlling (minority) interests.
The revised IFRS 3 and amended IAS 27 are effective for business combinations occurring in accounting periods beginning on or
after 1 July 2009.
Amendment to IAS 39, ‘Financial instruments: Recognition and Measurement’ – Eligible Hedged Items
This amendment to IAS 39 clarifies how the principles that determine whether a hedged risk or portion of cash flows is eligible for
designation should be applied in particular situations. This amendment is effective for EU compliant financial statements for accounting
periods beginning on or after 1 July 2009. The Group is currently assessing the impact of this amendment but it is not expected to have a
material impact on the financial statements of the Group.
Accounting pronouncements not yet endorsed by the EU
The following accounting pronouncements potentially relevant to the Group have been issued but not yet endorsed for use in the EU.
Improvements to IFRSs (2009)
In April 2009, the IASB published amendments to a number of standards as part if its annual improvements projects.
These amendments are effective for Prudential’s 2010 financial statements. The Group is currently assessing the impact of these
improvements to its financial statements.
Amendment to IFRS 2 – Group Cash-Settled Share-based Payment Transactions
In June 2009, the IASB issued further amendments to IFRS 2 which sets out the accounting requirements for share-based payments.
These amendments clarified existing guidance, in particular by specifying that an entity that receives goods or services in a share-based
payment arrangement must account for those goods or services no matter which entity in the group settles the transaction and no matter
whether the transaction is settled in shares or cash. The Group is still assessing the impact of the standard but it is not expected to have a
material impact on the Group’s financial statements.
IFRIC 19 Extinguishing financial liabilities with equity instruments
In November 2009, the IFRIC issued guidance on how to account for the extinguishment of a financial liability by the issue of equity
instruments. This standard is likely to be effective for EU compliant financial statements for accounting periods beginning on or after
1 July 2010. This interpretation is not considered to have a material effect on the Group’s financial statements.
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
IFRS 9 Financial Instruments: Classification and Measurement
In November 2009, the IASB issued a new standard which altered the classification and measurement of financial instruments. Under the
new standard only two possible classifications arise, rather than the four existing classifications currently available under IAS 39, and will
result in all financial assets being valued at amortised cost or fair value through profit and loss. Financial liabilities are excluded from the
scope of the standard.
The standard is not mandatory before 2013 year-ends and is yet to be endorsed by the European Union. The Group is still assessing
A
the full impact of this standard.
143
Notes on the Group financial statements > B: Summary of results
B1: Segment disclosure – income statement
The determination of the operating segments and performance measure of the operating segments of the Group are as detailed in note A4.
2009 £m
2008 £m
Asian operations
Insurance operations:note ii
Underlying results before exceptional credit
Exceptional credit for Malaysia operationsD4(h)
Total Asian insurance operations
Development expenses
Total Asian insurance operations after development expenses
Asian asset management
Total Asian operations
US operations
Jackson (US insurance operations)notes ii,iv
Broker-dealer and asset managementnote iv
Total US operations
UK operations
UK insurance operations:note ii
Long-term business
General insurance commissionnote v
Total UK insurance operations
M&G
Total UK operations
Total segment profit
Other income and expenditure
Investment return and other income
Interest payable on core structural borrowings
Corporate expenditure:
Group Head Office
Asia Regional Head Office
Charge for share-based payments for Prudential schemesnote viii
Total
Restructuring costsnote ix
Operating profit based on longer-term investment returnsnote i
Short-term fluctuations in investment returns on shareholder-backed businessnote vi
Shareholders' share of actuarial and other gains and losses on defined benefit pension schemesnote vii
Loss on sale and results for Taiwan agency businessnote iii
Profit (loss) from continuing operations before tax attributable to shareholders
353
63
416
(6)
410
55
465
459
4
463
606
51
657
238
895
257
–
257
(26)
231
52
283
406
7
413
545
44
589
286
875
1,823
1,571
22
(209)
(146)
(57)
(5)
(395)
(23)
1,405
36
(74)
(621)
746
89
(172)
(130)
(41)
(6)
(260)
(28)
1,283
(1,721)
(13)
1
(450)
Notes
i Operating profit based on longer-term investment returns.
Operating profit based on longer-term investment returns is a supplemental measure of results and is the basis on which management regularly
review the performance of the Group’s segments as defined by IFRS 8. For the purposes of measuring operating profit, investment returns on
shareholder-financed business are based on expected long-term rates of return as discussed in note A4. The expected long-term rates of return
are intended to reflect historical real rates of return and, where appropriate, current inflation expectations adjusted for consensus economic and
investment forecasts. The most significant operation that requires adjustment for the difference between actual and long-term investment returns
is Jackson. The amounts included in operating results for long-term capital returns for Jackson’s debt securities comprise two components. These
are a risk margin reserve based charge for long-term expected defaults, which is determined by reference to the credit quality of the portfolio,
and amortisation of interest-related realised gains and losses to operating results based on longer-term results to the date when sold bonds would
otherwise have matured. Consistent with the policy of including longer-term investment returns in the measure of operating profit, movements
in policyholder liabilities are also, where appropriate, delineated between amounts included in operating profits and movements arising from
short-term market conditions, which are recorded in short-term fluctuations in investment returns.
Effect of changes to assumptions, estimates and bases of determining life assurance liabilities.
The results of the Group’s long-term business operations are affected by changes to assumptions, estimates and bases of preparation.
These are described in notes D2(h), D3(h) and D4(h).
ii
144 Prudential plc > Annual Report 2009
iii Sale of Taiwan agency business:
In order to facilitate comparisons of operating profit based on longer-term investment returns that reflect the Group’s retained operations, the results
attributable to the Taiwan business for which the sale process was completed in June 2009 are included separately within the supplementary analysis
of profit.
iv Jackson operating results based on longer-term investment returns.
IFRS basis operating profits for US operations include the following amounts (net of related change in amortisation of deferred acquisition costs,
where applicable) so as to derive longer-term investment returns.
Debt securities:
Amortisation of interest related realised gains and losses
Risk margin reserve charge for longer-term credit related losses (see below)
Equity type investments:
Longer-term returns
2009
£m
47
(60)
69
2008
£m
24
(41)
62
The risk margin reserve (RMR) charge for longer-term credit related losses included in operating profit based on longer-term investment returns for
2009 is based on an average annual RMR of 27 basis points (2008: 23 basis points) on average book values for the year as shown below.
Moody’s rating category (or equivalent under NAIC ratings of RMBS)
A3 or higher
Baa1, 2, 3
Ba1, 2, 3
B1, 2, 3
Below B3
Total
Related change to amortisation of deferred acquisition costs
(see below)
Risk margin reserve charge to operating profit for longer-term
credit related losses
2009
2008
Average
book
value
(US $m)
19,509
21,072
2,035
594
691
43,901
RMR
%
0.03
0.23
1.13
2.86
3.91
0.27
Average
book
value
(US $m)
21,098
20,145
1,635
514
373
43,765
RMR
%
0.03
0.23
1.11
2.80
3.98
0.23
Annual
expected losses
US $m
(5)
(47)
(23)
(17)
(27)
(119)
25
(94)
£m
(3)
(30)
(15)
(11)
(17)
(76)
16
(60)
Annual
expected losses
US $m
(6)
(46)
(18)
(14)
(15)
(99)
23
(76)
£m
(3)
(25)
(10)
(8)
(8)
(54)
13
(41)
During 2009 the National Association of Insurance Commissioners (NAIC) changed its approach to the determination of regulatory ratings of
residential mortgage-backed securities (RMBS). This recognised the complexities associated with these investments and the limitations of the credit
rating previously applied. The new ratings framework has been applied by an external third party, PIMCO, and provides regulatory ratings details
for more than 20,000 RMBS securities owned by US insurers at the end of 2009. Jackson has decided to use the ratings resulting from this model
to determine the average annual RMR for 2009 as this is considered more relevant information for the RMBS securities concerned. If the previous
approach of using ratings by Nationally Recognised Statistical Ratings Organisation (NRSROS) such as Moody’s, Standard and Poor’s or Fitch for
these investments had been used this would have resulted in an annual RMR of 31 basis points for 2009, an additional £11 million of annual expected
losses for the year. It should be noted that this change has no impact on the valuation applied to these securities within the IFRS statement of financial
position and there is no impact to IFRS profit before tax or shareholders’ equity as a result of this change.
The longer-term rates of return for equity-type investments ranged from 6.7 per cent to 7.9 per cent for 2009 and 6.3 per cent to 8.4 per cent
for 2008 depending on the type of investments. These rates are currently based on spreads over 10 year US treasury rates of 400 to 600 basis points.
Market value movements on equity-based derivatives and embedded derivatives are also recorded within operating profits based on longer-
term investment returns so as to be consistent with the market related effects on fees and reserve movements for equity-based products. Market
value movements on other derivatives are excluded from operating profit, and are included in short-term fluctuations in investment returns.
Consistent with the basis of measurement of insurance assets and liabilities for US GAAP investment contracts applied to Jackson’s IFRS
results, the charges and credits to operating profits based on longer-term investment returns are partially offset by related changes to amortisation
of deferred acquisition costs.
v UK operations transferred its general insurance business to Churchill in 2002, with general insurance commission representing the commission
receivable net of expenses for Prudential-branded general insurance products as part of this arrangement.
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
B
145
Notes on the Group financial statements > B: Summary of results > continued
B1: Segment disclosure – income statement continued
vi Short-term fluctuations in investment returns on shareholder-backed business.
Insurance operations:
Asia
US
UK
Other operations:
IGD hedge costs
Other
Total
2009
£m
31
27
108
(235)
105
(130)
36
2008
£m
(138)
(1,058)
(212)
–
(313)
(313)
(1,721)
General overview of defaults
The Group incurred defaults of £11 million in 2009 (2008: £206 million) on its debt securities portfolio. The defaults of £11 million in 2009 were
experienced by the UK Shareholder-backed annuity business. Jackson experienced less than £1 million of default losses during 2009. Defaults in
2008 of £206 million (including losses on sale) arose primarily in respect of Lehman Brothers (£110 million) and Washington Mutual (£91 million),
the majority of which arose in Jackson.
Asian insurance operations
The fluctuations for Asian insurance operations in 2009 of a gain of £31 million primarily relate to strong market performance in Taiwan and Japan
partially offset by the fall in the Vietnamese bond markets.
For 2008, the fluctuations of a charge of £138 million relate mainly to £81 million for Vietnam, reflecting a significant fall in the Vietnamese bond
and equity markets.
US insurance operations
The short-term fluctuations in investment returns for US insurance operations for the year comprise the following items:
Short-term fluctuations related to debt securities:
Charges in the year*
Defaults
Losses on sales of impaired and deteriorating bonds
Bond write downs
Recoveries/reversals
Less: risk margin charge included in operating profit based on longer-term investment returnsB1 (iv)
Interest related realised gains (losses):
Arising in the year
Less: amortisation gains and losses arising in current and prior years to
operating profit based on longer-term investment returns
Related change to amortisation of deferred acquisition costs
Total short-term fluctuations related to debt securities
Derivatives (other than equity related): market value movements (net of related change to
amortisation of deferred acquisition costs)†
Equity type investments: actual less longer-term return (net of related change to amortisation
of deferred acquisition costs)
Other items (net of related change to amortisation of deferred acquisition costs)‡
Total
2009
£m
2008
£m
–
(6)
(630)
5
(631)
76
(555)
125
(59)
66
75
(414)
385
(59)
115
27
(78)
(130)
(419)
3
(624)
54
(570)
(25)
(28)
(53)
88
(535)
(369)
(69)
(85)
(1,058)
146 Prudential plc > Annual Report 2009
* The charges on debt securities of Jackson incurred in 2009 and 2008 of £631 million and £624 million, respectively comprise the following:
Residential mortgage-backed securities
Prime
Alt-A
Sub-prime
Total residential mortgage-backed securities
Corporate debt securities
Other
Total
Defaults
£m
Bond
write downs
£m
Losses on sale of
impaired and
deteriorating
bonds
£m
Recoveries/
reversals
£m
–
–
–
–
–
–
–
268
192
49
509
91
30
630
–
(10)
–
(10)
16
–
6
–
–
–
–
–
(5)
(5)
2009
Total
£m
268
182
49
499
107
25
631
2008
Total
£m
25
138
4
167
441
16
624
Other bond write downs and defaults of £30 million relate to Piedmont securities. Piedmont is an investment vehicle investing in certain asset-backed
and mortgage-backed securities in the US.
† The gain of £385 million (2008: charge of £369 million) value movement is for freestanding derivatives held to manage the fixed annuity and other
general account business. Under IAS 39, unless hedge accounting is applied, value movements on derivatives are recognised in the income statement.
Derivative value movements in respect of equity risk within variable annuity business are included within the operating profit based on longer-
term investment returns to broadly match with the commercial effects to which the variable annuity derivative programme relates, (subject to some
limitations to GMDB liabilities where US GAAP does not fully reflect the economic features being hedged.) Other derivative value movements are
separately identified within short-term fluctuations in investment returns.
For the derivatives programme attaching to the fixed annuity and other general account business the Group has continued its approach of not
seeking to apply hedge accounting under IAS 39. This decision reflects the inherent constraints of IAS 39 for hedge accounting investments and life
assurance assets and liabilities under ‘grandfathered’ US GAAP under IFRS 4.
‡The £115 million gain (2008: charge of £85 million) for other items shown above comprises a gain of £85 million (2008: charge of £70 million) for the
difference between the charge for embedded derivatives included in the operating result and the charge to the total result and a gain of £30 million
(2008: charge of £15 million) of other items. For embedded derivatives the operating result reflects the application of 10 year average AA corporate
bond rate curves and a static historical equity volatility assumption. The total result reflects the application of year end AA corporate bond rate curves
and current equity volatility levels.
In addition, for US insurance operations, included within the statement of comprehensive income, is a reduction in net unrealised losses on debt
securities classified as available-for-sale of £2,669 million (2008: increase in net unrealised losses of £2,104 million). These 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.
UK insurance operations
The short-term fluctuations gain for UK insurance operations of £108 million (2008: charge £212 million) reflected principally asset value movements,
principally for shareholder-backed annuity business. The 2008 charge of £212 million also included £42 million for the effect of credit downgrades on
the calculation of liabilities for shareholder-backed annuity business in PRIL and PAC non-profit sub-fund.
IGD hedge costs
During the severe equity market conditions experienced in the first quarter of 2009 coupled with historically high equity volatility the Group entered
into exceptional short-dated hedging contracts to protect against potential tail-events on the IGD capital position, in addition to the regular
operational hedging programmes. The hedge contracts have expired and have not been renewed.
Other operations
Short-term fluctuations of other operations, in addition to the previously discussed IGD hedge costs, arise from:
Unrealised value movements on swaps held centrally to manage Group assets and liabilities
Unrealised value movements on Prudential Capital’s bond portfolio
Unrealised value movements on investments held by other operations
Sale of investment in India Mutual fund in May 2008 giving rise to a transfer to operating profit of
£47 million for the crystallised gain, and value reduction in the year, prior to sale, of £24 million
2009
£m
28
66
11
–
105
2008
£m
(38)
(190)
(14)
(71)
(313)
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
B
147
Notes on the Group financial statements > B: Summary of results > continued
B1: Segment disclosure – income statement continued
vii Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes
Actuarial gains and losses
Actual less expected return on scheme assets
Experience gains on scheme liabilities
(Losses) gains on changes of assumptions for scheme liabilities
Less: amount attributable to the PAC with-profits sub-fund
Other gains and losses
Movement in the provision for deficit funding of PSPS
Less: amount attributable to the PAC with-profits sub-fund
Total
2009
£m
23
17
(147)
(107)
47
(60)
(48)
34
(14)
(74)
2008
£m
(97)
19
71
(7)
(2)
(9)
(13)
9
(4)
(13)
The actuarial gains and losses shown in the table above relate to the Scottish Amicable, M&G and until 2009 the small Taiwan defined benefit pension
scheme. The amounts did not include actuarial gains and losses for the Prudential Staff Pension Scheme (PSPS) for which the Group has not
recognised its interest in the scheme’s underlying surplus.
The losses of £147 million on change of assumptions comprise mainly the effect of a decrease in the risk discount rate combined with the effect
of increase in inflation rates.
Other gains and losses relate to the change in the year of the provision for deficit funding obligation for PSPS.
Further details on the Group’s defined benefit pension schemes and the effect of the accounting policy change are shown in note I2.
viii Share-based payments
The charge for share-based payments for Prudential schemes is for the SAYE and Group performance-related schemes.
ix Restructuring costs are incurred in the UK as part of EEV covered business (£16 million) and as part of central operations (EEV non-covered business)
(£7 million). (2008: £10 million and £18 million respectively).
B2: Earnings per share
Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number
of ordinary shares outstanding during the year, excluding those held in employee share trusts, which are treated as cancelled.
For diluted earnings per share, the weighted average number of shares in issue is adjusted to assume conversion of all dilutive potential
ordinary shares. The Group’s only class of dilutive potential ordinary shares are those share options granted to employees where the
exercise price is less than the average market price of the Company’s ordinary shares during the year. No adjustment is made if the impact
is anti-dilutive overall.
Based on operating profit based on
longer-term investment returns
Short-term fluctuations in investment returns
on shareholder-backed business
Shareholders’ share of actuarial and other
gains and losses on defined benefit
pension schemes
Adjustment from loss on sale and result of
Taiwan agency business
Based on profit for the year from
continuing operations
Adjustments for post-tax results of
discontinued operationsI9
Based on profit for the year
2009
Before tax
B1
£m
Tax
F5
£m
Minority
interests
£m
Net of tax
and
minority
interests
£m
Basic
earnings
per share
Pence
Diluted
earnings
per share
Pence
1,405
(318)
(2)
1,085
43.4p
43.3p
36
224
(74)
(621)
746
(14)
732
21
18
(55)
–
(55)
1
–
–
(1)
–
(1)
261
10.4p
10.4p
(53)
(2.1)p
(2.1)p
(603)
(24.1)p
(24.0)p
690
(14)
676
27.6p
27.6p
(0.6)p
27.0p
(0.6)p
27.0p
148 Prudential plc > Annual Report 2009
Based on operating profit based on
longer-term investment returns
Short-term fluctuations in investment returns
on shareholder-backed business
Shareholders’ share of actuarial and other gains
and losses on defined benefit pension schemes
Adjustment for result of sold Taiwan
agency business
Based on loss for the year
Before tax
B1
£m
1,283
(1,721)
(13)
1
(450)
Tax
F5
£m
(292)
352
3
(4)
59
2008
Minority
interests
£m
Net of tax
and
minority
interests
£m
Basic
earnings
per share
Pence
Diluted
earnings
per share
Pence
(4)
(1)
–
–
(5)
987
39.9p
39.9p
(1,370)
(55.4)p
(55.4)p
(10)
(3)
(0.4)p
(0.4)p
(0.1)p
(396)
(16.0)p
(0.1)p
(16.0)p
Number of shares
A reconciliation of the weighted average number of ordinary shares used for calculating basic and diluted earnings per share is set
out as below:
Weighted average shares for calculation of basic earnings per share
Shares under option at end of year
Number of shares that would have been issued at fair value on assumed option exercise
Weighted average shares for calculation of diluted earnings per share
2009 m
2008 m
2,501
12
(7)
2,506
2,472
–
–
2,472
At 31 December 2008 there were seven million shares under option offset by six million shares that would have been issued at fair value
on assumed option exercise. The net one million potentially dilutive ordinary shares have been excluded from the 2008 diluted earnings
per share calculation as their inclusion would have decreased the loss per share.
B3: Dividends
Dividends declared and paid in reporting period
Parent company:
Interim dividend (2009: 6.29p, 2008: 5.99p per share)
Final dividend for prior period (2009: 12.91p, 2008: 12.30p per share)
Subsidiary company payments to attributable to minority interests
Total
2009
£m
2008 £m
159
322
–
481
149
304
2
455
As a result of shares issued in lieu of dividends of £137 million (2008: £157 million), dividends paid in cash, as set out in the consolidated
cash flow statement, were £344 million (2008: £297 million).
Parent company dividends relating to reporting period:
Interim dividend (2009: 6.29p, 2008: 5.99p per share)
Final dividend (2009: 13.56p, 2008: 12.91p per share)
Total
2009
£m
2008 £m
159
343
502
149
322
471
A final dividend of 13.56 pence per share was proposed by the directors on 8 March 2010. Subject to shareholders’ approval, the
dividend will be paid on 27 May 2010 to shareholders on the register at the close of business on 9 April 2010. The dividend will absorb
an estimated £343 million of shareholders’ funds. A scrip dividend alternative will be offered to shareholders.
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
B
149
Notes on the Group financial statements > B: Summary of results > continued
B4: Exchange translation
Exchange movement recognised in other comprehensive income
Asian operations
US operations
Unallocated to a segment (central funds)
2009 £m
2008* £m
(189)
(244)
227
(206)
456
581
(646)
391
*As a result of changes following the implementation of amendments to IAS 1, exchange losses of £240 million relating to US operations previously
included within the unrealised valuation movement of Jackson’s available-for-sale debt securities have been reclassified as exchange movements within
the statement of comprehensive income. This is explained further in note A5. There is no impact on shareholders’ equity or the income statement from
this change.
The movements for Asian and US operations reflect the application of year end exchange rates to the assets and liabilities and average
exchange rates to the income statement on translation of these operations into the presentation currency of the Group. The movement
unallocated to a segment mainly reflects the translation of currency borrowings and forward contracts which have been designated as a
net investment hedge against the currency risk of the net investment in Jackson.
The exchange rates applied were:
Local currency: £
Hong Kong
Indonesia
Japan
Malaysia
Singapore
Taiwan
US
B5: New business
Closing
rate at
31 Dec 2009
12.52
15,171.52
150.33
5.53
2.27
51.65
1.61
Average
for 2009
12.14
16,173.28
146.46
5.51
2.27
51.65
1.57
Closing
rate at
31 Dec 2008
11.14
15,799.22
130.33
5.02
2.07
47.28
1.44
Average
for 2008
14.42
17,749.22
192.09
6.15
2.61
58.24
1.85
Opening
rate at
1 Jan 2008
15.52
18,696.71
222.38
6.58
2.87
64.56
1.99
Insurance products and investment products (note i)
Asian operations
US operations
UK operations
Group total
Insurance products
gross premiums
Investment products
gross inflows
note ii
Total
2007 £m
2009 £m
2008 £m
2009 £m
2008 £m
2009 £m
2008 £m
2,019
8,909
5,014
2,422
6,941
7,183
15,942
16,546
71,176
6
24,875
96,057
46,957
36
16,154
63,147
73,195
8,915
29,889
111,999
49,379
6,977
23,337
79,693
150 Prudential plc > Annual Report 2009
Insurance products – new business premiums and contributions (note i)
Single
Regular
Annual premium and
contribution equivalents
2007 £m
2009 £m
2008 £m
2009 £m
2008 £m
2009 £m
2008 £m
Asian operationsnote iv
China (Group’s 50% interest)
Hong Kong
India (Group’s 26% interest)
Indonesia
Japan
Korea
Malaysia
Singapore
Taiwannote iii
Other
Total Asian operations (all retail)
US operationsnote iv
Fixed annuities
Fixed index annuities
Variable annuities
Life
Total US operations – Retail
Guaranteed investment contracts
GIC – Medium Term Notes
Total US operations
UK operations
Product summary
Internal vesting annuities
Direct and partnership annuities
Intermediated annuities
Total individual annuities
Income drawdown
Equity release
Individual pensions
Corporate pensions
Unit-linked bonds
With-profits bonds
Protection
Offshore products
PruHealth
Total retail retirement
Corporate pensions
Other products
DWP rebates
Total mature life and pensions
Total UK retail
Wholesale annuities
Credit life
Total UK operations
Channel summary
Direct and partnership
Intermediated
Wholesale
Sub-total
DWP rebates
Total UK operations
Group total
72
94
47
41
57
38
63
297
104
29
842
1,053
1,433
6,389
10
8,885
–
–
8,885
1,357
590
242
2,189
91
127
198
81
122
1,264
–
317
–
4,389
111
79
127
317
4,706
39
23
4,768
1,814
2,765
62
4,641
127
4,768
63
507
60
94
115
78
28
341
36
18
38
232
163
186
46
118
140
98
97
59
32
154
202
167
30
211
99
78
55
54
45
241
168
190
52
122
146
128
107
62
38
205
208
176
42
219
102
112
58
56
1,340
1,177
1,082
1,261
1,216
1,724
501
3,491
7
5,723
857
337
6,917
1,600
703
497
2,800
75
242
115
221
109
869
–
551
–
4,982
227
132
153
512
5,494
1,417
18
6,929
2,352
2,990
1,434
6,776
153
6,929
–
–
–
24
24
–
–
24
–
–
–
–
–
–
7
86
–
–
17
3
11
124
105
17
–
122
246
–
–
246
201
45
–
246
–
246
–
–
–
24
24
–
–
24
–
–
–
–
–
–
3
88
–
–
6
4
16
117
116
21
–
137
254
–
–
254
215
39
–
254
–
254
105
143
639
25
912
–
–
912
136
59
24
219
9
13
27
94
12
126
17
35
11
563
116
25
13
154
717
4
2
723
382
322
6
710
13
723
172
50
349
25
596
86
34
716
160
70
50
280
8
24
14
110
11
87
6
59
16
615
139
34
15
188
803
142
2
947
450
338
144
932
15
947
14,495
15,186
1,447
1,360
2,896
2,879
151
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
B
Notes on the Group financial statements > B: Summary of results > continued
B5: New business continued
Investment products – funds under management (notes ii and iv)
Asian operations
US operations
UK operations
Group total
Asian operations
US operations
UK operations
Group total
2009 £m
Redemptions
(69,177)
(66)
(11,397)
(80,640)
2008 £m
Redemptions
(46,102)
(32)
(12,747)
(58,881)
Market
gross
inflows
71,176
6
24,875
96,057
Market
gross
inflows
46,957
36
16,154
63,147
Market
exchange
translation
and other
movements
2,243
10
9,831
12,084
Market
exchange
translation
and other
movements
(3,016)
(9)
(7,631)
(10,656)
31 Dec 2009
19,474
–
70,306
89,780
31 Dec 2008
15,232
50
46,997
62,279
1 Jan 2009
15,232
50
46,997
62,279
1 Jan 2008
17,393
55
51,221
68,669
Notes
i
The tables shown above are provided as an indicative volume measure of transactions undertaken in the reporting period that have the potential
to generate profits for shareholders. The amounts shown are not, and not intended to be, reflective of premium income recorded in the IFRS
income statement.
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.
The format of the tables shown above is consistent with the distinction between insurance and investment products as applied for previous
financial reporting periods. With the exception of some US institutional business, products categorised as ‘insurance’ refer to those classified as
contracts of long-term insurance business for regulatory reporting purposes, i.e. falling within one of the classes of insurance specified in Part II
of Schedule 1 to the Regulated Activities Order under FSA regulations.
The details shown above for insurance products include contributions for contracts that are classified under IFRS 4 ‘Insurance Contracts’ as
not containing significant insurance risk. These products are described as investment contracts or other financial instruments under IFRS. Contracts
included in this category are primarily certain unit-linked and similar contracts written in UK insurance operations and Guaranteed Investment
Contracts and similar funding agreements written in US operations.
Investment products referred to in the table for funds under management above are unit trust, mutual funds and similar types of retail fund
management arrangements. These are unrelated to insurance products that are classified as ‘investment contracts’ under IFRS 4, as described in
the preceding paragraph, although similar IFRS recognition and measurement principles apply to the acquisition costs and fees attaching to this
type of business.
ii
iii The tables above include new business for the Taiwan bank distribution operation. New business of the Taiwan Agency business, which was sold
in June 2009 (as explained in note I1) is excluded from the tables. Comparative figures have been adjusted accordingly.
iv New business and market gross inflows and redemptions have been translated at the average exchange rate for the year applicable. Funds under
management at points in time are translated at the exchange rate applicable at those dates.
152 Prudential plc > Annual Report 2009
B6: Group statement of financial position
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.
a Group statement of financial position by operating segment
i Position at 31 December 2009
2009 £m
Asset
manage-
ment
opera-
tions
E2
Unallo-
cated
to a
segment
(central
Intra-
group
opera- elimina-
tions
tions)
Total
insurance
opera-
tions
Insurance operations
US
D3
Asia
D4
UK
D2
By operating segment
Assets
Intangible assets attributable to shareholders:
Goodwill
Deferred acquisition costs and
other intangible assets
TotalH1
Intangible assets attributable to with-profits funds:
In respect of acquired subsidiaries for venture fund
and other investment purposes
Deferred acquisition costs and
other intangible assets
TotalH2
Total
Deferred tax assetsH4
Other non-investment and non-cash assetsH3-H6
Investment of long-term business and other operations:
Investment properties
Investments accounted for using the equity method
Financial investments:
Loansnote c
Equity securities and portfolio holdings in unit trusts
Debt securitiesnote c
Other investments
Deposits
Total investmentsG1,H7,H8
Properties held for saleH9
Cash and cash equivalentsH10
Total assets
–
–
80
80
1,230
127
127
3,092
3,092
822
902
4,041
8
4,121
1,238
124
9
133
260
292
3,074
10,861
4
124
106
230
–
–
–
4,351
1,238
–
–
–
3,092
1,944
1,404
–
97
97
999
132
880
33
–
11 10,905
6
2
–
–
4,319
1,815
1,207
7,341
37,051 20,984 11,182 69,217
9,984 100,587
67,772 22,831
258
955
4,843
746 12,757
454
3,630
11,557
1,413
137
1,164
113
63
132,690 49,576 23,390 205,656
2,890
–
2,265
3
340
–
837
3
3,442
–
970
31 Dec
2009
Group
total
1,310
4,049
5,359
124
106
230
5,589
2,708
5,425
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
176
–
176
–
895
–
–
10,905
6
8,754
–
69,354
–
– 101,751
5,132
–
12,820
–
– 208,722
–
–
3
5,307
2,368
5,358
132
718
208
–
4,393 (5,044)
138,581 56,359 26,238 221,178
5,948
5,672 (5,044) 227,754
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
B
153
Notes on the Group financial statements > B: Summary of results > continued
B6: Group statement of financial position continued
2009 £m
By operating segment
Equity and liabilities
Equity
Shareholders’ equityH11
Minority interests
Total equity
Insurance operations
US
D3
Asia
D4
UK
D2
Total
Asset
insurance manage-
ment
E2
opera-
tions
Unallo-
cated
to a
segment
(central
Intra-
group
opera- elimina-
tions
tions)
31 Dec
2009
Group
total
1,939
28
3,011
–
1,462
1
6,412
29
1,659 (1,800)
–
3
1,967
3,011
1,463
6,441
1,662 (1,800)
–
–
–
6,271
32
6,303
–
–
–
–
–
–
–
–
–
–
–
–
–
2,691
549
3,240
– 145,713
– 24,880
– 15,805
– 10,019
– 196,417
–
–
–
–
–
–
2,691
703
3,394
2,751
1,284
3,482
3,809
3,872
1,215
594
1,612
643
1,501
877
Liabilities
Policyholder liabilities and unallocated surplus of
with-profits funds:
Insurance contract liabilitiesH12
Investment contract liabilities with discretionary
77,655 46,346 21,712 145,713
participation featuresG1
24,780
–
100 24,880
Investment contract liabilities without discretionary
participation featuresG1
13,794
1,965
46 15,805
Unallocated surplus of with-profits funds (reflecting
application of ‘realistic’ basis provisions for UK
regulated with-profits funds)D2fii,H12
Total policyholder liabilities and unallocated surplus
9,966
–
53 10,019
of with-profits fundsnote d
126,195 48,311 21,911 196,417
Core structural borrowings of shareholder-financed
operations:H13
Subordinated debt
Other
Total
Operational borrowings attributable
to shareholder financed operationsG1,H13
Borrowings attributable to with-profits operationsH13
Other non-insurance liabilities:G1,H4,H14,H15
Obligations under funding, securities lending and
sale and repurchase agreements
Net asset value attributable to unit holders of
consolidated unit trusts and similar funds
Deferred tax liabilities
Current tax liabilities
Accruals and deferred income
Other creditors
Provisions
Derivative liabilities
Other liabilities
Total
Total liabilities
–
–
–
–
154
154
–
–
–
158
1,284
–
154
154
203
–
210
–
571
1,284
142
–
2,038
–
2,108
1,374
–
3,482
–
–
2,534
1,606
426
271
726
406
709
191
47
1,858
89
–
532
10
461
309
818
384
85
105
760
50
146
306
3,399
3,848
600
376
2,018
466
1,316
806
410
5
35
209
3,292
127
49
17
–
19
580
9
–
–
–
–
1,346 (5,044)
–
–
–
50
136
54
8,977
4,680
2,654 16,311
4,144
2,194 (5,044) 17,605
136,614 53,348 24,775 214,737
4,286
7,472 (5,044) 221,451
Total equity and liabilities
138,581 56,359 26,238 221,178
5,948
5,672 (5,044) 227,754
154 Prudential plc > Annual Report 2009
ii Position at 31 December 2008
2008 £m
By operating segment
Assets
Intangible assets attributable to
shareholders:
Goodwill
Deferred acquisition costs and other
intangible assets
TotalH1
Intangible assets attributable to
with-profits funds:
In respect of acquired subsidiaries
for venture fund and other
investment purposes
Deferred acquisition costs and other
intangible assets
TotalH2
Total
Deferred tax assetsH4
Other non-investment and non-cash assetsH3-H6
Investment of long-term business
and other operations:
Investment properties
Investments accounted for using the equity method
Financial investments:
Loansnote c
Equity securities and portfolio holdings in unit trusts
Debt securitiesnote c
Other investments
Deposits
Total investmentsG1,H7,H8
Properties held for saleH9
Cash and cash equivalentsH10
Total assets
Insurance operations
US
D3
Asia
D4
UK
D2
Total
Asset
insurance manage-
ment
E2
opera-
tions
–
134
134
–
111
111
1,230
3,962
3,962
1,247
1,358
5,343
5,454
6
1,236
174
13
187
321
513
4,962
11,959
–
1,902
38,880
58,871
4,160
6,090
–
–
–
3,962
1,969
1,819
–
113
113
1,471
101
1,416
174
126
300
5,754
2,583
8,197
13
–
20
–
11,992
–
5,121
15,142
24,249
1,256
390
1,705
8,077
11,113
144
750
8,728
62,099
94,233
5,560
7,230
121,862
46,171
21,809 189,842
–
2,571
–
246
–
1,501
–
4,318
130,229
54,167
26,298 210,694
–
–
–
1,236
160
135
–
–
1,763
23
991
462
64
3,303
–
1,472
6,306
Unallo-
cated
to a
segment
(central
opera-
tions)
Intra-
group
elimina-
tions
31 Dec
2008
Group
total
–
–
–
–
–
–
–
–
–
–
–
–
–
–
143
3,553
–
(5,608)
1,341
5,349
6,690
174
126
300
6,990
2,886
6,277
–
10
–
–
–
279
–
289
–
165
–
–
–
–
–
–
–
11,992
10
10,491
62,122
95,224
6,301
7,294
– 193,434
–
–
–
5,955
4,150
(5,608) 215,542
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
B
155
Notes on the Group financial statements > B: Summary of results > continued
B6: Group statement of financial position continued
2008 £m
Insurance operations
US
D3
Asia
D4
UK
D2
Total
Asset
insurance manage-
ment
E2
opera-
tions
Unallo-
cated
to a
segment
(central
Intra-
group
opera- elimina-
tions
tions)
31 Dec
2008
Group
total
1,655
47
1,702
1,698
–
1,698
2,167
7
2,174
5,520
54
5,574
1,642
1
(2,104)
–
1,643
(2,104)
–
–
–
5,058
55
5,113
72,756
42,476
20,798 136,030
23,367
–
79
23,446
11,584
2,885
32
14,501
8,254
–
160
8,414
115,961
45,361
21,069 182,391
–
–
–
–
173
173
–
–
–
–
173
173
54
511
130
695
1,308
–
–
1,308
2,251
3,321
–
5,572
–
–
–
–
–
–
–
–
4
–
–
–
–
–
–
–
1,987
798
2,785
1,278
–
–
– 136,030
–
–
–
23,446
14,501
8,414
– 182,391
–
–
–
–
–
1,987
971
2,958
1,977
1,308
–
5,572
1,536
1,421
127
265
1,619
267
3,401
317
11,204
88
1,337
–
–
529
23
863
263
6,424
1,154
441
76
130
796
37
32
259
2,778
3,199
203
395
2,944
327
4,296
839
2,925
20,553
128,527
52,469
24,124 205,120
130,229
54,167
26,298 210,694
1,065
11
40
205
2,898
97
292
51
4,659
4,663
6,306
–
19
599
30
1,262
37
244
–
–
–
–
–
(5,608)
–
–
–
3,843
3,229
842
630
1,496
461
4,832
890
2,191
(5,608) 21,795
6,254
(5,608) 210,429
4,150
(5,608) 215,542
By business segment
Equity and liabilities
Equity
Shareholders’ equityH11
Minority interests
Total equity
Liabilities
Policyholder liabilities and unallocated
surplus of with-profits funds:
Insurance contract liabilitiesH12
Investment contract liabilities with
discretionary participation featuresG1
Investment contract liabilities without
discretionary participation featuresG1
Unallocated surplus of with-profits
fundsD2fii,H12
Total policyholder liabilities and unallocated
surplus of with-profits fundsnote d
Core structural borrowings of shareholder-
financed operations:H13
Subordinated debt
Other
Total
Operational borrowings attributable
to shareholder-financed operationsG1,H13
Borrowings attributable to with-profits
fundsG1,H13
Other non-insurance liabilities: G1,H4,H14,H15
Obligations under funding, securities
lending and sale and repurchase
agreements
Net asset value attributable to unit
holders of consolidated unit trusts
and similar funds
Deferred tax liabilities
Current tax liabilities
Accruals and deferred income
Other creditors
Provisions
Derivative liabilities
Other liabilities
Total
Total liabilities
Total equity and liabilities
156 Prudential plc > Annual Report 2009
b Group statement of financial position by business type
2009 £m
2008 £m
By business type
Assets
Intangible assets attributable to shareholders:
Goodwill
Deferred acquisition costs and other intangible assets
TotalH1
Intangible assets attributable to with-profits funds:
In respect of acquired subsidiaries for venture fund
and other investment purposes
Deferred acquisition costs and other intangible assets
TotalH2
Total
Deferred tax assetsH4
Other non-investment and non-cash assetsH3-H6
Investment of long-term business
and other operations:
Investment properties
Investments accounted for using the equity method
Financial investments:
Loansnote c
Equity securities and portfolio holdings in unit trusts
Debt securitiesnote c
Other investments
Deposits
Total investmentsG1,H7,H8
Properties held for saleH9
Cash and cash equivalentsH10
Total assets
Shareholder-backed business
Unit-
linked
and
variable
annuity
Non-
linked
business
Partici-
pating
funds
Asset
manage-
ment
opera-
tions
E2
Unallo-
cated
to a
segment
(central
Intra-
group
opera- elimina-
tions
tions)
–
–
–
124
106
230
230
–
–
–
–
–
–
–
80
4,041
1,230
8
4,121
1,238
–
–
–
–
–
–
4,121
1,238
–
–
–
–
–
–
–
–
–
–
–
–
–
–
31 Dec
2009
Group
total
31 Dec
2008
Group
total
1,310
4,049
5,359
1,341
5,349
6,690
124
106
230
5,589
174
126
300
6,990
2,886
6,277
156
2,017
–
630
2,212
2,711
132
718
8,759
–
662
–
1,484
6
–
–
1,887
27
29,962 38,620
47,327
3,448
9,638
5,427
635
8,848 44,412
1,285
2,373
110
746
1,413
137
1,164
113
63
101,021 49,013 55,622
2,890
–
1,421
–
1,174
3
847
–
970
208
2,708
4,393 (5,044) 5,425
–
–
–
–
–
–
176
–
176
–
895
– 10,905 11,992
6
–
10
–
8,754 10,491
– 69,354 62,122
– 101,751 95,224
–
5,132
6,301
– 12,820
7,294
– 208,722 193,434
–
–
3
5,307
–
5,955
104,845 50,817 65,516
5,948
5,672 (5,044) 227,754 215,542
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
B
157
Notes on the Group financial statements > B: Summary of results > continued
B6: Group statement of financial position continued
By business type
Equity and liabilities
Equity
Shareholders’ equityH11
Minority interests
Total equity
2009 £m
2008 £m
Shareholder-backed business
Unit-
linked
and
variable
annuity
Non-
linked
business
Partici-
pating
funds
Asset
manage-
ment
opera-
tions
E2
Unallo-
cated
to a
segment
(central
opera-
tions)
Intra-
group
elimina-
tions
31 Dec
2009
Group
total
31 Dec
2008
Group
total
–
28
28
–
–
–
6,412
1
1,659 (1,800)
–
3
6,413
1,662 (1,800)
–
–
–
6,271
32
6,303
5,058
55
5,113
Liabilities
Policyholder liabilities and unallocated surplus
of with-profits funds:
Contract liabilities (including amounts in respect
of contracts classified as investment contracts
under IFRS 4)
Unallocated surplus of with-profits funds
86,337 49,391 50,670
(reflecting application of ‘realistic’ basis provisions
for UK regulated with-profits funds)D2fii,H12
10,019
–
–
Total policyholder liabilities and unallocated surplus
of with-profits fundsnote d
96,356 49,391 50,670
Core structural borrowings of
shareholder-financed operations:H13
Subordinated debt
Other
Total
–
–
–
–
–
–
–
154
154
–
–
–
–
–
–
–
–
–
– 186,398 173,977
– 10,019
8,414
– 196,417 182,391
2,691
549
3,240
–
–
–
2,691
703
3,394
1,987
971
2,958
Operational borrowings attributable
to shareholder-financed operationsG1,H13
Borrowings attributable to with-profits operationsG1,H13
Deferred tax liabilities
Other non-insurance liabilities
–
1,284
1,420
5,757
–
–
12
1,414
571
–
2,416
5,292
142
–
5
4,139
2,038
–
19
1,977
1,308
3,229
2,175 (5,044) 13,733 18,566
2,751
1,284
3,872
–
–
–
Total liabilities
Total equity and liabilities
104,817 50,817 59,103
4,286
7,472 (5,044) 221,451 210,429
104,845 50,817 65,516
5,948
5,672 (5,044) 227,754 215,542
158 Prudential plc > Annual Report 2009
c Debt securities and loans
i Information on the credit risks of debt securities
S&P – AAA
S&P – AA+ to AA-
S&P – A+ to A-
S&P – BBB+ to BBB-
S&P – Other
Moody’s – Aaa
Moody’s – Aa1 to Aa3
Moody’s – A1 to A3
Moody’s – Baa1 to Baa3
Moody’s – Other
Implicit ratings of RMBS based
on NAIC valuations (see below)
– NAIC 1
– NAIC 2
– NAIC 3-6
Fitch
Other
Insurance operations
UK
16,091
6,472
19,693
12,183
2,667
57,106
463
276
801
815
339
2,694
–
–
–
–
1,022
6,950
US
3,287
846
5,192
7,659
895
17,879
273
43
32
64
57
469
747
105
473
1,325
281
2,877
Total debt securities
67,772
22,831
2009 £m
2008 £m
Total
insurance
operations
Asset
manage-
ment
21,637
8,912
26,381
20,524
4,479
81,933
870
668
1,142
919
411
4,010
747
105
473
1,325
1,342
11,977
469
148
468
57
–
1,142
–
19
2
–
–
21
–
–
–
–
–
1
Group
total
22,106
9,060
26,849
20,581
4,479
83,075
870
687
1,144
919
411
4,031
747
105
473
1,325
1,342
11,978
100,587
1,164
101,751
Asia
2,259
1,594
1,496
682
917
6,948
134
349
309
40
15
847
–
–
–
–
39
2,150
9,984
Group
total
27,276
10,885
22,300
15,392
2,607
78,460
1,657
1,056
1,187
614
307
4,821
–
–
–
–
1,065
10,878
95,224
In the table above, with the exception in 2009 of residential mortgage-backed securities within Jackson, Standard & Poor’s (S&P)
ratings have been used where available. For securities where S&P ratings are not immediately available, those produced by Moody’s
and then Fitch have been used as an alternative. During 2009, the National Association of Insurance Commissioners in the US revised the
regulatory ratings process for more than 20,000 residential mortgage-backed securities. The table above includes these securities, held
by Jackson, using the regulatory ratings levels established by an external third party (PIMCO). Notes D2(c), D3(c), D4(c) and E2 provide
further details on the credit risks of debt securities by segment.
ii Group exposure to holdings in asset-backed securities
The Group’s exposure to holdings in asset-backed securities which comprise residential mortgage-backed securities (RMBS),
commercial mortgage backed securities (CMBS), CDO funds and other asset-backed securities (ABS), at 31 December 2009
is as follows:
Shareholder-backed operations:
UK insurance operationsnote i
US insurance operationsnote ii
Asian insurance operationsnote iii
Other operationsnote iv
With-profits operations:
UK insurance operationsnote i
Asian insurance operationsnote iii
Total
2009 £m
2008 £m
2,044
6,376
59
326
8,805
6,451
378
6,829
1,075
7,464
15
407
8,961
4,977
328
5,305
15,634
14,266
159
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
B
Notes on the Group financial statements > B: Summary of results > continued
B6: Group statement of financial position continued
i UK insurance operations
The UK insurance operations’ exposure to asset-backed securities at 31 December 2009 comprises:
Shareholder-backed business (2009: 29% AAA, 24% AA)
With-profits operations (2009: 33% AAA, 14% AA)
Total
2009 £m
2008 £m
2,044
6,451
8,495
1,075
4,977
6,052
All of the £2,044 million (2008: £1,075 million) exposure of the shareholder-backed business relates to the UK market, primarily to
investments held by PRIL. £4,695 million of the £6,451 million (2008: £2,721 million of the £4,977 million) exposure of the with-profits
operations relates to exposure to the UK market while the remaining £1,756 million (2008: £2,256 million) relates to exposure to the
US market.
ii US insurance operations
The US insurance operations’ exposure to asset-backed securities at 31 December 2009 comprises:
RMBS*:
Sub-prime (2009: 76% AAA, 1% AA)
Alt-A (2009: 24% AAA, 5% AA)
Prime (2009: 82% AAA, 4% AA)
CMBS (2009: 46% AAA, 14% AA)
CDO funds (2009: 29% AAA, 10% AA),† including £3 million exposure to sub-prime
Other ABS (2009: 25% AAA, 18% AA), including £nil exposure to sub-prime
Total
*RMBS ratings refer to the rating implicit within NAIC risk-based capital valuation (see note c(i)).
†Including the Group’s economic interest in Piedmont and other consolidated CDO funds.
Further details on Jackson’s RMBS sub-prime and Alt-A securities are given in note D3(c).
2009 £m
2008 £m
194
443
2,679
2,104
79
877
6,376
291
646
3,572
1,869
320
766
7,464
iii Asian insurance operations
The Asian insurance operations’ exposure to asset-backed securities is primarily held by the with-profits operations.
The £378 million (2008: £328 million) asset-backed securities exposure of the Asian with-profits operations comprises:
RMBS – all without sub-prime exposure
CMBS
CDO funds and other ABS
Total
2009 £m
2008 £m
–
91
287
378
46
88
194
328
The £378 million (2008: £328 million) includes £228 million (2008: £259 million) held by investment funds consolidated under IFRS in
recognition of the control arrangements for those funds and includes an amount not owned by the Group with a corresponding liability
of £61 million (2008: £32 million) on the statement of financial position for net asset value attributable to external unit-holders in respect
of these funds, which are non-recourse to the Group. Of the £378 million, 72 per cent (2008: £328 million, 70 per cent) are investment
graded by Standard & Poor’s.
iv Other operations
Other operations’ exposure to asset-backed securities at 31 December 2009 is held by Prudential Capital and comprises:
RMBS: Prime (2009: 92% AAA, 8% AA)
CMBS (2009: 48% AAA, 18% AA)
CDO funds and other ABS
Total
2009 £m
2008 £m
91
193
42
326
106
230
71
407
iii Loans
Information on the credit quality of the portfolio of loans, which almost wholly is for amounts which are neither past due or impaired
is shown in notes D2, D3, D4 and E2. Details of allowances for loans, losses and amounts past due are shown in notes G1 and G2. No
additional analysis is provided of the element of loans and receivables that were neither past due nor impaired from those of the total
portfolio on the grounds of the immateriality of the difference between the neither past due nor impaired element and the total portfolio.
160 Prudential plc > Annual Report 2009
d 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 the Group from the beginning of the
year to the end of the year is as follows:
At 1 January 2008
Premiums
Surrenders
Maturities/Deaths
Net cash flows
Shareholders’ transfers post tax
Investment-related items and other movements
Foreign exchange translation differences
At 31 December 2008/1 January 2009
Premiums
Surrenders
Maturities/Deaths
Net cash flows
Shareholders’ transfers post tax
Changes in reserving basis in Malaysia
Assumption changes (shareholder-backed business)
Investment-related items and other movements
Foreign exchange translation differences
Disposal of Taiwan agency business
Insurance operations
US
£m
Asia
£m
UK
£m
138,290
9,372
(4,281)
(8,324)
(3,233)
(284)
(16,331)
(2,481)
115,961
6,867
(3,971)
(7,239)
(4,343)
(202)
–
(46)
14,118
707
–
34,848
6,728
(3,852)
(564)
2,312
–
(4,552)
12,753
45,361
9,177
(3,255)
(733)
5,189
–
–
–
2,986
(5,225)
–
17,179
4,162
(1,191)
(354)
2,617
(23)
(4,293)
5,589
21,069
3,807
(1,201)
(342)
2,264
(20)
(63)
(4)
4,242
(2,069)
(3,508)
Total
insurance
operations
£m
190,317
20,262
(9,324)
(9,242)
1,696
(307)
(25,176)
15,861
182,391
19,851
(8,427)
(8,314)
3,110
(222)
(63)
(50)
21,346
(6,587)
(3,508)
At 31 December 2009
126,195
48,311
21,911
196,417
The items above represent the amount attributable to changes in policyholder liabilities and unallocated surplus of with-profits funds as a
result of each of the components listed.
Premiums, surrenders and maturities/deaths represent the amounts impacting policyholder liabilities and may not represent the total
cash paid/received (for example, premiums are net of any deductions to cover acquisition costs).
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
B
161
Notes on the Group financial statements > C: Group risk management
a Overview
As a provider of financial services, including insurance, the Group’s business is the managed acceptance of risk. The control procedures
and systems established within the Group are designed to manage, rather than eliminate, the risk of failure to meet business objectives.
They can only provide reasonable and not absolute assurance against material misstatement or loss, and focus on aligning the levels of
risk-taking with the achievement of business objectives.
The Group’s internal control processes are detailed in the Group Governance Manual. This is supported by the Group risk
framework, which provides an overview of the Group-wide philosophy and approach to risk management. Where appropriate, more
detailed policies and procedures have been developed at Group and/or business unit levels. These include Group-wide mandatory
policies on certain operational risks, including: health, safety, fraud, money laundering, bribery, business continuity, information security
and operational security, and policies on certain financial risks. Additional guidelines are provided for some aspects of actuarial and
financial activity.
Prudential’s risk governance framework requires that all of the Group’s businesses and functions establish processes for identifying,
evaluating and managing the key risks faced by the Group. The risk governance framework is based on the concept of ‘three lines of
defence’: Risk management; risk oversight and independent assurance. Primary responsibility for strategy, performance management
and risk control lies with the Board, the Group Chief Executive and the chief executives of each business unit. Risk oversight is provided
by Group-level risk committees, chaired by the Group Chief Risk Officer or the Chief Financial Officer. Independent assurance on the
Group’s and business unit internal control and risk management systems is provided by Group-wide Internal Audit reporting to the
Group and business unit audit committees.
The Group’s risk reporting framework forms an important part of the Group’s business planning process. Business units review their
risks as part of the annual preparation of their business plans and review opportunities and risks against business objectives regularly
with Group executive management.
Additional information on the Group’s risk framework is included in the risk and capital management section of the Group’s business
review.
The management of the risk attached to the Group’s financial instruments and insurance liabilities, together with the inter-
relationship with the management of capital may be summarised in the following sections.
b Group risk appetite
The Group risk appetite framework sets out the Group’s tolerance to risk management and return optimisation. The Group defines and
monitors aggregate risk limits for its earnings volatility and its capital requirements based on financial and non-financial stresses.
i Earnings volatility:
The objectives of the limits are to ensure that (a) the volatility of earnings is consistent with stakeholder expectations, (b) the Group has
adequate earnings (and cash flows) to service debt and expected dividends and (c) that earnings (and cash flows) are managed properly
across geographies and are consistent with the Group’s funding strategies. The two measures used currently are European Embedded
Value (EEV) operating profit based on longer-term investment returns and International Financial Reporting Standards (IFRS) operating
profit based on longer-term investment returns. Additionally, EEV and IFRS total profits are also assessed.
ii Capital requirements:
The objectives of the limits are to ensure that (a) the Group meets the internal economic capital requirements at all times, (b) the Group
achieves its desired target rating to meet its business objectives and (c) supervisory intervention is avoided. The two measures used are
EU Insurance Groups Directive (IGD) capital requirements and internal economic capital requirements. In addition we also monitor
capital requirements on a local statutory basis.
Business units must establish suitable market, credit, underwriting and liquidity limits that maintain financial risk exposures within the
defined Group risk appetite.
The Group’s risk appetite framework forms an integral part of its annual business planning cycle. Throughout the year, the Group risk
function monitors the Group’s risk profile against the agreed limits. Using submissions from business units, Group risk function calculates
the Group’s aggregated position (allowing for diversification effects between business units) relative to the limits determined by the risk
appetite statements.
Market risk is managed such that as conditions evolve the risk profile is maintained within risk appetite in addition to business unit
operational limits on credit risk, the Group sets counterparty risk limits at Group level. Limits on the total Group-wide exposures to a
single counterparty are specified within different credit rating ‘categories’. Actual exposures are monitored against these limits on a
monthly basis.
c Risk mitigation and hedging
The Group manages its actual risk profile against its tolerance of risk. To do this, the Group maintains risk registers that include details
of the identified risks and of the controls and mitigating actions employed in managing them. Any mitigation strategies involving large
transactions, such as a material derivative transaction, are subject to scrutiny at Group level before implementation.
The Group uses a range of risk management and mitigation strategies. The most important of these include: adjusting asset portfolios
to reduce investment risks (such as duration mismatches or overweight counterparty exposures); using derivatives to hedge market
risks; implementing reinsurance programmes to limit insurance risk; implementing corporate insurance programmes to limit the impact
of operational risks; and revising business plans where appropriate.
162 Prudential plc > Annual Report 2009
i Use of derivatives
In the UK and Asia, Prudential uses derivatives to reduce equity and credit risk, interest rate and currency exposures, and to facilitate
efficient investment management. In the US, Prudential uses derivatives to reduce interest rate risk, to facilitate efficient portfolio
management and to match liabilities under annuity policies, and for certain equity-based product management activities.
Further details of the Group’s use of derivatives are explained in note G3.
ii Asset/liability management
Prudential manages its assets and liabilities locally, in accordance with local regulatory requirements and reflecting the differing types of
liabilities of each business unit. Stochastic asset/liability modelling is carried out locally by business units to perform dynamic solvency
testing and assess capital requirements. Reserve adequacy testing under a range of scenarios and dynamic solvency analysis is carried
out, including under certain scenarios mandated by the US, the UK and Asian regulators.
A stochastic approach models the inter-relationship between asset and liability movements, taking into account asset correlation
and policyholder behaviour, under a large number of possible scenarios. These scenarios are projected forward over a period of time,
typically 25 years, and the liabilities and solvency position of the fund are calculated in each scenario in each future year. This allows the
identification of which extreme scenarios will have the most adverse effects and what the best estimate outcome may be. The fund’s
policy on management actions, including bonus and investment policy, are then set in order that they are consistent with the available
capital and the targeted risk of default. This differs from a deterministic model, which would only consider the results from one carefully
selected scenario.
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 fixed income securities whose value changes in line with the value of liabilities when interest rates change.
This type of analysis helps protect profits and the capital position from changing interest rates. In the UK, the cash flow analysis is used in
Prudential’s annuity business while, in the US, it is used for its interest-sensitive and fixed index annuities and stable value products such
as Guaranteed Investment Contracts (GICs). Perfect matching is not possible, for example because of the nature of the liabilities (which
might include guaranteed surrender values) and options for prepayment contained in the assets or the unavailability of assets with a
sufficiently long duration.
For businesses that are most sensitive to equity price changes, Prudential uses stochastic modelling and scenario testing to look at
the expected future returns on its investments under different scenarios that 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 method extensively in connection with its UK with-profits business.
All of Prudential’s investments are held either for risk management or investment purposes. This is because almost all of the
investments support policyholder or customer liabilities of one form or another. Any assets that Prudential holds centrally that are not
supporting customer liabilities are predominantly invested in short-term fixed income and fixed maturity securities.
The Group has contingency plans in place for a range of operational risk scenarios, including incident management and business
continuity plans. As a contingency plan for liquidity risk, the Group has arranged access to committed revolving credit facilities and
committed securities lending facilities.
d Risk exposures
The Group publishes separately within ‘Additional Information’ of its Group Annual Report a section on key risk factors, which discusses
inherent risks in the business and trading environment.
i Market risks
Market risk is the risk that arises from adverse changes in the value of, or income from, assets and changes in interest rates or
exchange rates.
Equity and interest rate risk
Prudential faces equity risk and interest rate risk because most of its assets are investments that are either equity type investments and
subject to equity price risk, or bonds, mortgages or cash deposits, the values of which are subject to interest rate risk. The amount of risk
borne by Prudential’s shareholders depends on the extent to which its customers share the investment risk through the structure of
Prudential’s products.
The split of Prudential’s investments between equity investments and interest-sensitive instruments depends principally on the type
of liabilities supported by those investments and the amount of capital Prudential has available. The nature of some liabilities allows
Prudential to invest a substantial portion of its investment funds in equity and property investments that Prudential believes produce
greater returns over the long term. On the other hand Prudential has some liabilities that contain guaranteed returns and allow instant
access (for example, interest-sensitive fixed annuities and immediate annuities), which generally will be supported by fixed income
investments.
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Foreign exchange risk
Prudential faces foreign exchange risk, primarily because its presentation currency is pounds sterling, whereas approximately 62 per
cent of Prudential’s operating profit from continuing operations based on longer-term investment returns, as described in note B1, for
the year ended 31 December 2009, came from US and Asian operations. The exposure relating to the translation of reported earnings
is not separately managed although its impact is reduced by interest payments on foreign currency borrowings and by the adoption
of average exchange rates for the translation of foreign currency revenues.
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Notes on the Group financial statements > C: Group risk management > continued
d Risk exposures continued
Approximately 77 per cent of the Group’s IFRS basis shareholders’ equity at 31 December 2009 arose in Prudential’s US and Asian
operations (2008: approximately 83 per cent). To mitigate the exposure of the US component there are US$1.55 billion of borrowings
held centrally, which are formally designated as net investment hedges at 31 December 2009. Net of the currency position arising from
these borrowings some 52 per cent of the Group’s shareholders’ funds are represented by net assets in currencies other than sterling.
Additional details on the market risks’ exposures of the UK, US and Asian insurance operations are provided in notes D2, D3
and D4, respectively.
ii Credit risk
Credit risk is the risk of loss to the Group if another party fails to perform its obligations, or fails to perform them in a timely manner. Credit
risk is the Group’s most significant financial risk.
Some of Prudential’s businesses, in particular Jackson, the PAC with-profits fund and Prudential’s UK pension annuity business hold
large amounts of interest-sensitive investments that contain credit risk on which a certain level of defaults is expected. These expected
losses are considered when Prudential determines the crediting rates, deposit rates and premium rates for the products that will be
supported by these assets. The key shareholder business exposed to credit risks is Jackson. Certain over-the-counter derivatives contain
a credit risk element that is controlled through evaluation of collateral agreements and master netting agreements on interest rate and
currency swaps. Prudential is also exposed to credit-related losses in the event of non-performance by counterparties.
Further analysis of the credit quality of debt securities held by the Group is shown in note B6. Additional details on the credit quality
of the debt security portfolios of UK, US and Asian insurance operations are shown in notes D2, D3 and D4, respectively.
iii Liquidity risk
The assets of insurers are in general relatively liquid whilst liabilities to policyholders are mainly illiquid. Accordingly, for insurers, the
focus is on parent capital and liquidity measures. Prudential regularly monitors and analyses its liquidity position at the Group level and
performs stress tests of this position. For Prudential, liquidity risk is the risk that though solvent on a statement of financial position basis,
the Group either does not have the financial resources to meet its obligations as they fall due or can secure such resources only at
excessive cost. The liquidity of the Group is monitored on a monthly basis by comparing the predicted cash needs of the Group centre
to meet corporate and financing costs (net of expected dividends from the business units) to the liquid resources available to it. These
liquid resources include cash held and cash that could be raised through internal resources (for example by repoing unencumbered
bonds). Base case and stress scenarios are reported monthly to the Balance Sheet and Capital Management Committee. The main stress
is the assumption that the external financing markets are completely closed to Prudential, so no new external funding can be obtained,
and existing funding cannot be rolled over. In addition, Group liquidity risk reports are prepared regularly. In summary, these address
the sufficiency of external back-up lines, internal sources of liquidity, and monitor how external liabilities and other commitments over
the next 12 months compare with internal and external sources. Currently, the parent company has significant internal resources of
liquidity which are sufficient to meet all of its foreseeable future needs without having to utilise external funding. The Group maintains
committed facilities that include £1.4 billion of undrawn syndicated committed banking facility and two £100 million bi-lateral facilities
on the same terms, maturing in 2011 and 2012 respectively, as well as a committed £500 million annually renewable securities lending
back-up facility.
iv Insurance risk
Insurance risk is the inherent uncertainty as to the occurrence, amount and timing of insurance liabilities. This includes adverse mortality,
morbidity and persistency experience.
Prudential needs to make assumptions about a number of factors in determining the pricing of its products and for reporting the
results of its long-term business operations. In common with other industry participants, the profitability of the Group’s businesses
depends on a mix of factors including mortality and morbidity trends, voluntary discontinuance rates, investment performance, unit cost
of administration and new business acquisition expenses.
For example, the assumption that Prudential makes about future expected levels of mortality is particularly relevant for its UK annuity
business where, in exchange for their accumulated pension fund, pension annuity policyholders receive a guaranteed payment, for as
long as they live. Prudential conducts extensive research into longevity risk using data from its substantial annuitant portfolio. As part of
its pension annuity pricing and reserving policy, Prudential UK assumes that current rates of mortality continuously improve over time at
levels based on adjusted data from the Continuous Mortality Investigations (CMI) projections as published by the Institute and Faculty
of Actuaries.
Prudential’s voluntary discontinuance (persistency) assumptions reflect recent past experience for each relevant line of business,
and any expectations of future persistency. Where appropriate, allowance is also made for the relationship, which is either assumed
or historically observed, between persistency and investment returns and the resulting additional risk is allowed for.
v Non-financial risks – operational, business environment and strategic risk
Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internal processes, people, systems or from
external events. Business environment risk may arise from exposure to forces in the external environment that could significantly
change the fundamentals that drive the business’ overall objectives and strategy. Strategic risk may arise from ineffective, inefficient
or inadequate senior management processes for the development and implementation of business strategy in relation to the business
environment and the Group’s capabilities.
164 Prudential plc > Annual Report 2009
Prudential is exposed to operational, business environment and strategic risk in the course of running its businesses. Prudential
processes a large number of complex transactions across numerous and diverse products, and is subject to a number of different legal
and regulatory regimes. Prudential has a significant number of third-party relationships that are important to the distribution and
processing of its products, as market counterparties and as business partners.
The Group uses the qualitative and quantitative analysis of operational risk exposures material to the Group to support business
decisions, to inform overall levels of capital held and to assess the adequacy of the corporate insurance programme.
e Regulatory capital requirements
Regulatory capital requirements apply at an individual company level for the Group’s life assurance and asset management business.
These are described in sections D5 and E3 respectively.
In addition, the Group as a whole is subject to the capital adequacy requirements of the Insurance Groups Directive (IGD) as
implemented by the FSA. The IGD pertains to groups whose activities are primarily concentrated in the insurance sector. Under this
test the surplus capital held in each of the regulated subsidiaries is aggregated with the free assets of non-regulated subsidiaries.
From this total Group borrowings are deducted, other than subordinated debt issues which qualify as capital. No credit for the benefit
of diversification is allowed for under this approach. The test is passed when this aggregate number is positive: a negative result at any
point in time is a notifiable breach of UK regulatory requirements.
Due to the geographically diverse nature of Prudential’s operations, the application of these requirements to Prudential is complex.
In particular, for many of the Group’s Asian operations the assets, liabilities and capital requirements have to be recalculated based on
FSA regulations as if the companies were directly subject to FSA regulation.
The FSA has established a structure for determining how much hybrid debt can count as capital which is similar to that used
for banks. It categorises capital as Tier 1 (equity and preference shares), Upper Tier 2 and Lower Tier 2. Up to 15 per cent of Tier 1
capital can be in the form of hybrid debt and is called ‘Innovative Tier 1’. At 31 December 2009 the Group held £1,422 million
(2008: £1,059 million) of Innovative Tier 1 capital in the form of perpetual securities, £nil (2008: £nil) of Upper Tier 2 and £1,423 million
(2008: £1,101 million) of Lower Tier 2 capital. The increase in these amounts arises from the issue in May 2009 of £400 million of
subordinated debt (Lower Tier 2), the issue in July 2009 of $750 million perpetual subordinated capital securities (Innovative Tier 1)
and exchange rate movements during 2009. Further details on these amounts and other Group borrowings are shown in note H13.
At 31 December 2008, Prudential met the requirements of the IGD with £1.5 billion of surplus capital before allowing for the 2008
final dividend. In addition, during 2009, Prudential met the requirements of the FSA under the IGD. The IGD position as at 31 December
2009 will be submitted to the FSA by 30 April 2010 and at the time of preparation of these financial statements the surplus capital under
the test was estimated to be around £3.4 billion before allowing for the 2009 final dividend giving a solvency ratio of circa 270 per cent.
The main components of the increase in IGD surplus during 2009 are:
• net capital generation mainly through operating earnings (in-force releases less investment in new business) of £1.1 billion;
• the sale of the Taiwan agency business (increasing IGD surplus by £0.8 billion);
• the hybrid debt issues in May and July (increasing IGD surplus by £0.9 billion);
• an additional recognition of £0.4 billion in respect of part of the shareholders’ interest in the future transfers from the PAC with-profits
fund, recognition of £0.2 billion of future profits in the UK and Hong Kong and other intra-group capital efficiencies of £0.3 billion;
• offset by dividend payments, external financing costs and other central costs, credit related impacts in the US, impacts from regulatory
changes and foreign exchange movements.
Prudential’s approach to capital allocation takes into account a range of factors, especially risk adjusted returns on capital, the impact
of alternative capital measurement bases (accounting, regulatory, economic and ratings agency assessments), tax efficiency and wider
strategic objectives.
Prudential optimises capital allocation across the Group by using a consistent set of capital performance metrics across all business
units to ensure meaningful comparison. Capital utilisation, return on capital and new business value creation are measured at a product
level. The use of these capital performance metrics is embedded into our decision-making processes for product launches, product
design and product pricing.
Prudential’s capital performance metrics are based on economic capital, which provides a realistic and consistent view of our capital
requirements across the Group, allowing for diversification benefits. Economic capital also provides valuable insights into our risk profile
and is used both for risk measurement and capital management.
Prudential’s detailed understanding of risk adjusted performance allows Prudential to manage proactively its allocation of capital to
write new business to maximise risk adjusted value creation.
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Notes on the Group financial statements > D: Life assurance businesses
D1: Group overview
a Products and classification for IFRS reporting
The measurement basis of assets and liabilities of long-term business contracts is dependent upon the classification of the contracts
under IFRS. Under IFRS 4, contracts are initially classified as being either ‘insurance’ contracts, if the level of insurance risk in the
contracts is significant, or ‘investment’ contracts, if the risk is insignificant.
Insurance contracts
Insurance contracts are permitted to be accounted for under previously applied GAAP. The Group has chosen to adopt this approach.
However, as an improvement to accounting policy, permitted by IFRS 4, the Group has applied the measurement principles for with-
profits contracts of UK regulated entities and disclosures of the UK Standard FRS 27 from 1 January 2005. An explanation of the
provisions under FRS 27 is provided in note D2.
Under the previously applied GAAP, UK GAAP, the assets and liabilities of contracts are reported in accordance with the MSB
of reporting as set out in the ABI SORP.
The insurance contracts of the Group’s shareholder-backed business fall broadly into the following categories:
• UK insurance operations
– bulk and individual annuity business, written primarily by Prudential Retirement Income Limited and other categories of
non-participating UK business;
• Jackson
– fixed and variable annuity business and life insurance; and
• Prudential Corporation Asia
– non-participating term, whole life, and unit-linked policies, together with accident and health policies.
Investment contracts
Investment contracts are further delineated under IFRS 4 between those with and without discretionary participation features.
For those contracts with discretionary participation features, IFRS 4 also permits the continued application of previously applied GAAP.
The Group has adopted this approach, again subject to the FRS 27 improvement.
For investment contracts that do not contain discretionary participation 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 that may
diverge from those previously applied.
Contracts of the Group, which are classified as investment contracts that do not contain discretionary participation features,
can be summarised as:
• UK
– certain unit-linked savings and similar contracts;
• Jackson
– GICs and funding agreements
– minor amounts of ‘annuity certain’ contracts; and
• Prudential Corporation Asia
– minor amounts for a number of small categories of business.
166 Prudential plc > Annual Report 2009
The accounting for the investment contracts of UK insurance operations and Jackson’s GICs and funding agreements are considered
in turn below:
i Certain UK unit-linked savings and similar contracts
Deferred acquisition costs
Acquisition costs are deferred to the extent that it is appropriate to recognise an asset that represents the entity’s contractual right to
benefit from providing investment management services and are amortised as the entity recognises the related revenue. IAS 18 further
reduces the costs potentially capable of deferral to incremental costs only. Deferred acquisition costs are amortised to the income
statement in line with service provision.
Deferred income reserves
These are required to be established under IAS 18 with amortisation over the expected life of the contract. The majority of the relevant
UK contracts are single premium with the initial deferred income reflecting the ‘front-end load’ i.e. the difference between the premium
paid and the amount credited to the unit fund. Deferred income is amortised to the income statement in line with service provision.
The amortisation profile is either on a straight-line basis or, if more appropriate, a further deferral of income recognition is applied.
Sterling reserves
Prudent provisions established for possible future expenses not covered by future margins at a policy level reflecting the regulatory
approach in the UK are not permitted for those contracts with insignificant insurance risk that are classified as investment contracts.
ii Jackson – GICs and funding arrangements
Under a traditional GIC, the policyholder makes a lump sum deposit. The interest rate paid is fixed and established when the contract
is issued. Funding agreements are of a similar nature but the interest rate may be floating, based on a rate linked to an external index.
The US GAAP accounting requirements for such contracts are very similar to those under IFRS on the amortised cost model for liability
measurement.
b Concentration of risk
i Business accepted
The Group’s exposure to life assurance risks is well diversified. This is achieved through the geographical spread of the Group’s
operations and, within those operations, through a broad mix of product types.
As part of the risk management framework, the Group regularly monitors concentration of risk using a variety of risk monitoring tools
including:
• Scenario testing and sensitivity analysis of the Group capital and profitability metrics involving IGD, Group economic capital, EEV and
IFRS help identify concentrations of risks by risk types, products and business units, as well as the benefits of diversification of risks.
An example of the diversification benefits for Prudential is that adverse scenarios do not affect all business units in the same way,
providing natural hedges within the Group. For example, the Group’s US business is sensitive to increasing interest rates, whereas,
in contrast, several business units in Asia benefit from increasing rates. Conversely, these Asian business units are sensitive towards
low interest rates, whereas certain products in the US benefit from falling interest rates. The economic capital framework also takes
into account situations where factors are correlated, for example the extent of correlation between UK and US economies.
• Business units are also required to disclose to the Group risk function all material risks, along with information on their severity and
likelihood, and mitigating actions taken or planned.
Credit risk remains one of the largest risk exposures. This reflects the relative size of exposure in Jackson and the UK shareholder
annuities business. The Group manages concentration of credit risks by setting limits on the maximum exposure to each counterparty
based on their credit ratings.
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Notes on the Group financial statements > D: Life assurance businesses > continued
D1: Group overview continued
ii Ceded business
The Group cedes certain business to other insurance companies. Although the ceding of insurance does not relieve the Group of liability
to its policyholders, the Group participates in such agreements for the purpose of managing its loss exposure. The Group evaluates the
financial condition of its reinsurers and monitors concentration of credit risk from similar geographic regions, activities or economic
characteristics of the reinsurers to minimise its exposure from reinsurer insolvencies. There are no significant concentrations of
reinsurance risk. At 31 December 2009, 98 per cent (2008: 98 per cent) of the reinsurance recoverable insurance assets were ceded by
the Group’s UK and US operations, of which 92 per cent (2008: 93 per cent) of the balance were from reinsurers with Standard & Poor’s
rating A- and above.
c Guarantees
Notes D2(d), D3(d) and D4(d) provide details of guarantee features of the Group’s life assurance products. In the UK, guarantees of
the with-profits products are valued for accounting purposes on a market consistent basis for 2009 as described in section D2(f)(ii).
The UK business also has products with guaranteed annuity option features, mostly within SAIF, as described in section D2(d). There
is little exposure to financial options and guarantees in the shareholder-backed business of the UK operations. The US business annuity
products have a variety of option and guarantee features as described in Section D3(d). Jackson’s derivative programme seeks to
manage the exposures as described in Section D3(e). The Group’s exposure to guarantees was significantly reduced during 2009
as a result of the disposal of the Taiwan agency business.
d Sensitivity of EEV basis profit and equity for market and other risks
The Group prepares supplementary EEV basis financial statements for half yearly and annual publication. These statements include
sensitivity disclosures which are part of the market risk information provided to key management. The 2009 EEV sensitivity disclosures
are shown in note 15 of the EEV basis supplementary information in this Annual Report.
e Sensitivity of IFRS basis profit or loss and equity to market and other risks
i Overview of risks by business unit
The financial assets and liabilities attaching to the Group’s life assurance business are, to varying degrees, subject to market and
insurance risk and other changes of experience assumptions that may have a material effect on IFRS basis profit or loss and equity.
Market risk is the risk that the fair value or future cash flows of a financial instrument or, in the case of liabilities of insurance contracts,
their carrying value will fluctuate because of changes in market prices. Market risk comprises three types of risk, namely:
• Currency risk: due to changes in foreign exchange rates;
• interest rate risk: due to changes in market interest rates; and
• other price risk: due to fluctuations in market prices (other than those arising from interest rate risk or currency risk).
Policyholder liabilities relating to the Group’s life assurance businesses are also sensitive to the effects of other changes in experience,
or expected future experience, such as for mortality, other insurance risk and lapse risk.
In addition, the profitability of the Group’s life assurance businesses and, as described in Section E, asset management business,
is indirectly affected by the performance of the assets covering policyholder liabilities and related capital.
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 shareholder-backed
business are for debt securities.
The most significant items for which the IFRS basis shareholders’ profit or loss and equity for the Group’s life assurance business is
sensitive to these variables are shown in the following tables. The distinction between direct and indirect exposure is not intended to
indicate the relative size of the sensitivity.
168 Prudential plc > Annual Report 2009
Type of business
Investments/derivatives
Liabilities/unallocated
Other exposure
Insurance and lapse risk
Market and credit risk
UK insurance operations (see also section D2(i))
Net neutral direct exposure
With-profits business
(Indirect exposure only)
(including Prudential
Annuities Limited)
SAIF sub-fund
Unit-linked business
Net neutral direct exposure
(Indirect exposure only)
Net neutral direct exposure
(Indirect exposure only)
Asset/liability mismatch risk
Shareholder-backed
annuity business
Credit risk
Interest rate risk for assets
in excess of liabilities
i.e. representing
shareholder capital
US insurance operations (see also section D3(i))
All business
Currency risk
Variable annuity
business
Fixed index
annuity business
Fixed index annuities,
Fixed annuities and
GIC business
Net effect of market risk arising from incidence of
guarantee features and variability of asset management
fees offset by derivative hedging programme
Incidence of equity
participation features
Derivative hedge
programme to the
extent not fully hedged
against liability and
fund performance
Credit risk
Interest rate risk
These risks are reflected in
volatile profit or loss and
shareholders’ equity for
derivative value movements
and impairment losses, and,
in addition, for shareholders’
equity for value movements
on fixed income securities
classified as ‘available for
sale’ under IAS 39
Investment performance
subject to smoothing
through declared bonuses
Persistency risk to
future shareholder
transfers
Asset management fees
earned by M&G
Investment performance
through asset
management fees
Persistency risk
Mortality experience
and assumptions for
longevity
Persistency risk
Spread difference
between earned rate
and rate credited to
policyholders
Lapse risk but the
effects of extreme
events are mitigated
by the use of
swaption contracts
Asian insurance operations (see also section D4(i))
All business
Currency risk
With-profits business
Net neutral direct exposure
(Indirect exposure only)
Unit-linked business
Net neutral direct exposure
(Indirect exposure only)
Non-participating business
Interest rate and price risk
Long-term interest rates
Mortality and
morbidity risk
Persistency risk
Investment performance
subject to smoothing
through declared bonuses
Investment performance
through asset
management fees
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Notes on the Group financial statements > D: Life assurance businesses > continued
D1: Group overview continued
ii IFRS shareholder results – Exposures for market and other risk
Key Group exposures
The IFRS operating profit based on longer-term investment returns for UK insurance operations has high potential sensitivity for changes
to longevity assumptions affecting the carrying value of liabilities to policyholders for shareholder-backed annuity business. In addition,
at the total IFRS profit level the result is sensitive to temporary value movements on assets backing IFRS equity.
For Jackson at the level of operating profit based on longer-term investment returns, the results are sensitive to market conditions to
the extent of income earned on spread-based products and equity-based exposure not mitigated by the equity and interest derivative
programmes. Further information is given below under the US operations section of market and credit risk.
Jackson’s derivative programme is used to substantially mitigate equity market risk attaching to its equity-based products and
interest rate risk associated with its spread-based products. Movements in interest rates and credit spreads materially affect the carrying
value of derivatives which are used to manage the liabilities to policyholders and backing investment assets of fixed annuity and other
general account business. Combined with the use of US GAAP measurement (as grandfathered under IFRS 4) for the asset and liabilities
for the insurance contract liabilities, which is largely insensitive to current period market movements, the Jackson total profit (i.e.
including short-term fluctuations in investment returns) is very sensitive to market movements. In addition to these effects the Jackson
IFRS equity is sensitive to the impact of interest rate and credit spread movements on the value of fixed income securities. Movements
in unrealised appreciation on these securities are included as movement in equity (i.e. outside the income statement).
For Asian operations, the operating profit based on longer-term investment returns is mainly affected by the impact of market levels
on unit-linked business persistency, and other insurance risk.
At the total IFRS profit level the Asian result is affected by short-term value movements on the asset portfolio for non-linked
shareholder-backed business.
M&G profits are affected primarily by movements in the growth in funds under management and by the effect of any impairment on
the loan book and fair value movements on debt securities held by Prudential Capital.
Market and credit risk
UK insurance operations
With-profits business
• With-profits business
Shareholder results of UK with-profits business are sensitive to market risk only through the indirect effect of investment performance
on declared policyholder bonuses.
The investment assets of the PAC with-profits fund are subject to market risk. However, changes in their carrying value, net of
related changes to asset-share liabilities of with-profit contracts, affect the level of unallocated surplus of the fund. As unallocated
surplus is accounted for as a liability under IFRS, movements in its value do not affect shareholders’ profit or equity.
The shareholder results of the UK with-profits fund correspond to the shareholders’ share of the cost of bonuses declared on
the with-profits business. This currently corresponds to one-ninth of the cost of bonuses declared.
Investment performance is a key driver of bonuses, and hence the shareholders’ share of cost of bonuses. Due to the ‘smoothed’
basis of bonus declaration the sensitivity to investment performance in a single year is low. However, over multiple periods it is
important.
• Prudential Annuities Limited (PAL)
PAL’s business is not with-profits, it writes annuity business. However, as PAL is owned by the PAC with-profits sub-fund, changes in
the carrying value of PAL’s assets and liabilities are reflected in the liability for unallocated surplus which as described above, do not
affect shareholder results.
• Scottish Amicable Insurance Fund (SAIF)
SAIF is a ring-fenced fund in which, apart from asset management fees, shareholders have no interest. Accordingly, the Group’s IFRS
profit and equity are insensitive to the direct effects of market risk attaching to SAIF’s assets and liabilities.
Shareholder-backed business
The factors that may significantly affect the IFRS results of UK shareholder-backed business are the mortality experience and
assumptions and credit risk attaching to the annuity business of Prudential Retirement Income Limited and the PAC non-profit sub-fund.
• Prudential Retirement Income Limited (PRIL)
The assets covering PRIL’s liabilities are principally debt securities and other investments that are held to match the expected duration
and payment characteristics of the policyholder liabilities. These liabilities are valued for IFRS reporting purposes by applying discount
rates that reflect the market rates of return attaching to the covering assets.
170 Prudential plc > Annual Report 2009
Except to the extent of any asset/liability duration mismatch which is reviewed regularly, and exposure to credit risk, the sensitivity of the
Group’s results to market risk for movements in the carrying value of PRIL’s liabilities and covering assets is broadly neutral on a net basis.
The main market risk sensitivity for PRIL arises from interest rate risk on the debt securities which substantially represent IFRS equity.
This equity comprises the net assets held within the long-term fund of the company that cover regulatory basis liabilities that are not
recognised for IFRS reporting purposes, for example contingency reserves, and shareholder capital held outside the long-term fund.
The principal items affecting the IFRS results for PRIL are mortality experience and assumptions, and credit risk.
• PAC non-profit sub-fund
The PAC non-profit sub-fund principally comprises annuity business previously written by Scottish Amicable Life, credit life, unit-
linked and other non-participating business.
The financial assets covering the liabilities for those types of business are subject to market risk. However, for the annuity business
the same considerations as described above for PRIL apply, whilst the liabilities of the unit-linked business change in line with the
matching linked assets. Other liabilities of the PAC non-profit sub-fund are broadly insensitive to market risk.
• Other shareholder-backed unit-linked business
Due to the matching of policyholder liabilities to attaching asset value movements, the UK unit-linked business is not directly affected
by market or credit risk. The principal factor affecting the IFRS results is investment performance through asset management fees.
US insurance operations (Jackson)
The IFRS basis results of Jackson are highly sensitive to market risk on the assets covering liabilities other than variable annuity business
segregated in the separate accounts.
Invested assets covering liabilities (other than the separate accounts) and related capital comprise principally debt securities
classified as available-for-sale. Value movements for these securities are reflected as movements in shareholders’ equity through the
statement of comprehensive income. Other invested assets and derivatives are carried at fair value with the value movements reflected
in the income statement.
By contrast, the IFRS insurance liabilities for business written by Jackson, by the application of grandfathered GAAP under IFRS 4,
are measured on US GAAP bases which with the exception of certain items covered by the equity hedging programme, are generally
insensitive to temporary changes in market conditions or the short-term returns on the attaching asset portfolios.
These differences in carrying value of debt securities, other invested assets, derivatives and insurance liabilities give rise to
potentially significant volatility in the IFRS income statement and shareholders’ equity. As with other shareholder-backed business the
profit or loss for Jackson is presented in the Group’s segmental analysis of profit as described in note B1, by distinguishing the result for
the year between an operating result based on longer-term investment returns and short-term fluctuations in investment returns. In this
way the most significant direct effect of market changes that have taken place to the Jackson result are separately identified.
Excluding these short-term effects, the factors that most significantly affect the Jackson IFRS operating result based on long-term
investment returns are:
• Variable annuity business – net effect of market risk arising from the incidence and valuation of guarantee features and variability
of asset management fees offset by derivative hedging performance. The net effect of market risk in Jackson’s guarantees and
derivatives included in operating result excludes the impact of changes in market implied volatility. Further movements in reserves for
guarantees reflected in operating result are also based on a discount rate using a long-term average Corporate AA credit curve instead
of the actual Corporate AA credit curve at the valuation date. The derivative hedging programme is designed to be economically
effective and there can be some accounting mis-matches for those guarantee features which are not economically valued under
grandfathered US GAAP, for example guaranteed minimum death benefits. These accounting mis-matches are magnified in periods
of market dislocation;
• fixed annuity business – the spread differential between the earned rate and the rate credited to policyholders; and
• fixed index annuity business – the spread differential between the earned rate and the rate credited to policyholders and incidence
of equity index participation features, net of the related hedging performance.
In addition, the total profit for Jackson is affected by the level of impairment losses on the debt securities portfolios, short-term value
movements on derivatives held to manage the fixed annuity and other general account business, other temporary value movements on
portfolio investments classified as fair value through profit and loss, and those arising on revaluing the embedded derivative components
of variable annuity liabilities for the effects of short-term movements in AA corporate bond rate curves and equity volatility levels.
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171
Notes on the Group financial statements > D: Life assurance businesses > continued
D1: Group overview continued
Asian insurance operations
For Asian with-profits business the same features apply as described above for UK with-profits business. Similarly, as for other
parts of the Group, for unit-linked business the main factor affecting IFRS basis results is investment performance through asset
management fees.
The sensitivity of the IFRS basis results of the Group’s Asian operations to market risk is primarily restricted to the non-participating
business.
This sensitivity is primarily reflected through the volatility of asset returns coupled with the fact that the accounting carrying value
of liabilities to policyholders are only partially sensitive to changed market conditions. As for UK shareholder-backed operations and
Jackson, the IFRS profit is distinguished in the Group’s segmental analysis so as to distinguish operating profits based on longer-term
investment returns and short-term fluctuations in investment returns.
Insurance and lapse risk
The features described above cover the main sensitivities of IFRS profit and loss and equity for market, insurance and credit risk.
Lapse and longevity risk may also be a key determination of IFRS basis results with variable impacts.
In the UK, adverse persistency experience can affect the level of profitability from with-profits and unit-linked business. For with-
profits business in any given year, the amount represented by the shareholders’ share of cost of bonus may only be marginally affected.
However, altered persistency trends may affect future expected shareholder transfers.
By contrast, Group IFRS operating profit is particularly sensitive to longevity outlook that results in changes of assumption for the UK
shareholder-backed annuity business.
Jackson is sensitive to lapse risk. However, Jackson uses swaption derivatives to ameliorate the effect of a sharp rise in interest rates,
which would be the most likely cause of a sudden change in policyholder behaviour.
In Asia adverse persistency experience can impact the IFRS profitability of certain business written in the region. This risk is managed
at a business unit level through monthly monitoring of experience and the implementation of management actions as necessary. These
actions could include product enhancements, increased management focus on premium collection as well as other customer retention
efforts. The potential financial impact of lapses is often mitigated through the specific features of the products, e.g. surrender charges.
iii Impact of diversification on risk exposure
The Group enjoys significant diversification benefits. This arises because not all risk scenarios will happen at the same time and across
all geographic regions. The Group tests the sensitivities of results to different correlation factors such as:
Correlation across geographic regions
• Financial risk factors
• Non-financial risk factors.
Correlation across risk factors
• Longevity risk
• Expenses
• Persistency
• Other risks.
The effect of Group diversification is to significantly reduce the aggregate standalone volatility risk to IFRS operating profit based on
longer-term investment returns. The effect is almost wholly explained by the correlations across risk types, in particular longevity risk.
f Duration of liabilities
Under the terms of the Group’s contracts, as for life assurance contracts generally, the contractual maturity date is the earlier of the end
of the contract term, death, other insurable events or surrender. The Group has therefore chosen to provide details of liability duration
that reflect the actuarially determined best estimate of the likely incidence of these factors on contract duration. Details are shown in
sections D2(j), D3(j) and D4(j).
In the years 2005 to 2009, claims paid on the Group’s life assurance contracts including those classified as investment contracts
under IFRS 4 ranged from £13 billion to £19 billion. Indicatively, it is to be expected that, of the Group’s policyholder liabilities (excluding
unallocated surplus) at 31 December 2009 of £186.4 billion, the amounts likely to be paid in 2010 will be of a similar magnitude.
172
Prudential plc > Annual Report 2009
D2: UK insurance operations
a Summary statement of financial position
In order to explain the different types of UK business and fund structure, the statement of financial position of the UK insurance
operations may be analysed by the assets and liabilities of the Scottish Amicable Insurance Fund (SAIF), the PAC with-profits sub-fund
(WPSF), unit-linked assets and liabilities and annuity (principally PRIL) and other business. The assets and liabilities of these funds and
subsidiaries are shown in the table below.
PAC with-profits fund note i
Other funds and subsidiaries
Scottish
Amicable
Excluding
Insurance Prudential
Annuities
Limited
£m
Fund
note ii
£m
Prudential
Annuities
Limited
note iii
£m
Unit-
linked
assets
and
liabilities
£m
Annuity
and other
long-term
business
£m
Total
note iv
£m
UK insurance
operations
2009
2008
Total
£m
Total
£m
Total
£m
Assets
Intangible assets attributable to
shareholders:
Deferred acquisition costs
and other intangible assets
Intangible assets attributable
to PAC with-profits fund:
In respect of acquired subsidiaries
for venture fund and other
investment purposes
Deferred acquisition costs
Total
Deferred tax assets
Other non-investment and
non-cash assets
Investments of long-term business
and other operations:
Investment properties
Investments accounted for
using the equity method
Financial investments:
Loansnote v
Equity securities and portfolio
holdings in unit trusts
Debt securitiesnote D2c
Other investmentsnote vi
Deposits
Total investments
Cash and cash equivalents
–
–
–
2
2
2
2
–
–
124
7
131
131
84
–
–
–
–
–
–
70
–
–
124
7
131
131
154
–
–
–
–
–
–
419
1,020
344
1,364
547
127
127
127
127
127
127
134
134
–
–
–
127
136
744
–
–
–
127
136
124
9
133
260
292
174
13
187
321
513
1,291
3,074
4,962
710
7,330
719
8,049
662
1,440
2,102
10,861
11,959
–
–
–
–
138
825
143
968
–
–
4
4
4
–
709
709
1,815
1,902
2,994
4,797
340
869
9,848
214
23,062
25,358
2,879
8,378
215
12,184
156
377
23,277
37,542
3,035
8,755
10,757
6,386
66
550
23
19,047
189
1,383
10,780
25,433
255
1,933
37,051
67,772
3,630
11,557
38,880
58,871
4,160
6,090
67,832
13,794
81,626
18,421
22,795
41,216 132,690
121,862
948
34
982
939
130
1,069
2,265
2,571
Total assets
10,485 70,015
14,242
84,257
19,907
23,932
43,839 138,581
130,229
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173
Notes on the Group financial statements > D: Life assurance businesses > continued
D2: UK insurance operations continued
PAC with-profits fund note i
Other funds and subsidiaries
Scottish
Amicable
Excluding
Insurance Prudential
Annuities
Limited
£m
Fund
note ii
£m
Prudential
Annuities
Limited
note iii
£m
Unit-
linked
assets
and
liabilities
£m
Annuity
and other
long-term
business
£m
Total
note iv
£m
UK insurance
operations
2009
2008
Total
£m
Total
£m
Total
£m
Equity and liabilities
Equity
Shareholders’ equity
Minority interests
Total equity
Liabilities
Policyholder liabilities and
unallocated surplus of
with-profits funds:
Contract liabilities
(including amounts in respect
of contracts classified as
investment contracts
under IFRS 4)
Unallocated surplus of
with-profits funds
(reflecting application
of ‘realistic’ provisions
for UK regulated
with-profits funds)
–
–
–
–
28
28
–
–
–
–
28
28
–
–
–
1,939
–
1,939
1,939
–
1,939
1,939
28
1,967
1,655
47
1,702
9,972
55,588
11,969
67,557
19,035
19,665
38,700 116,229
107,707
–
8,421
1,545
9,966
–
–
–
9,966
8,254
Total
9,972
64,009
13,514
77,523
19,035
19,665
38,700 126,195
115,961
Operational borrowings attributable
to shareholder-financed
operations
Borrowings attributable to
with-profits funds
Deferred tax liabilities
Other non-insurance liabilities
–
118
66
329
–
1,166
807
4,005
–
–
281
447
–
–
158
158
158
54
1,166
1,088
4,452
–
–
872
–
452
1,718
–
452
2,590
1,284
1,606
7,371
1,308
1,421
9,783
Total liabilities
10,485
69,987
14,242
84,229
19,907
21,993
41,900 136,614
128,527
Total equity and liabilities
10,485 70,015
14,242
84,257
19,907
23,932
43,839 138,581
130,229
Notes
i
For the purposes of this table and subsequent explanation, references to the PAC WPSF also include, for convenience, the amounts attaching to the
Defined Charges Participating Sub-fund, which includes the with-profits annuity business transferred to Prudential from the Equitable Life Assurance
Society on 1 December 2007 (with assets of approximately £1.7 billion). Profits to shareholders on this with-profits annuity business emerge on a
‘charges less expenses’ basis and policyholders are entitled to 100 per cent of the investment earnings.
ii
SAIF is a separate sub-fund within the PAC long-term business fund.
iii Wholly-owned subsidiary of the PAC WPSF that writes annuity business.
iv Excluding policyholder liabilities of the Hong Kong branch of PAC.
v
The loans of the Group’s UK insurance operations of £1,815 million (2008: £1,902 million) comprise loans held by the PAC WPSF of £1,106 million
(2008: £1,345 million) and loans held by shareholder-backed business of £709 million (2008: £557 million).
The loans held by the PAC WPSF comprise mortgage loans of £145 million, policy loans of £24 million and other loans of £937 million (2008:
£150 million, £29 million and £1,166 million respectively). The mortgage loans are collateralised by properties. Other loans held by the PAC
with-profits fund are all commercial loans and comprise mainly syndicated loans.
The loans held by the UK shareholder-backed business comprise mortgage loans collateralised by properties of £702 million (2008: £551 million)
and other loans of £7 million (2008: £6 million).
174
Prudential plc > Annual Report 2009
vi Other investments comprise:
Derivative assets*note G3
Partnerships in investment pools and other†
2009
£m
910
2,720
3,630
2008
£m
1,326
2,834
4,160
*In the UK, Prudential uses derivatives to reduce equity and credit risk, interest rate and currency exposures, and to facilitate efficient portfolio
management. After derivative liabilities of £709 million (2008: £3,401 million), which are also included in the statement of financial position,
the overall derivative position was a net asset of £201 million (2008: net liability of £2,075 million).
†Partnerships in investment pools and other comprise mainly investments held by the PAC with-profits fund. These investments are primarily
venture fund investments and investment in property funds and limited partnerships.
b 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:
At 1 January 2008
Premiums
Surrenders
Maturities/Deaths
Net cash flowsnote a
Shareholders transfers post tax
Switches
Assumption changes (shareholder-backed business)note D2h note c
Investment-related items and other movementsnote b
Foreign exchange translation differences
At 31 December 2008/1 January 2009
Premiums
Surrenders
Maturities/Deaths
Net cash flowsnote a
Shareholders transfers post tax
Switches
Assumption changes (shareholder-backed business)note D2h note c
Investment-related items and other movementsnote b
Foreign exchange translation differences
Other funds and subsidiaries
SAIF
and PAC
with-profits
sub-fund
£m
Unit-linked
liabilities
£m
Annuity
and other UK insurance
operations
long-term
Total
business
£m
£m
103,772
3,157
(2,336)
(6,309)
(5,488)
(284)
(360)
–
(13,049)
(2,483)
82,108
3,271
(2,394)
(5,147)
(4,270)
(202)
(270)
–
9,365
764
18,977
2,435
(1,838)
(666)
(69)
–
360
–
(2,952)
2
16,318
1,860
(1,535)
(670)
(345)
–
270
–
2,849
(57)
15,541
3,780
(107)
(1,349)
2,324
–
–
447
(777)
–
17,535
1,736
(42)
(1,422)
272
–
–
(46)
1,904
–
138,290
9,372
(4,281)
(8,324)
(3,233)
(284)
–
447
(16,778)
(2,481)
115,961
6,867
(3,971)
(7,239)
(4,343)
(202)
–
(46)
14,118
707
At 31 December 2009
87,495
19,035
19,665
126,195
Notes
a Net cash flows of negative £4,343 million have increased from negative £3,233 million in 2008, principally as a result of a decrease in premiums
b
following the decision to limit bulk annuity transactions in the period.
Investment-related items and other movements of £14,118 million across fund types reflected the strong performance of UK equity markets in 2009,
as well as the increase in value of debt securities and the reversal of unrealised losses on property investments recorded in 2008.
c Assumption changes principally represent the net impact of changes to the deflation reserve, expense assumptions and modelling changes.
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175
Notes on the Group financial statements > D: Life assurance businesses > continued
D2: UK insurance operations continued
c Information on credit risk of debt securities
The following table summarises by rating the securities held by UK insurance operations as at 31 December 2009 and 2008:
PAC with-profits sub-fund
Other funds and subsidiaries
Scottish
Excluding
Amicable Prudential
Annuities
Insurance
Limited
Fund
£m
£m
Prudential
Annuities
Limited
£m
1,018
399
1,210
1,124
316
4,067
59
18
36
65
27
205
46
479
4,594
2,242
6,954
6,141
1,618
21,549
252
108
181
324
140
1,005
300
2,504
2,531
1,131
3,685
1,287
168
8,802
51
40
290
258
61
700
331
2,351
Total
£m
7,125
3,373
10,639
7,428
1,786
30,351
303
148
471
582
201
1,705
631
4,855
Unit-
linked
assets
and
liabilities
£m
2,451
765
1,788
905
360
6,269
Other
annuity
and
long-term
business
£m
795
219
690
450
23
UK insurance
operations
2009
2008
Total
£m
16,091
6,472
19,693
12,183
2,667
Total
£m
18,981
6,012
15,929
7,413
1,033
PRIL
£m
4,702
1,716
5,366
2,276
182
14,242
2,177
57,106
49,368
4
–
–
–
–
4
76
85
251
141
102
655
–
113
314
1,423
21
25
43
27
9
125
31
80
463
276
801
815
339
2,694
1,022
6,950
681
833
678
454
162
2,808
560
6,135
S&P – AAA
S&P – AA+ to AA-
S&P – A+ to A-
S&P – BBB+ to BBB-
S&P – Other
Moody’s – Aaa
Moody’s – Aa1 to Aa
Moody’s – A1 to A3
Moody’s – Baa1 to Baa3
Moody’s – Other
Fitch
Other
Total debt securities
4,797
25,358
12,184
37,542
6,386
16,634
2,413
67,772
58,871
Where no external ratings are available, internal ratings produced by the Group’s asset management operation, which are prepared on
the Company’s assessment of a comparable basis to external ratings, are used where possible. Of the £6,950 million total debt securities
held in 2009 (2008: £6,135 million) which are not externally rated, £2,190 million were internally rated AAA to A-, £3,445 million were
internally rated BBB to B- and £1,315 million were rated below B- or unrated (2008: £2,325 million, £3,149 million and £661 million
respectively). The majority of unrated debt security investments were held in SAIF and the PAC with-profits fund and relate to
convertible debt and other investments which are not covered by ratings analysts nor have an internal rating attributed to them. Of the
£1,503 million PRIL and other annuity and long-term business investments which are not externally rated, £15 million were internally
rated AAA, £88 million AA, £495 million A, £647 million BBB, £123 million BB and £135 million were internally rated B+ and below.
As detailed in note D2(i) below, the primary sensitivity of IFRS basis profit or loss and shareholders’ equity relates to non-linked
shareholder-backed business which covers ‘PRIL’ and ‘other annuity and long-term business’ in the table above.
d Products and guarantees
Prudential’s long-term products in the UK consist of life insurance, pension products and pension annuities.
These products are written primarily in:
• One of three separate sub-funds of the PAC long-term fund, namely the with-profits sub-fund, SAIF, and the non-profit sub-fund;
• Prudential Annuities Limited, which is owned by the PAC with-profits sub-fund;
• Prudential Retirement Income Limited, a shareholder-owned subsidiary; or
• Other shareholder-backed subsidiaries writing mainly non-profit unit-linked business.
i With-profits products and PAC with-profits sub-fund
Within the statement of financial position of UK insurance operations at 31 December 2009, as shown in note D2(a), there are
policyholder liabilities and unallocated surplus of £77.5 billion (2008: £72.1 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 £31 million at 31 December 2009 (2008: £42 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.
With-profits products provide returns to policyholders through bonuses that are ‘smoothed’. There are two types of bonuses:
‘annual’ and ‘final’. Annual bonuses are declared once a year, and once credited, are guaranteed in accordance with the terms of the
particular product. Unlike annual bonuses, final bonuses are guaranteed only until the next bonus declaration.
176 Prudential plc > Annual Report 2009
The main factors that influence the determination of bonus rates are the return on the investments of the with-profits fund, inflation,
taxation, the expenses of the fund chargeable to policyholders and the degree to which investment returns are smoothed. The overall
rate of return earned on investments and the expectation of future investment returns are the most important influences on bonus rates.
A high proportion of the assets backing the with-profits business are invested in equities and real estate. If the financial strength of
the with-profits business is affected, then a higher proportion of fixed interest or similar assets might be held by the fund.
Further details on the determination of the two types of the bonuses: ‘regular’ and ‘final’, the application of significant judgement,
key assumptions and the degree of smoothing of investment returns in determining the bonus rates are provided below.
Regular bonus rates
For regular bonuses, the bonus rates are determined for each type of policy primarily by targeting the bonus level at a prudent proportion
of the long-term expected future investment return on underlying assets. The expected future investment return is reduced as
appropriate for each type of policy to allow for items such as expenses, charges, tax and shareholders’ transfers. However, the rates
declared may differ by product type, or by the date of payment of the premium or date of issue of the policy or if the accumulated annual
bonuses are particularly high or low relative to a prudent proportion of the achieved investment return.
When target bonus levels change the PAC Board has regard to the overall strength of the long-term fund when determining the
length of time over which it will seek to achieve the amended prudent target bonus level.
In normal investment conditions, PAC expects changes in regular bonus rates to be gradual over time, and these are not expected
to exceed one per cent per annum over any year. However, the PAC Directors retain the discretion whether or not to declare a regular
bonus each year, and there is no limit on the amount by which regular bonus rates can change.
Final bonus rates
A final bonus which is normally declared yearly, may be added when a claim is paid or when units of a unitised product are realised.
The rates of final bonus usually vary by type of policy and by reference to the period, usually a year, in which the policy commences
or each premium is paid. These rates are determined by reference to the asset shares for the sample policies but subject to the smoothing
approach, explained below.
In general, the same final bonus scale applies to maturity, death and surrender claims except that:
• The total surrender value may be impacted by the application of a Market Value Reduction – MVR – (for accumulating with-profits
policies) and is affected by the surrender bases (for conventional with-profits business); and
• For the SAIF and Scottish Amicable Life (SAL), the final bonus rates applicable on surrender may be adjusted to reflect expected future
bonus rates.
Application of significant judgement
The application of the above method for determining bonuses requires the PAC board of directors to apply significant judgement in
many respects, including in particular the following:
• Determining what constitutes fair treatment of customers: Prudential is required by UK law and regulation to consider the fair
treatment of its customers in setting bonus levels. The concept of determining what constitutes fair treatment, while established
by statute, is not defined.
• Smoothing of investment returns: This is an important feature of with-profits products. Determining when particular circumstances,
such as a significant rise or fall in market values, warrant variations in the standard bonus smoothing limits that apply in normal
circumstances requires the PAC Board to exercise significant judgement.
• Determining at what level to set bonuses to ensure that they are competitive: The overall return to policyholders is an important
competitive measure for attracting new business.
Key assumptions
As noted above, the overall rate of return on investments and the expectation of future investment returns are the most important
influences in bonus rates, subject to the smoothing described below. Prudential determines the assumptions to apply in respect of
these factors, including the effects of reasonably likely changes in key assumptions, in the context of the overarching discretionary
and smoothing framework that applies to its with-profits business as described above. As such, it is not possible to specifically quantify
the effects of each of these assumptions or of reasonably likely changes in these assumptions.
Prudential’s approach, in applying significant judgement and discretion in relation to determining bonus rates, is consistent
conceptually with the approach adopted by other firms that manage a with-profits business. It is also consistent with the requirements
of UK law, which require all UK firms that carry out a with-profits business to define, and make publicly available, the Principles and
Practices of Financial Management (PPFM) that are applied in the management of their with-profits funds.
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Notes on the Group financial statements > D: Life assurance businesses > continued
D2: UK insurance operations continued
Accordingly, Prudential’s PPFM contains an explanation of how it determines regular and final bonus rates within the discretionary
framework that applies to all with-profits policies, subject to the general legislative requirements applicable. The purpose of Prudential’s
PPFM is therefore to:
• explain the nature and extent of the discretion available;
• show how competing or conflicting interests or expectations of:
– different groups and generations of policyholders; and
– policyholders and shareholders are managed so that all policyholders and shareholders are treated fairly; and
• provide a knowledgeable observer (e.g. a financial adviser) with an understanding of the material risks and rewards from starting and
continuing to invest in a with-profits policy with Prudential.
Furthermore, in accordance with industry-wide regulatory requirements, the PAC Board has appointed:
• an Actuarial Function Holder who provides the PAC Board with all actuarial advice;
• a With-Profits Actuary whose specific duty is to advise the PAC Board on the reasonableness and proportionality of the manner in
which its discretion has been exercised in applying the PPFM and the manner in which any conflicting interests have been addressed;
and
• a With-Profits Committee of independent individuals, which assesses the degree of compliance with the PPFM and the manner in
which conflicting rights have been addressed.
Smoothing of investment return
In determining bonus rates for the UK with-profits policies, smoothing is applied to the allocation of the overall earnings of the UK
with-profits fund of which the investment return is a significant element. The smoothing approach differs between accumulating and
conventional with-profits policies to reflect the different contract features. In normal circumstances, Prudential does not expect most
payout values on policies of the same duration to change by more than 10 per cent up or down from one year to the next, although
some larger changes may occur to balance payout values between different policies. Greater flexibility may be required in certain
circumstances, for example following a significant rise or fall in market values, and in such situations the PAC Board may decide to
vary the standard bonus smoothing limits in order to protect the overall interests of policyholders.
The degree of smoothing is illustrated numerically by comparing in the following table the relatively ‘smoothed’ level of policyholder
bonuses declared as part of the surplus for distribution with the more volatile movement in investment return and other items of income
and expenditure of the UK component of the PAC with-profits fund for each year presented.
Net income of the fund:
Investment return
Claims incurred
Movement in policyholder liabilities
Add back policyholder bonuses for the year (as shown below)
Claims incurred and movement in policyholder liabilities
(including charge for provision for asset shares and excluding policyholder bonuses)
Earned premiums, net of reinsurance
Other income
Acquisition costs and other operating expenditure
Tax (charge) credit
Net income of the fund before movement in unallocated surplus
Movement in unallocated surplus
Surplus for distribution
Surplus for distribution allocated as follows:
– 90% policyholders bonus (as shown above)
– 10% shareholders’ transfers
2009 £m
2008 £m
10,461
(6,253)
(3,692)
1,827
(8,118)
3,063
(2)
(842)
(640)
3,922
(1,893)
2,029
(14,595)
(7,068)
13,504
2,565
9,001
2,927
(36)
(408)
1,191
(1,920)
4,769
2,849
1,827
202
2,029
2,565
284
2,849
178 Prudential plc > Annual Report 2009
ii Annuity business
Prudential’s conventional annuities include level, fixed-increase and retail price index (RPI) annuities. They are mainly written within the
subsidiaries PAL, PRIL, Prudential Pensions Limited and the PAC with-profits sub-fund, but there are some annuity liabilities in the non-
profit sub-fund and SAIF.
Prudential’s fixed-increase annuities incorporate automatic increases in annuity payments by fixed amounts over the policyholder’s
life. The RPI annuities that Prudential offers provide for a regular annuity payment to which an additional amount is added periodically
based on the increase in the UK RPI.
Prudential’s with-profits annuities, which are written in the WPSF, combine the income features of annuity products with the
investment smoothing features of with-profits products and enable policyholders to obtain exposure to investment return on the WPSF’s
equity shares, property and other investment categories over time. Policyholders select an ‘anticipated bonus’ from the specific range
Prudential offers for the particular product. The amount of the annuity payment each year depends upon the relationship between the
anticipated bonus rate selected by the policyholder when the product is purchased and the bonus rates Prudential subsequently
declares each year during the term of the product. If the total bonus rates fall below the anticipated rate, then the annuity income falls.
At 31 December 2009, £32.3 billion (2008: £29.4 billion) of investments relate to annuity business of PAL and PRIL. These
investments are predominantly in debt securities (including retail price index-linked bonds to match retail price index-linked annuities),
loans and deposits and are duration matched with the estimated duration of the liabilities they support.
iii SAIF
SAIF is a ring-fenced sub-fund of the PAC long-term fund formed following the acquisition of the mutually owned Scottish Amicable Life
Assurance Society in 1997. No new business may be written in SAIF, although regular premiums are still being paid on policies in force at
the time of the acquisition and incremental premiums are permitted on these policies.
The fund is solely for the benefit of policyholders of SAIF. Shareholders have no interest in the profits of this fund although they are
entitled to asset management fees on this business.
The process for determining policyholder bonuses of SAIF with-profits policies, which constitute the vast majority of obligations
of the funds, is similar to that for the with-profits policies of the WPSF. However, in addition, the surplus assets in SAIF are allocated to
policies in an orderly and equitable distribution over time as enhancements to policyholder benefits i.e. in excess of those based on
asset share.
Provision is made for the risks attaching to some SAIF unitised with-profits policies that have MVR-free dates and for those SAIF
products which have a guaranteed minimum benefit on death or maturity of premiums accumulated at four per cent per annum.
The Group’s main exposure to guaranteed annuities in the UK is through SAIF and a provision of £284 million was held in SAIF at
31 December 2009 (2008: £391 million) to honour the guarantees. As SAIF is a separate sub-fund solely for the benefit of policyholders
of SAIF this provision has no impact on the financial position of the Group’s shareholders’ equity.
iv Unit-linked (non-annuity) and other non-profit business
Prudential UK insurance operations also have an extensive book of unit-linked policies of varying types and provide a range of other
non-profit business such as credit life and protection contracts. These contracts do not contain significant financial guarantees.
There are no guaranteed maturity values or guaranteed annuity options on unit-linked policies except for minor amounts for
certain policies linked to cash units within SAIF.
e Exposure to market risk
i Non-linked life and pension business
For with-profits business, the absence of guaranteed surrender values and the flexibility given by the operation of the bonus system
means that a high proportion of the investments backing the with-profits business are in equities and real estate with the balance in debt
securities, deposits and loans.
The investments supporting the protection business are small in value and tend to be assets of a fixed term duration reflecting the
guaranteed nature of the liabilities.
ii Pension annuity business
Prudential’s UK annuity business mainly employs fixed income investments (including UK retail price index-linked assets) because the
liabilities consist of guaranteed payments for as long as each annuitant or surviving partner is alive. Retail price index-linked assets are
used to back pension annuities where the payments are linked to the RPI.
iii Unit-linked business
Except through the second order effect on asset management fees, the unit-linked business of the UK insurance operations is not
exposed to market risk. The lack of exposure arises from the contract nature whereby policyholder benefits reflect asset value
movements of the unit-linked funds.
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Notes on the Group financial statements > D: Life assurance businesses > continued
D2: UK insurance operations continued
f Process for setting assumptions and determining contract liabilities
i Overview
The calculation of the contract liabilities involves the setting of assumptions for future experience. This is done following detailed review
of the relevant experience including, in particular, mortality, expenses, tax, economic assumptions and where applicable, persistency.
For with-profits business written in the WPSF or SAIF, a market consistent valuation is performed (as described in section (ii) below).
Additional assumptions required are for persistency and the management actions under which the fund is managed. Assumptions used
for a market consistent valuation typically do not contain margins, whereas those used for the valuation of other classes of business do.
Mortality assumptions are set based on the results of the most recent experience analysis looking at the experience over recent years
of the relevant business. For non-profit business, a margin for adverse deviation is added. Different assumptions are applied for different
product groups. For annuitant mortality, assumptions for current mortality rates are based on recent experience investigations and
expected future improvements in mortality. The expected future improvements are based on recent experience and projections of the
business and industry experience generally.
Maintenance and, for some classes of business, termination expense assumptions are expressed as per policy amounts. They are
set based on the expenses incurred during the year, including an allowance for ongoing investment expenditure and allocated between
entities and product groups in accordance with the operation’s internal cost allocation model. For non-profit business a margin for
adverse deviation is added to this amount. Expense inflation assumptions are set consistent with the economic basis and based on
the difference between yields on nominal gilts and index-linked gilts.
From 1 January 2008, when the previous tariff arrangement terminated, the actual renewal expenses incurred on behalf of SAIF
by other Group companies are recharged in full to SAIF.
The assumptions for asset management expenses are based on the charges specified in agreements with the Group’s asset
management operations, plus a margin for adverse deviation for non-profit business.
Tax assumptions are set equal to current rates of taxation.
For non-profit business excluding unit-linked business, the valuation interest rates used to discount the liabilities are based on the
yields as at the valuation date on the assets backing the technical provisions. For fixed interest securities the gross redemption yield is
used except for the PAL and PRIL annuity business where the internal rate of return of the assets backing the liabilities is used. Properties
are valued using the rental yield, and for equities it is the greater of the dividend yield and the average of the dividend yield and the
earnings yield. An adjustment is made to the yield on non risk-free fixed interest securities and property to reflect credit risk. To calculate
the non-unit reserves for linked business, assumptions have been set for the gross unit growth rate and the rate of inflation of
maintenance expenses, as well as for the valuation interest rate as described above.
ii WPSF and SAIF
The policyholder liabilities reported for the WPSF are primarily for two broad types of business. These are accumulating and
conventional with-profits contracts. The policyholder liabilities of the WPSF are accounted for under FRS 27.
The provisions have been determined on a basis consistent with the detailed methodology included in regulations contained in the
FSA’s rules for the determination of reserves on the FSA’s ‘realistic’ Peak 2 basis. In aggregate, the regime has the effect of placing a value
on the liabilities of UK with-profits contracts, which reflects the amounts expected to be paid based on the current value of investments
held by the with-profits funds and current circumstances. These contracts are a combination of insurance and investment contracts with
discretionary participation features, as defined by IFRS 4.
The FSA’s Peak 2 calculation under the realistic regime requires the value of liabilities to be calculated as:
• The with-profits benefits reserve (WPBR); plus
• future policy related liabilities (FPRL); plus
• the realistic current liabilities of the fund.
The WPBR is primarily based on the retrospective calculation of accumulated asset shares but is adjusted to reflect future expected
policyholder benefits and other outgoings. Asset shares are calculated as the accumulation of all items of income and outgo that are
relevant to each policy type. Income comprises credits for premiums, investment returns (including unrealised gains), and miscellaneous
profits. Outgo comprises charges for tax (including an allowance for tax on unrealised gains), guarantees and smoothing, mortality and
morbidity, shareholders’ profit transfers, miscellaneous losses, and expenses and commission (net of any tax relief).
The FPRL must include a market consistent valuation of costs of guarantees, options and smoothing, less any related charges,
and this amount must be determined using either a stochastic approach, hedging costs or a series of deterministic projections with
attributed probabilities.
180 Prudential plc > Annual Report 2009
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.
iii Annuity business
Credit risk provisions
For IFRS reporting, the results for UK shareholder-backed annuity business are particularly sensitive to the allowances made for credit
risk. The allowance is reflected in the deduction from the valuation rate of interest for discounting projected future annuity payments to
policyholders that would have otherwise applied. Since mid-2007 there has been a significant increase in the actual and perceived credit
risk associated with corporate bonds as reflected in the significant widening that has occurred in corporate bond spreads. Although bond
spreads over swap rates have narrowed from their peak in March 2009, they are still high compared with the levels seen in the years
immediately preceding the start of the dislocated markets in 2007. The allowance that should therefore be made for credit risk remains
a particular area of judgement.
The additional yield received on corporate bonds relative to swaps can be broken into the following constituent parts:
• the expected level of future defaults;
• the credit risk premium that is required to compensate for the potential volatility in default levels; and
• the liquidity premium that is required to compensate for the lower liquidity of corporate bonds relative to swaps.
The credit risk allowance is a function of the asset mix and the credit quality of the underlying portfolio. At 31 December 2009,
80 per cent (2008: 75 per cent) of the assets backing the shareholder annuity and other business were debt securities as shown
in D2(a). This comprises both government and corporate bonds. Government bonds are generally given a credit default allowance
of zero. For corporate bonds the credit allowance varies by credit rating. An analysis of the credit ratings of debt securities is included
in note D2(c).
Given that the normal business model for Prudential’s annuity business is to hold bonds to match long-term liabilities,
the valuation rate that is applied to discount the future annuity payments includes a liquidity premium that reflects the residual
element of current bond spreads over swap rates after providing for the credit risk.
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.
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Notes on the Group financial statements > D: Life assurance businesses > continued
D2: UK insurance operations continued
The weighted components of the bond spread over swap rates for shareholder-backed fixed and linked annuity business for PRIL at
31 December 2009, 31 December 2008 and 31 December 2007 based on the asset mix at the relevant balance sheet dates are as follows:
Bond spread over swap ratesnote i
Credit risk allowance
Long-term expected defaultsnote ii
Long-term credit risk premiumnote iii
Short-term allowance for credit risknote iv
Total credit risk allowance
Liquidity premium
Bond spread over swap ratesnote i
Credit risk allowance
Long-term expected defaultsnote ii
Long-term credit risk premiumnote iii
Short-term allowance for credit risknote iv
Total credit risk allowance
Liquidity premium
Bond spread over swap ratesnote i
Credit risk allowance
Long-term expected defaultsnote ii
Long-term credit risk premiumnote iii
Short-term allowance for credit risknote iv
Total credit risk allowance
Liquidity premium
2009
Adjustment
from
regulatory
to IFRS basis
(bps)
note v
Pillar I
Regulatory
basis
(bps)
175
19
13
39
71
104
–
–
–
(24)
(24)
24
2008
Adjustment
from
regulatory
to IFRS basis
(bps)
note v
Pillar I
Regulatory
basis
(bps)
323
15
11
54
80
243
–
–
–
(25)
(25)
25
2007
Adjustment
from
regulatory
to IFRS basis
(bps)
note v
Pillar I
Regulatory
basis
(bps)
76
13
10
10
33
43
–
–
(3)
(10)
(13)
13
IFRS
(bps)
175
19
13
15
47
128
IFRS
(bps)
323
15
11
29
55
268
IFRS
(bps)
76
13
7
–
20
56
Notes
i
ii
Bond spread over swap rates reflect market observed data.
Long-term expected defaults are derived by applying Moody’s data from 1970 to 2004 uplifted by between 100 per cent (B) and 200 per cent (AAA)
according to credit rating on the annuity asset portfolio. The credit rating assigned to each asset held is based on external credit rating and for this
purpose the credit rating assigned to each asset held is the lowest credit rating published by Moody’s, Standard and Poor’s and Fitch.
iii The long-term credit risk premium, provides compensation against the risk of potential volatility in the level of defaults and is derived by applying the
95th percentile from Moody’s data from 1970 to 2004 to the annuity asset portfolio.
iv The short-term allowance for credit risk assumed in the Pillar 1 solvency valuations at 31 December 2007 and 31 December 2008 were determined
v
as 25 per cent of the increase in corporate bond spreads (as estimated from the movements in published corporate bond indices) since
31 December 2006.
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’. In years prior to 2008 long-term IFRS
default assumptions had been set mid-way between the EEV and Pillar 1 assumptions. At 31 December 2008, in light of the increased uncertainty
surrounding future credit default experience, the IFRS long-term assumptions were strengthened to bring them into line with the long-term
Pillar 1 default assumptions. In addition a short-term allowance for credit risk was established but at a lower level than allowed for in the Pillar 1
regulatory basis.
182 Prudential plc > Annual Report 2009
Factors affecting the credit risk allowance at 31 December 2009
The main factors influencing the credit risk allowance at 31 December 2009 are as follows:
a Credit downgrades and default experience
As highlighted above, the short-term allowance at 31 December 2008 was intended to cover both short-term credit downgrades and
losses in excess of the longer-term expectations. Downgrades in 2009 have been within the opening Pillar 1 assumptions and hence the
increase in the long-term allowance as a result of credit downgrades has been offset by an equal decrease in the short-term allowance.
Defaults for the UK shareholder-backed annuity business totalled £11 million during 2009, below the amount allowed for within the
short-term allowance. The allowance (in bps terms) has been adjusted to eliminate any experience profits that would have otherwise
arisen.
b Asset trading in relation to subordinated financial debt
During the second half of 2009, the Group decided to trade out of subordinated financial debt into higher quality assets. This resulted
in a gross transaction loss arising from the lower expected yield on the newly purchased assets. The reduction in subordinated financial
debt holdings improved the overall credit quality of the corporate bond portfolio and so allowed a release of long-term credit reserves to
offset this loss. In addition the allowance for the short-term defaults above has been notionally allocated to the highest yielding assets
and so the allowance attaching to the subordinated debt sold has also been released.
On a Pillar 1 basis this transaction had no overall impact on the solvency surplus of PRIL, the PAC non-participating sub-fund and
PAL. On an IFRS basis, a lower short-term default reserve was held at 31 December 2008 and the release of the reserves in respect of the
subordinated debt is therefore lower. Overall the reduction in subordinated financial debt holdings generated a pre-tax IFRS operating
loss of £51 million.
c Asset purchases in respect of new business
The assets purchased during 2009 to back new business have been of better average credit quality than the assets held at 31 December
2008, in particular no subordinated bank debt or sub-investment grade assets have been bought to back new business. As a result of the
lower credit risk of the new business assets, the overall allowance for credit risk required at 31 December 2009 is reduced when the new
business assets and in-force assets are aggregated together.
d Overall impact on the PRIL credit risk allowance
After taking account of the factors noted above the movement on the average basis points allowances for PRIL on the Pillar 1 regulatory
and IFRS bases are as follows:
Total allowance for credit risk
at 31 December 2008
Credit downgrades
Retention of surplus from favourable
default experience
Asset trading
New business
Other
Total allowance for credit risk
at 31 December 2009
Pillar 1 Regulatory basis
(bps)
IFRS
(bps)
Long-term
Short-term
Total
Long-term
Short-term
Total
26
14
–
(8)
–
–
32
54
(14)
5
(4)
(2)
–
39
80
–
5
(12)
(2)
–
71
26
14
–
(8)
–
–
32
29
(14)
1
(1)
(1)
1
15
55
–
1
(9)
(1)
1
47
Overall this has led to the credit allowance for Pillar 1 purposes to be 41 per cent (2008: 25 per cent) of the bond spread over swap rates.
For IFRS purposes it represents 27 per cent of the bond spread over swap rates (2008: 17 per cent).
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Notes on the Group financial statements > D: Life assurance businesses > continued
D2: UK insurance operations continued
Mortality
The mortality assumptions are set in light of recent population and internal experience. The assumptions used are percentages of
standard actuarial mortality tables with an allowance for future mortality improvements. Where annuities have been sold on an enhanced
basis to impaired lives an additional age adjustment is made. The percentages of the standard table used are selected according to the
source of business. The range of percentages used is set out in the following tables:
2009
In payment
Males
PAL
Females
102% – 126% 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
84% – 117% PNFA00
(C = 2000) with 75%
of medium cohort
improvement table
with a minimum annual
improvement of 1.25%
up to age 90, tapering
to zero at age 120
Males
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
PRIL
Females
87% – 98% PNFA00
(C = 2000) with 75%
of medium cohort
improvement table
with a minimum annual
improvement of 1.25%
up to age 90, tapering
to zero at age 120
In deferment
AM92 minus 4 years
AF92 minus 4 years
AM92 minus 4 years
AF92 minus 4 years
2008
In payment
Males
PAL
Females
102% – 126% 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
84% – 117% PNFA00
(C = 2000) with 75%
of medium cohort
improvement table
with a minimum annual
improvement of 1.25%
up to age 90, tapering
to zero at age 120
Males
97% – 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
PRIL
Females
88% – 98% PNFA00
(C = 2000) with 75%
of medium cohort
improvement table
with a minimum annual
improvement of 1.25%
up to age 90, tapering
to zero at age 120
In deferment
AM92 minus 4 years
AF92 minus 4 years
AM92 minus 4 years
AF92 minus 4 years
2007
In payment
Males
PAL
Females
106% – 126% 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
84% – 117% PNFA00
(C = 2000) with 75%
of medium cohort
improvement table
with a minimum annual
improvement of 1.25%
up to age 90, tapering
to zero at age 120
Males
99% – 114% 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
PRIL
Females
85% – 103% PNFA00
(C = 2000) with 75%
of medium cohort
improvement table
with a minimum annual
improvement of 1.25%
up to age 90, tapering
to zero at age 120
In deferment
AM92 minus 4 years
AF92 minus 4 years
AM92 minus 4 years
AF92 minus 4 years
iv Unit-linked (non-annuity) and other non-profit business
The majority of other long-term business written in the UK insurance operations is unit-linked business or other business with
similar features. For these contracts the attaching liability reflects the unit value obligation and provision for expenses and mortality
risk. The latter component is determined by applying mortality assumptions on a basis that is appropriate for the policyholder profile.
For unit-linked business, the assets covering unit liabilities are exposed to market risk, but the residual risk when considering the
unit-linked liabilities and assets together is limited to the effect on fund-based charges.
For those contracts where the level of insurance risk is insignificant the assets and liabilities arising under the contracts are
distinguished between those that relate to the financial instrument liability and acquisition costs and deferred income that relate to the
component of the contract that relates to investment management. Acquisition costs and deferred income are recognised consistent
with the level of service provision in line with the requirements of IAS 18.
184 Prudential plc > Annual Report 2009
g Reinsurance
The Group’s UK insurance business cedes only minor amounts of business outside the Group. During 2009, reinsurance premiums for
externally ceded business were £122 million (2008: £61 million) and reinsurance recoverable insurance assets were £502 million (2008:
£416 million) in aggregate. During the year the Group’s UK insurance business wrote a longevity swap on certain aspects of the UK’s
annuity back-book liabilities. This resulted in a one-off benefit of £34 million to IFRS profit before tax. The gains and losses recognised
in profit and loss for other contracts were immaterial.
h Effect of changes in assumptions used to measure insurance assets and liabilities
2009
Mortality
Recent mortality experience has been in line with expectations and no change is therefore required to the overall strength of mortality
assumptions at 31 December 2009.
Credit risk
The approach to reserving for credit risk is set out in note (f)(iii).
Aggregate effect of assumptions changes
For UK insurance operations, the effects of assumptions changes for 2009 were as follows:
Effect of changing expense assumptions
Release of investment-related margins:
Deflation risk margins
Asset management fees
Weakening of other assumptions
Net credit to unallocated surplus
Net credit to shareholder result
2009 £m
With-profits
sub-fund
note a
Shareholder-
backed
business
note b
51
14
65
(9)
32
14
9
46
Notes
a Charges and expenses of the with-profits sub-fund have been updated to reflect the experience in 2009. The changes vary by product and the overall
b
impact is a £51 million credit.
The assumption changes in 2009 for the shareholder-backed business primarily relate to changes to the deflation reserve, expense assumptions and
modelling changes.
2008
Mortality
Overall mortality experience was in line with expectations and no change was therefore required to the overall strength of mortality
assumptions at 31 December 2008. However, mortality assumptions were rebalanced across different categories of business so as
to more closely align to the actual experience of each product category. The overall effect of rebalancing the assumptions between
different product groups was financially neutral.
Credit risk
In total, for 2008, the effect of changes to the allowance for credit risk and the effect of portfolio rebalancing gave rise to a charge of
£23 million. For shareholder-backed annuity and lifetime mortgage business, the operating profit based on longer-term investment
returns included a charge of £413 million for the additional credit risk allowance for the annuity portfolio as a whole. Partially offsetting
this was £390 million for the impact of £2.8 billion of portfolio rebalancing to more closely align management benchmark. The credit
reflecting the additional yield expected after allowing for additional credit risk arising from the rebalancing.
F
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N
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T
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M
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S
D
D
185
Notes on the Group financial statements > D: Life assurance businesses > continued
D2: UK insurance operations continued
Aggregate effect of assumptions changes
For UK insurance operations, the effects of assumptions changes for 2008 were as follows:
Effect of strengthening of mortality assumptions
Modelling of management actionsnote a
Weakening of other assumptions
Release of other margins:
Projected benefit related
Investment related:
Additional credit default margins
Deflation risk margins
Expense related
Net credit to unallocated surplus
Net charge to shareholder result
2008 £m
With-profits
sub-fund
Shareholder-
backed
business
(60)
421
75
436
10
(369)
(30)
36
83
(4)
–
–
(4)
10
note b(413)
(32)
(8)
(447)
The £421 million credit for modelling of management actions relates primarily to enhancements for actions in the event of solvency distress scenarios.
Notes
a
b Net of additional credit risk allowance attaching to effect of portfolio balancing described above.
c
In 2008, no changes to mortality assumptions were made or necessary.
i Sensitivity of IFRS basis profit or loss and equity to market and other risks
The risks to which the IFRS basis results of the UK insurance operations are sensitive are asset/liability matching, mortality experience
and payment assumptions for shareholder-backed annuity business. Further details are described below.
i With-profits business
SAIF
Shareholders have no interest in the profits of SAIF but are entitled to the asset management fees paid on the assets of the fund.
With-profits sub-fund business
For with-profits business (including non-participating business of PAL which is owned by the WPSF) adjustments to liabilities and
any related tax effects are recognised in the income statement. However, except for any impact on the annual declaration of bonuses,
shareholders’ profit for with-profits business is unaffected. This is because IFRS basis profits for with-profits business, which are
determined on the same basis as on preceding UK GAAP, solely reflect one-ninth of the cost of bonuses declared for the year.
The main factors that influence the determination of bonus rates are the return on the investments of the fund, the effect of inflation,
taxation, the expenses of the fund chargeable to policyholders and the degree to which investment returns are smoothed. Mortality
and other insurance risk are relatively minor factors.
Unallocated surplus represents the excess of assets over policyholder liabilities of the fund. As unallocated surplus of the WPSF
is recorded as a liability, movements in its value do not affect shareholders’ profits or equity.
The level of unallocated surplus is particularly sensitive to the level of investment returns on the portion of the life fund assets that
represents the surplus. The effects for 2009 and 2008 are demonstrated in note D5.
ii Shareholder-backed annuity business
Profits from shareholder-backed annuity business are most sensitive to:
• The extent to which the duration of the assets held closely matches the expected duration of the liabilities under the contracts.
Assuming close matching, the impact of short-term asset value movements as a result of interest rate movements will broadly
offset changes in the value of liabilities caused by movements in valuation rates of interest;
• actual versus expected default rates on assets held;
• the difference between long-term rates of return on corporate bonds and risk-free rates;
• the variance between actual and expected mortality experience;
• the extent to which expected future mortality experience gives rise to changes in the measurement of liabilities; and
• changes in renewal expense levels.
A decrease in assumed mortality rates of one per cent would decrease gross profits by approximately £44 million
(2008: £35 million). A decrease in credit default assumptions of five basis points would increase gross profits by
£91 million (2008: £71 million). A decrease in renewal expenses (excluding asset management expenses) of five per cent
would increase gross profits by £17 million (2008: £15 million). The effect on profits would be approximately symmetrical
for changes in assumptions that are directionally opposite to those explained above.
186 Prudential plc > Annual Report 2009
iii Unit-linked and other business
Unit-linked and other business represents a comparatively small proportion of the in-force business of the UK insurance operations.
Profits from unit-linked and similar contracts primarily arise from the excess of charges to policyholders, for management of
assets under the Company’s stewardship, over expenses incurred. The former is most sensitive to the net accretion of funds under
management as a function of new business and lapse and timing of death. The accounting impact of the latter is dependent upon the
amortisation of acquisition costs in line with the emergence of margins (for insurance contracts) and amortisation in line with service
provision (for the investment management component of investment contracts). By virtue of the design features of most of the contracts
which provide low levels of mortality cover, the profits are relatively insensitive to changes in mortality experience.
iv Shareholder exposure to interest rate risk and other market risk
By virtue of the fund structure, product features and basis of accounting described in note D2(d) and (f), the policyholder liabilities of
the UK insurance operations are, except for pension annuity business, not generally exposed to interest rate risk. For pension annuity
business, liabilities are exposed to fair value interest rate risk. However, the net exposure to the PAC WPSF (for PAL) and shareholders
(for liabilities of PRIL and the non-profit sub-fund) is very substantially ameliorated by virtue of the close matching of assets with
appropriate duration. The level of matching from period to period can vary depending on management actions and economic factors
so it is possible for a degree of mis-matching profits or losses to arise.
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 capital reporting requirements and IFRS is not the same, with contingency
reserves and some other margins for prudence within the assumptions required under the FSA regulatory solvency basis not included
for IFRS reporting purposes. As a result IFRS equity is higher than regulatory capital and therefore more sensitive to interest rate risk.
The estimated sensitivity of the UK non-linked shareholder-backed business (principally pension annuities business) to a movement
in interest rates is as follows.
2009
£m
2008 £m
A decrease
of 2%
A decrease
of 1%
An increase
of 1%
An increase
of 2%
A decrease
of 2%
A decrease
of 1%
An increase
of 1%
An increase
of 2%
Carrying value of debt
securities and
derivatives
Policyholder liabilities
Related deferred
tax effects
Net sensitivity of
profit after tax
and shareholders’
equity
5,372
(5,125)
2,422
(2,304)
(2,020)
1,905
(3,731)
3,498
4,362
(3,974)
1,983
(1,798)
(1,676)
1,503
(3,108)
2,773
(69)
(33)
32
65
(109)
(52)
48
94
178
85
(83)
(168)
279
133
(125)
(241)
In addition the shareholder-backed portfolio of UK non-linked insurance operations covering liabilities and shareholders’ equity
includes equity securities and investment property. Excluding any second order effects on the measurement of the liabilities for future
cash flows to the policyholder, a fall in their value would have given rise to the following effects on pre-tax profit, profit after tax, and
shareholders’ equity.
Pre-tax profit
Related deferred tax effects
Net sensitivity of profit after tax and shareholders’ equity
2009 £m
2008 £m
A decrease
of 20%
A decrease
of 10%
A decrease
of 40%
A decrease
of 20%
A decrease
of 10%
(292)
82
(210)
(146)
41
(105)
(508)
142
(366)
(254)
71
(183)
(127)
35
(92)
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
A 10 or 20 per cent (2008: 10, 20 or 40 per cent) increase in their value would have an approximately equal and opposite effect on profit
and shareholders’ equity to the sensitivities shown above. The market risk sensitivities shown above reflect the impact of temporary
market movements and, therefore, the primary effect of such movements would, in the Group’s segmental analysis of profits, be
included within the short-term fluctuations in investment returns. The disclosure of the effect of a 40 per cent fall for the 2008 year end
was included because of the exceptional market conditions at that time. These conditions have now abated and the disclosure is no
longer appropriate.
In the equity risk sensitivity analysis given above, the Group has, for 2009, 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.
D
D
187
Notes on the Group financial statements > D: Life assurance businesses > continued
D2: UK insurance operations continued
j Duration of liabilities
With the exception of most unitised with-profits bonds and other whole of life contracts the majority of the contracts of the UK insurance
operations have a contract term. However, in effect, the maturity term of contracts reflects the earlier of death, maturity, or lapsation.
In addition, with-profits contract liabilities as noted in note D2(f) include projected future bonuses based on current investment values.
The actual amounts payable will vary with future investment performance of SAIF and the WPSF.
The tables below show the carrying value of the policyholder liabilities. Separately, the Group uses cash flow projections of expected
benefit payments as part of the determination of the value of in-force business when preparing EEV basis results. The tables below also
show the maturity profile of the cash flows used for 2009 and 2008 for that purpose for insurance contracts, as defined by IFRS, i.e. those
containing significant insurance risk, and investment contracts, which do not.
Policyholder liabilities
Expected maturity:
0 to 5 years
5 to 10 years
10 to 15 years
15 to 20 years
20 to 25 years
Over 25 years
2009 £m
With-profits business
Annuity business
(Insurance contracts)
Other
Insurance Investment
contracts contracts
Total
PAL
PRIL
Insurance Investment
Total contracts contracts
Total
Total
40,780 24,780 65,560 11,969 14,292 26,261 10,614 13,794 24,408 116,229
2009 %
50
26
13
6
3
2
29
25
19
14
9
4
41
26
15
9
6
3
32
25
18
11
7
7
31
23
17
12
8
9
32
24
17
12
7
8
34
25
18
11
7
5
35
22
19
11
6
7
35
23
18
11
6
7
With-profits business
Annuity business
(Insurance contracts)
Other
Insurance Investment
contracts contracts
Total
PAL
PRIL
Insurance Investment
Total contracts contracts
Total
Total
2008 £m
Policyholder liabilities
39,010
23,367
62,377
11,477
12,513
23,990
9,756
11,584
21,340 107,707
Expected maturity:
0 to 5 years
5 to 10 years
10 to 15 years
15 to 20 years
20 to 25 years
Over 25 years
47
26
13
7
4
3
26
23
19
15
11
6
38
25
15
10
7
5
30
24
18
12
8
8
2008 %
29
23
17
13
8
10
29
23
18
13
8
9
31
23
18
12
8
8
32
22
18
12
7
9
32
23
18
12
7
8
Notes
i
The cash flow projections of expected benefit payments used in the maturity profile table above are from value of in-force business and exclude the
value of future new business, including vesting of internal pension contracts.
ii Benefit payments do not reflect the pattern of bonuses and shareholder transfers in respect of the with-profits business.
iii
iv For business with no maturity term included within the contracts, for example with-profits investment bonds such as Prudence Bond, an assumption
Investment contracts under Other comprise certain unit-linked and similar contracts accounted for under IAS 39 and IAS 18.
is made as to likely duration based on prior experience.
v The maturity tables shown above have been prepared on a discounted basis. Details of undiscounted cash flow for investment contracts are shown
in note G2.
188 Prudential plc > Annual Report 2009
D3: US insurance operations
a Summary results and statement of financial position
i Results and movements in shareholders’ equity
Operating profit based on longer-term investment returns
Short-term fluctuations in investment returns
Profit (loss) before shareholder tax
Tax
Profit (loss) for the year
Profit (loss) for the year (as above)
Items recognised in other comprehensive income:
Exchange movements
Unrealised valuation movements on securities classified as available-for-sale:
Unrealised holding gains (losses) arising during the year
Less losses included in the income statement
Total unrealised valuation movements
Related change in amortisation of deferred income and acquisition costs
Related tax
Total other comprehensive income (loss)
Total comprehensive income (loss) for the year
Dividends and interest payments to central companies
Net increase (decrease) in equity
Shareholders’ equity at beginning of year
Shareholders’ equity at end of year
2009 £m
2008 £m
459
27
486
102
588
406
(1,058)
(652)
72
(580)
2009 £m
2008 £m
588
(231)
2,249
420
2,669
(1,069)
(557)
812
1,400
(87)
1,313
1,698
3,011
(580)
545
(2,482)
378
(2,104)
831
442
(286)
(866)
(126)
(992)
2,690
1,698
Included within the movements in shareholders’ equity is a net increase in value of Jackson’s debt securities classified as ‘available-for-
sale’ under IAS 39 of £2,669 million (2008: net reduction of £2,104 million).
With the exception of debt securities for US insurance operations classified as ‘available-for-sale’ under IAS 39, unrealised value
movements on the Group’s investments are booked within the income statement. However, for debt securities classified as ‘available-
for-sale’, unless impaired, fair value movements are recognised in other comprehensive income. Realised gains and losses, including
impairments, are recorded in the income statement. This classification is applied for most of the debt securities of the Group’s US
operations. In 2009, Jackson recorded £630 million (2008: £497 million) of impairment losses arising from:
Residential mortgage-backed securities
Public fixed income
Other
2009 £m
2008 £m
509
91
30
630
167
311
19
497
Further details on the impairment losses recognised in the year are shown in note B1. Jackson’s portfolio of debt securities is managed
proactively with credit analysts closely monitoring and reporting on the credit quality of its holdings. Jackson continues to review its
investments on a case-by-case basis to determine whether any decline in fair value represents an impairment. In addition, investment in
structured securities where market prices are depressed are subject to a rigorous review of their future estimated cash flows, including
expected and stress case scenarios, to identify potential shortfalls in contractual payments (both interest and principal). Impairment
charges are recorded on structured securities when the Company forecasts a contractual payment shortfall. Situations where such a
shortfall would not lead to a recognition of a loss are rare. However, some structured securities do not have a single determined set of
future cash flows and instead, there can be a reasonable range of estimates that could potentially emerge. With this variability, there
could be instances where the projected cash flow shortfall under management’s base case set of assumptions is so minor that relatively
small and justifiable changes to the base case assumptions would eliminate the need for an impairment loss to be recognised. The
impairment loss reflects the difference between the fair value and book value.
189
F
I
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A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
D
D
Notes on the Group financial statements > D: Life assurance businesses > continued
D3: US insurance operations continued
In 2009, there was a movement in the statement of financial position value for debt securities classified as available-for-sale from a net
unrealised loss of £2,897 million to a net unrealised gain of £4 million (2008: net unrealised loss of £136 million to a net unrealised
loss of £2,897 million), principally as a result of improving credit spreads more than offsetting the negative effect on the bond values
from the increase in the US treasury yields. During 2009, the gross unrealised gain in the statement of financial position increased from
£281 million at 31 December 2008 to £970 million at 31 December 2009 while the gross unrealised loss decreased from £3,178 million at
31 December 2008 to £966 million at 31 December 2009. Details of the securities in an unrealised loss position are shown in D3(c) below.
These features are included in the table shown below of the movements in the values of available-for-sale securities:
2009
2008
Assets fair valued at below book value
Book value*
Unrealised loss
Fair value (as included in statement of financial position)
Assets fair valued at or above book value
Book value*
Unrealised gain
Fair value (as included in statement of financial position)
Total
Book value*
Net unrealised gain (loss)
Fair value (as included in statement of financial position)†
Reflected as part of movement in other comprehensive income
Movement in unrealised appreciation
Exchange movements
Changes in
unrealised
appreciation‡
Foreign
exchange
translation
Reflected as part of movement
in other comprehensive income
£m
£m
£m
1,925
287
744
(55)
2,669
232
8,220
(966)
7,254
14,444
970
15,414
22,664
4
22,668
2,669
232
2,901
£m
20,600
(3,178)
17,422
6,296
281
6,577
26,896
(2,897)
23,999
(2,104)
(657)
(2,761)
*Book value represents cost/amortised cost of the debt securities.
† Debt securities for US operations as included in the statement of financial position of £22,831 million (2008: £24,249 million) comprise £22,668 million
(2008: £23,999 million) in respect of securities classified as ‘available-for-sale’ and £163 million (2008: £250 million) for securities of consolidated
investment funds classified as fair value through profit and loss.
‡ Translated at the average rate of US$1.57: £1.
Included within the movement in gross unrealised losses for the debt securities of Jackson of £1,925 million (2008: £1,997 million) as
shown above was a value reduction of £72 million (2008: £105 million) relating to the sub-prime and Alt-A securities as referred to in
section B6.
190 Prudential plc > Annual Report 2009
ii Statement of financial position
Assets
Intangible assets attributable to shareholders:
Deferred acquisition costs and other intangible assets
Total
Deferred tax assets
Other non-investment and non-cash assets
Investments of long-term business and other operations:
Investment properties
Financial investments:
Loansnote ii
Equity securities and portfolio holdings in unit trusts
Debt securitiesnote D3c
Other investmentsnote iii
Deposits
Total investments
Properties held for sale
Cash and cash equivalents
Total assets
Equity and liabilities
Equity
Shareholders’ equity
Minority interests
Total equity
Liabilities
Policyholder liabilities: note iv
Contract liabilities (including amounts in respect of contracts
classified as investment contracts under IFRS 4)
Total
Core structural borrowings of shareholder-financed operations
Operational borrowings attributable to shareholder-financed operations
Deferred tax liabilities
Other non-insurance liabilities
Total liabilities
Total equity and liabilities
Variable annuity
separate account
assets and
liabilities
note i
£m
Fixed
annuity, GIC
and other
business
note i
£m
US insurance operations
2009
2008
Total
£m
Total
£m
–
–
–
–
–
–
20,639
–
–
–
20,639
–
–
3,092
3,092
1,944
1,404
33
4,319
345
22,831
955
454
28,937
3
340
3,092
3,092
1,944
1,404
33
4,319
20,984
22,831
955
454
49,576
3
340
3,962
3,962
1,969
1,819
13
5,121
15,142
24,249
1,256
390
46,171
–
246
20,639
35,720
56,359
54,167
–
–
–
3,011
–
3,011
3,011
–
3,011
1,698
–
1,698
20,639
20,639
–
–
–
–
20,639
20,639
27,672
27,672
154
203
1,858
2,822
32,709
35,720
48,311
48,311
154
203
1,858
2,822
53,348
56,359
45,361
45,361
173
511
1,337
5,087
52,469
54,167
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
D
D
191
Notes on the Group financial statements > D: Life assurance businesses > continued
D3: US insurance operations continued
Notes
i
ii
Assets and liabilities attaching to variable annuity business that are not held in the separate account are shown within other business.
Loans
The loans of the Group’s US insurance operations of £4,319 million (2008: £5,121 million) comprise mortgage loans of £3,774 million
(2008: £4,534 million), policy loans of £530 million (2008: £587 million) and other loans of £15 million (2008: £nil). All of the mortgage loans are
commercial mortgage loans which are collateralised by properties. The property types are mainly industrial, multi-family residential, suburban office,
retail and hotel. The breakdown by property type is as follows:
Industrial
Multi-family residential
Office
Retail
Hotels
Other
2009
%
32
18
20
19
10
1
100
2008
%
29
21
21
17
10
2
100
The US insurance operations’ commercial mortgage loan portfolio does not include any single-family residential mortgage loans and is therefore not
exposed to the risk of defaults associated with residential sub-prime mortgage loans. The average loan size is £6.3 million (2008: £7.5 million). The
portfolio has a current estimated average loan to value of 74 per cent (2008: 73 per cent) which provides significant cushion to withstand substantial
declines in value.
The policy loans are fully secured by individual life insurance policies or annuity policies. These loans are accounted for at amortised cost, less
any impairment.
iii Other investments comprise:
Derivative assetsnote G3*
Partnerships in investment pools and other
†
2009
£m
519
436
955
2008
£m
675
581
1,256
*In the US, Prudential uses derivatives to reduce interest rate risk, to facilitate efficient portfolio management to match liabilities under annuity policies,
and for certain equity-based product management activities. After taking account of the derivative liability of £461 million (2008: £863 million),
which is also included in the statement of financial position, the derivative position for US operations is a net asset of £58 million (2008: net liability of
£188 million).
† Partnerships in investment pools and other comprise primarily investments in limited partnerships. These include interest in the PPM America Private
Equity Fund and diversified investments in 159 (2008: 157) other partnerships by independent money managers that generally invest in various
equities and fixed income loans and securities.
iv Summary policyholder liabilities (net of reinsurance) and reserves at 31 December 2009
The policyholder liabilities, net of reinsurers’ share of £667 million (2008: £800 million), reflect balances in respect of the following:
Policy reserves and liabilities on non-linked business:
Reserves for future policyholder benefits and claims payable
Deposits on investment contracts (as defined under US GAAP)
Guaranteed investment contracts
Unit-linked (variable annuity) business
2009
£m
1,645
23,706
1,654
20,639
47,644
2008
£m
2,518
24,962
2,543
14,538
44,561
In addition to the policyholder liabilities above, Jackson has entered into a programme of funding arrangements under contracts which, in substance,
are almost identical to GICs. The liabilities under these funding arrangements totalled £1,444 million (2008: £3,233 million) and are included in ‘other
non-insurance liabilities’ in the statement of financial position above.
192 Prudential plc > Annual Report 2009
b Reconciliation of movement in policyholder liabilities
A reconciliation of the total policyholder liabilities of US insurance operations from the beginning of the year to the end of the year
is as follows:
At 1 January 2008
Premiums
Surrenders
Maturities/Deaths
Net cash flowsnote b
Investment-related items and other movements
Foreign exchange translation differencesnote a
At 31 December 2008/1 January 2009
Premiums
Surrenders
Maturities/Deaths
Net cash flowsnote b
Transfers from general to separate account
Investment-related items and other movementsnote c
Foreign exchange translation differencesnote a
At 31 December 2009
Variable annuity
separate
account
liabilities
£m
Fixed annuity,
GIC and other
business
£m
US insurance
operations
Total
£m
15,027
19,821
34,848
2,637
(1,053)
(161)
1,423
(6,288)
4,376
4,091
(2,799)
(403)
889
1,736
8,377
6,728
(3,852)
(564)
2,312
(4,552)
12,753
14,538
30,823
45,361
4,667
(882)
(199)
3,586
984
3,368
(1,837)
4,510
(2,373)
(534)
1,603
(984)
(382)
(3,388)
9,177
(3,255)
(733)
5,189
–
2,986
(5,225)
20,639
27,672
48,311
Notes
a Movements in the year have been translated at an average rate of 1.57 (full year 2008: 1.85). The closing balance has been translated at closing
rate of 1.61 (full year 2008: 1.44). Differences upon retranslation are included in foreign exchange translation differences of £5,225 million.
b Net cash flows for the year were £5,189 million compared with £2,312 million in 2008, driven largely by increased new business volumes for the
c
variable annuity business.
Positive investment-related items and other movements in variable annuity separate account liabilities were impacted by the recovery of
US equity markets during 2009. Negative movements in fixed annuity, GIC and other business of £382 million primarily represents a reduction
in the liabilities for variable annuity guarantees following improvements in equity markets and increases in interest rates offset by interest credited
to policyholder accounts.
c Information on credit risks of debt securities
Summary
Corporate security and commercial loans:
Publicly traded and SEC Rule 144A traded
Non-SEC Rule 144A traded
Total
Residential mortgage-backed securities
Commercial mortgage-backed securities
Other debt securities
Total debt securities
2009 £m
2008 £m
Carrying
value
Carrying
value
13,338
3,117
16,455
3,316
2,104
956
22,831
13,198
3,273
16,471
4,509
1,869
1,400
24,249
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Notes on the Group financial statements > D: Life assurance businesses > continued
D3: US insurance operations continued
i Credit quality
For statutory reporting in the US, debt securities are classified into six quality categories specified by the Securities Valuation Office
of the National Association of Insurance Commissioners (NAIC). The categories range from Class 1 (the highest) to Class 6 (the lowest).
Performing securities are designated as Classes 1 to 5. Securities in or near default are designated Class 6. Securities designated as
Class 3, 4, 5 and 6 are non-investment grade securities. Generally, securities rated AAA to A by nationally recognised statistical ratings
organisations are reflected in Class 1, BBB in Class 2, BB in Class 3 and B and below in Classes 4 to 6. If a designation is not currently
available from the NAIC, Jackson’s investment adviser, PPM America, provides the designation for the purposes of disclosure below.
NAIC designation:
1
2
3
4
5
6
2009
2008
Carrying value
Carrying value
£m
% of total
£m
% of total
5,067
7,508
598
122
40
3
38
56
5
1
–
–
5,380
6,849
690
200
75
4
41
52
5
1
1
–
13,338
100
13,198
100
The following table shows the quality of the non-SEC Rule 144A traded private placement portfolio by NAIC classifications:
NAIC designation:
1
2
3
4
5
6
2009
2008
Carrying value
Carrying value
£m
% of total
£m
% of total
1,084
1,792
162
54
20
5
3,117
35
57
5
2
1
–
100
1,268
1,655
285
54
11
–
3,273
39
50
9
2
–
–
100
Included within other debt securities of £956 million (2008: £1,400 million) in the summary shown above are £652 million (2008:
£893 million) of asset-backed securities held directly by Jackson, of which £447 million (2008: £663 million) were NAIC designation 1
and £152 million (2008: £159 million) NAIC designation 2. In addition, other debt securities includes £172 million (2008: £257 million)
in respect of securities held by the Piedmont trust entity and £131 million (2008: £250 million) from the consolidation of investment
funds managed by PPM America.
194 Prudential plc > Annual Report 2009
In addition to the ratings disclosed above, the following table summarises by rating the debt securities, as at 31 December 2009 using
Standard and Poor’s (S&P), Moody’s, Fitch and implicit ratings of RMBS based on NAIC valuations:
S&P – AAA
S&P – AA+ to AA-
S&P – A+ to A-
S&P – BBB+ to BBB-
S&P – Other
Moody’s – Aaa
Moody’s – Aa1 to Aa3
Moody’s – A1 to A3
Moody’s – Baa1 to Baa3
Moody’s – Other
Implicit ratings of RMBS based on NAIC valuations (see below)
NAIC 1
NAIC 2
NAIC 3-6
Fitch
Other*
Total debt securities
2009 £m
2008 £m
Carrying
value
Carrying
value
3,287
846
5,192
7,659
895
5,321
853
5,244
7,077
1,321
17,879
19,816
273
43
32
64
57
469
747
105
473
1,325
281
2,877
22,831
458
100
111
100
95
864
–
–
–
–
464
3,105
24,249
* The amounts within Other which are not rated by S&P, Moody’s, Fitch nor are RMBS securities using the revised regulatory ratings have the following
NAIC classifications:
2009
£m
2008
£m
NAIC 1
NAIC 2
NAIC 3-6
1,102
1,623
152
2,877
1,334
1,650
121
3,105
In the table above, with the exception of residential mortgage-backed securities for 2009, S&P ratings have been used where available.
For securities where S&P ratings are not immediately available, those produced by Moody’s and then Fitch have been used as an
alternative.
During 2009, the National Association of Insurance Commissioners (NAIC) in the US revised the regulatory ratings process for
more than 20,000 residential mortgage-backed securities. The table above includes these securities, where held by Jackson, using the
regulatory rating levels established by an external third party (PIMCO).
ii Determining the fair value of debt securities when the markets are not active
Under IAS 39, unless categorised as ‘held to maturity’ or ‘loans and receivables’ debt securities are required to be fair valued. Where
available, quoted market prices are used. However, where securities are in inactive markets, IAS 39 requires that valuation techniques
be applied. Note G1 sets out further details of the Group’s approach to determining fair value and classifies these fair values into a three
level hierarchy as required by IFRS 7. At 31 December 2009, three per cent of Jackson’s debt securities were classified as level 3 (2008:
15 per cent) being fair values where there are significant inputs which are not based on observable market data. The higher proportion
at 31 December 2008 arises from the illiquidity of the market at that time and hence a greater use of internal valuation techniques.
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Notes on the Group financial statements > D: Life assurance businesses > continued
D3: US insurance operations continued
In 2008, due to inactive and illiquid markets, beginning at the end of the third quarter of 2008 the external prices obtained for certain
asset-backed securities were deemed not to reflect fair value in the dislocated market conditions at that time. For the valuations at
31 December 2008, Jackson had therefore utilised internal valuation models, provided by PPM America, as best estimate of fair
values of all non-agency Residential Mortgage-backed Securities (RMBS) and Asset-backed Securities (ABS) and certain Commercial
Mortgage-backed Securities (CMBS).
During 2009, improvements were observed in the level of liquidity for these sectors of structured securities and this increased
liquidity in the markets for certain tranches of non-agency RMBS and ABS resulted in Jackson being able to rely on external prices
for the securities as the most appropriate measure of fair value.
Accordingly, at 30 June 2009 and 31 December 2009, nearly all of the non-agency RMBS, ABS and certain CMBS which at
31 December 2008 were valued using internal valuation models due to the dislocated market conditions in 2008, have now been
valued using external prices.
iii Asset-backed securities funds exposures
Included within the debt securities of Jackson at 31 December 2009 are exposures to asset-backed securities as follows:
RMBS Sub-prime (31 Dec 2009: 76% AAA, 1% AA)†
Alt-A (31 Dec 2009: 24% AAA, 5% AA)
Prime (31 Dec 2009: 82% AAA, 4% AA)
CMBS (31 Dec 2009: 46% AAA, 14% AA)
CDO funds (31 Dec 2009: 29% AAA, 10% AA)*, including £3 million exposure to sub-prime
ABS (31 Dec 2009: 25% AAA, 18% AA), including nil exposure to sub-prime
2009 £m
2008 £m
194
443
2,679
2,104
79
877
6,376
291
646
3,572
1,869
320
766
7,464
*Including Group’s economic interest in Piedmont and other consolidated CDO funds.
† RMBS ratings refer to the rating implicit within NAIC risk-based capital valuation (see D3(i) previous page).
Jackson defines its exposure to sub-prime mortgages as investments in residential mortgage-backed securities in which the underlying
borrowers have a US Fair Isaac Credit Organisation (FICO) credit score of 680 or lower.
iv Debt securities classified as available-for-sale in an unrealised loss position
a Fair value of securities as a percentage of book value
The unrealised losses in Jackson’s statement of financial position on unimpaired securities are £966 million (2008: £3,178 million).
This relates to assets with fair market value and book value of £7,254 million (2008: £17,422 million) and £8,220 million (2008: £20,600
million) respectively.
The following table shows the fair value of the debt securities in a gross unrealised loss position for various percentages of book value at
31 December:
Fair value of securities as a percentage of book value
Between 90% and 100%
Between 80% and 90%
Below 80%
Total
2009 £m
2008 £m
Fair
value
Unrealised
loss
5,127
1,201
926
7,254
(169)
(203)
(594)
(966)
Fair
value
8,757
4,581
4,084
17,422
Unrealised
loss
(431)
(809)
(1,938)
(3,178)
Included within the table above are amounts relating to sub-prime and Alt–A securities of:
Fair value of securities as a percentage of book value
Between 90% and 100%
Between 80% and 90%
Below 80% note d
Total
2009 £m
2008 £m
Fair
value
Unrealised
loss
Fair
value
Unrealised
loss
102
160
159
421
(3)
(28)
(88)
(119)
479
120
192
791
(27)
(19)
(166)
(212)
196 Prudential plc > Annual Report 2009
b Unrealised losses by maturity of security
Less than 1 year
1 to 5 years
5 to 10 years
More than 10 years
Mortgage-backed and other debt securities
Total
2009 £m
2008 £m
Unrealised
loss
Unrealised
loss
–
(29)
(127)
(92)
(718)
(966)
(21)
(537)
(1,236)
(395)
(989)
(3,178)
c Age analysis of unrealised losses for the years indicated
The following table shows the aged analysis for all the unrealised losses in the portfolio by reference to the length of time the securities
have been in an unrealised loss position:
Less than 6 months
6 months to 1 year
1 year to 2 years
2 years to 3 years
More than 3 years
Non-
investment
grade
2009 £m
Investment
grade
(7)
(25)
(59)
(125)
(35)
(251)
(51)
(59)
(234)
(199)
(172)
(715)
Non-
investment
grade
2008 £m
Investment
grade
(108)
(125)
(154)
(15)
(61)
(463)
(362)
(1,164)
(622)
(91)
(476)
(2,715)
Total
(58)
(84)
(293)
(324)
(207)
(966)
Total
(470)
(1,289)
(776)
(106)
(537)
(3,178)
At 31 December 2009, the gross unrealised losses in the statement of financial position for the sub-prime and Alt-A securities in
an unrealised loss position were £119 million (2008: £212 million), as shown above in note (a). Of these losses £21 million (2008:
£91 million) relate to securities that have been in an unrealised loss position for less than one year and £98 million (2008: £121 million)
to securities that have been in an unrealised loss position for more than one year.
d Securities whose fair value were below 80 per cent of the book value
As shown in the table (a) above, £594 million of the £966 million of gross unrealised losses at 31 December 2009 (2008: £1,938 million
of the £3,178 million of gross unrealised losses) related to securities whose fair values were below 80 per cent of the book value. The
analysis of the £594 million, (2008: £1,938 million) by category of debt securities and by age analysis indicating the length of time for
which their fair value was below 80 per cent of the book value, are as follows:
Category analysis
Residential mortgage-backed securities
Prime
Alt-A
Sub-prime
Commercial mortgage-backed securities
Other asset-backed securities
Total structured securities
Corporates
Total
2009 £m
2008 £m
Fair
value
Unrealised
loss
Fair
value
Unrealised
loss
322
77
82
481
87
183
751
175
926
(153)
(33)
(55)
(241)
(86)
(188)
(515)
(79)
(594)
287
144
48
479
811
198
1,488
2,596
4,084
(115)
(127)
(39)
(281)
(375)
(86)
(742)
(1,196)
(1,938)
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Notes on the Group financial statements > D: Life assurance businesses > continued
D3: US insurance operations continued
Age analysis of fair value being below 80 per cent for the period indicated:
Age analysis
Less than 3 months
3 months to 6 months
More than 6 months
2009 £m
2008 £m
Fair
value
Unrealised
loss
153
5
768
926
(45)
(3)
(546)
(594)
Fair
value
3,118
696
270
4,084
Unrealised
loss
(1,364)
(403)
(171)
(1,938)
d Products and guarantees
Jackson provides long-term savings and retirement products to retail and institutional customers throughout the US. Jackson offers fixed
annuities (interest-sensitive, fixed indexed and immediate annuities), variable annuities (VA), life insurance and institutional products.
i Fixed annuities
Interest-sensitive annuities
At 31 December 2009, interest-sensitive fixed annuities accounted for 24 per cent (2008: 29 per cent) of policy and contract liabilities of
Jackson. Interest-sensitive fixed annuities are primarily deferred annuity products that are used for retirement planning and for providing
income in retirement. They permit tax-deferred accumulation of funds and flexible payout options.
The policyholder of an interest-sensitive fixed annuity pays Jackson a premium, which is credited to the policyholder’s account.
Periodically, interest is credited to the policyholder’s account and in some cases administrative charges are deducted from the
policyholder’s account. Jackson makes benefit payments at a future date as specified in the policy based on the value of the
policyholder’s account at that date.
The policy provides that at Jackson’s discretion it may reset the interest rate, subject to a guaranteed minimum. The minimum
guarantee varies from 1.5 per cent to 5.5 per cent (2008: 1.5 per cent to 5.5 per cent) depending on the jurisdiction of issue and the
date of issue, with 82 per cent (2008: 83 per cent) of the fund at three per cent or less. The average guarantee rate is 3.1 per cent
(2008: 3.1 per cent).
Approximately 61 per cent (2008: 34 per cent) of the interest-sensitive fixed annuities Jackson wrote in 2009 provide for a market
value adjustment, that could be positive or negative, on surrenders in the surrender period of the policy. This formula-based adjustment
approximates the change in value that assets supporting the product would realise as interest rates move up or down. The minimum
guaranteed rate is not affected by this adjustment.
Fixed indexed annuities
Fixed indexed annuities accounted for 10 per cent (2008: eight per cent) of Jackson’s policy and contract liabilities at 31 December 2009.
Fixed indexed annuities vary in structure, but generally are deferred annuities that enable policyholders to obtain a portion of an equity-
linked return (based on participation rates and caps) but provide a guaranteed minimum return. These guaranteed minimum rates are
generally set at 1.25 to 3.0 per cent.
Jackson hedges the equity return risk on fixed indexed products using futures and options linked to the relevant index. The cost of
these hedges is taken into account in setting the index participation rates or caps. Jackson bears the investment and surrender risk on
these products.
Immediate annuities
At 31 December 2009, immediate annuities accounted for two per cent (2008: two per cent) of Jackson’s policy and contract liabilities.
Immediate annuities guarantee a series of payments beginning within a year of purchase and continuing over either a fixed period of
years and/or the life of the policyholder. If the term is for the life of the policyholder, then Jackson’s primary risk is mortality risk. The
implicit interest rate on these products is based on the market conditions that exist at the time the policy is issued and is guaranteed for
the term of the annuity.
ii Variable annuities
At 31 December 2009, VAs accounted for 49 per cent (2008: 39 per cent) of Jackson’s policy and contract liabilities. VAs are deferred
annuities that have the same tax advantages and payout options as interest-sensitive and fixed indexed annuities.
The primary differences between VAs and interest-sensitive or fixed indexed annuities are investment risk and return. If a
policyholder chooses a VA, the rate of return depends upon the performance of the selected fund portfolio. Policyholders may allocate
their investment to either the fixed or variable account. Investment risk on the variable account is borne by the policyholder, while
investment risk on the fixed account is borne by Jackson through guaranteed minimum fixed rates of return. At 31 December 2009,
approximately 14 per cent (2008: approximately 18 per cent) of VA funds were in fixed accounts.
198 Prudential plc > Annual Report 2009
Jackson issues VA contracts where it contractually guarantees to the contractholder either a) return of no less than total deposits made
to the contract adjusted for any partial withdrawals, b) total deposits made to the contract adjusted for any partial withdrawals plus a
minimum return, or c) the highest contract value on a specified anniversary date adjusted for any withdrawals following the contract
anniversary. These guarantees include benefits that are payable in the event of death (guaranteed minimum death benefit (GMDB)),
annuitisation (guaranteed minimum income benefit (GMIB)), or at specified dates during the accumulation period (guaranteed minimum
withdrawal benefit (GMWB)) and guaranteed minimum accumulation benefit (GMAB). Jackson hedges these risks using equity options
and futures contracts as described in note D3(e). The GMIB is no longer offered, with existing coverage being reinsured.
iii Life insurance
Jackson’s life insurance products accounted for nine per cent (2008: 10 per cent) of Jackson’s policy and contract liabilities at
31 December 2009. The products offered include variable universal life insurance, term life insurance and interest-sensitive life insurance.
iv Institutional products
Jackson’s institutional products consist of GICs, funding agreements (including agreements issued in conjunction with Jackson’s
participation in the US Federal Home Loan Bank programme) and medium-term note funding agreements. At 31 December 2009,
institutional products accounted for six per cent of policy and contract liabilities (2008: 12 per cent). Under a traditional GIC, the
policyholder makes a lump sum deposit. The interest rate paid is fixed and established when the contract is issued. If deposited funds
are withdrawn earlier than the specified term of the contract, an adjustment is made that approximates a market value adjustment.
Under a funding agreement, the policyholder either makes a lump sum deposit or makes specified periodic deposits. Jackson
agrees to pay a rate of interest, which may be fixed but which is usually a floating short-term interest rate linked to an external index.
The average term of the funding arrangements is one to two years. Funding agreements terminable by the policyholder with less
than 90 days’ notice account for less than one per cent (2008: one per cent) of total policyholder reserves.
Medium-term note funding agreements are generally issued to support trust instruments issued on non-US exchanges or to qualified
investors (as defined by SEC Rule 144A). Through the funding agreements, Jackson agrees to pay a rate of interest, which may be fixed
or floating, to the holders of the trust instruments.
e Exposure to market risk and risk management
Jackson’s main exposures are to market risk through its exposure to interest rate risk and equity risk. Approximately 95 per cent (2008:
90 per cent) of its general account investments support interest-sensitive and fixed indexed annuities, life business and surplus and five
per cent (2008: 10 per cent) support institutional business. All of these types of business contain considerable interest rate guarantee
features and, consequently, require that the assets that support them are primarily fixed income or fixed maturity.
Prudential is exposed primarily to the following risks in the US arising from fluctuations in interest rates:
• the risk of loss related to meeting guaranteed rates of accumulation following a sharp and sustained fall in interest rates;
• the risk of loss related to policyholder withdrawals following a sharp and sustained increase in interest rates; and
• the risk of mismatch between the expected duration of certain annuity liabilities and prepayment risk and extension risk inherent
in mortgage-backed securities.
Prudential is also exposed to the following risks in the US arising from equity market movements:
• the risk of loss related to the incidence of benefits related to guarantees issued in connection with its VA contracts; and
• the risk of loss related to meeting contractual accumulation requirements in FIA contracts.
Jackson enters into financial derivative transactions, including those noted below to reduce and manage business risks. These
transactions manage the risk of a change in the value, yield, price, cash flows, or quantity of, or a degree of exposure with respect to
assets, liabilities or future cash flows, which Jackson has acquired or incurred.
Jackson uses free-standing derivative instruments for hedging purposes. Additionally, certain liabilities, primarily trust instruments
supported by funding agreements, fixed indexed annuities, certain GMWB variable annuity features and reinsured GMIB variable
annuity features contain embedded derivatives as defined by IAS 39, ‘Financial Instruments: Recognition and Measurement’. Jackson
does not account for such derivatives as either fair value or cash flow hedges as might be permitted if the specific hedge documentation
requirements of IAS 39 were followed. Financial derivatives, including derivatives embedded in certain host liabilities that have been
separated for accounting and financial reporting purposes are carried at fair value.
Value movements on the derivatives are reported within the income statement. In preparing Jackson’s segment profit as shown in
note B1, value movements on Jackson’s derivative contracts, other than for certain equity-based product management activities, are
included within short-term fluctuations in investment returns and excluded from operating results based on longer-term investment
returns (defined as segment profit). Value movements on derivative instruments used for certain equity-based product management
activities, based on a static long-term volatility assumption and, for embedded liabilities, average Corporate AA interest rates, are
included within operating results based on longer-term investment returns, as the value movements broadly offset the economic impact
of changed levels of benefit payments and reserves as equity markets fluctuate, (subject to some limitations for GMDB where US GAAP
does not fully reflect the economic features being hedged). Any differences in value movements on these derivatives between the static
long-term volatility assumption and implied volatility or average Corporate AA interest rates and ending Corporate AA interest rates are
reflected as components of short-term fluctuations. The types of derivatives used by Jackson and their purpose are as follows:
199
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Notes on the Group financial statements > D: Life assurance businesses > continued
D3: US insurance operations continued
• interest rate swaps generally involve the exchange of fixed and floating payments over the period for which Jackson holds the
instrument without an exchange of the underlying principal amount. These agreements are used for hedging purposes;
• put-swaption contracts provide the purchaser with the right, but not the obligation, to require the writer to pay the present value of a
long-duration interest rate swap at future exercise dates. Jackson purchases and writes put-swaptions with maturities up to 10 years.
On a net basis, put-swaptions hedge against significant upward movements in interest rates;
• equity index futures contracts and equity index call and put options are used to hedge Jackson’s obligations associated with its
issuance of fixed indexed immediate and deferred annuities and certain VA guarantees. These annuities and guarantees contain
embedded options which are fair valued for financial reporting purposes;
• total return swaps in which Jackson receives equity returns or returns based on reference pools of assets in exchange for short-term
floating rate payments based on notional amounts, are held for both hedging and investment purposes;
• cross-currency swaps, which embody spot and forward currency swaps and additionally, in some cases, interest rate swaps and equity
index swaps, are entered into for the purpose of hedging Jackson’s foreign currency denominated funding agreements supporting
trust instrument obligations;
• spread cap options are used as a macro-economic hedge against declining interest rates. Jackson receives quarterly settlements based
on the spread between the two-year and the 10 year constant maturity swap rates in excess of a specified spread; and
• credit default swaps, represent agreements under which Jackson has purchased default protection on certain underlying corporate
bonds held in its portfolio. These contracts allow Jackson to sell the protected bonds at par value to the counterparty in the event of
their default in exchange for periodic payments made by Jackson for the life of the agreement.
Note D3(i) parts (iii) and (iv) show the sensitivities of Jackson’s results through its exposure to equity risk and interest rate risk.
f Process for setting assumptions and determining contract liabilities
Under the MSB of reporting applied under IFRS 4 for insurance contracts, providing the requirements of the Companies Act, UK GAAP
standards and the ABI SORP are met, it is permissible to reflect the previously applied UK GAAP basis. Accordingly, and consistent with
the basis explained in note A4, in the case of Jackson the carrying values of insurance assets and liabilities are consolidated into the
Group accounts based on US GAAP.
Under US GAAP, investment contracts (as defined for US GAAP purposes) are accounted for by applying in the first instance a
retrospective deposit method to determine the liability for policyholder benefits. This is then augmented by potentially three additional
amounts. These amounts are for:
• any amounts that have been assessed to compensate the insurer for services to be performed over future periods
(i.e. deferred income);
• any amounts previously assessed against policyholders that are refundable on termination of the contract; and
• any probable future loss on the contract (i.e. premium deficiency).
Capitalised acquisition costs and deferred income for these contracts are amortised over the life of the book of contracts. The present
value of the estimated gross profits is generally computed using the rate of interest that accrues to policyholder balances (sometimes
referred to as the contract rate). Estimated gross profits include estimates of the following elements, each of which will be determined
based on the best estimate of amounts of the following individual elements over the life of the book of contracts without provision for
adverse deviation for:
• amounts expected to be assessed for mortality less benefit claims in excess of related policyholder balances;
• amounts expected to be assessed for contract administration less costs incurred for contract administration;
• amounts expected to be earned from the investment of policyholder balances less interest credited to policyholder balances;
• amounts expected to be assessed against policyholder balances upon termination of contracts (sometimes referred to as surrender
charges); and
• other expected assessments and credits.
VA contracts written by Jackson may, as described above, provide for GMDB, GMIB, GMWB and GMAB features. In general terms,
liabilities for these benefits are accounted for under US GAAP by using estimates of future benefits and fees under best estimate
persistency assumptions.
In accordance with SOP03-01 (Accounting and Reporting by Insurance Enterprises for Certain Non-traditional Long Duration
Contracts and for Separate Accounts) which specifies how certain guarantee features should be accounted for under US GAAP, the
GMDB liability is not fair valued but is instead determined each period end by estimating the expected value of death benefits in excess
of the projected account balance and recognising the excess ratably over the life of the contract based on total expected assessments. At
31 December 2009, the GMDB liability was valued using a series of deterministic investment performance scenarios, a mean investment
return of 8.4 per cent (2008: 8.4 per cent) and assumptions for lapse, mortality and expense that are the same as those used in amortising
the capitalised acquisition costs.
The direct GMIB liability is determined by estimating the expected value of the annuitisation benefits in excess of the projected
account balance at the date of annuitisation and recognising the excess ratably over the accumulation period based on total expected
assessments.
The assumptions used for calculating the direct GMIB liability at 31 December 2009 and 2008 are consistent with those used for
calculating the GMDB liability.
Jackson regularly evaluates estimates used and adjusts the additional GMDB and GMIB liability balances, with a related charge
or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised.
200 Prudential plc > Annual Report 2009
GMIB benefits are essentially fully reinsured, subject to annual claim limits. As this reinsurance benefit is net settled, it is considered to be
a derivative under IAS 39 and is, therefore, recognised at fair value with the change in fair value included as a component of short-term
derivative fluctuations.
Most GMWB features are considered to be embedded derivatives under IAS 39. Therefore, provisions for these benefits are
recognised at fair value, with the change in fair value included in operating profit based on longer-term investment returns. Certain
GMWB features guarantee payments over a lifetime and, therefore, include mortality risk. Provisions for these GMWB amounts are
valued consistent with the GMDB valuation method discussed above.
For GMWB and GMIB reinsurance embedded derivatives that are fair valued under IAS 39, Jackson bases its volatility assumptions
solely on implied market volatility with no reference to historical volatility levels and explicitly incorporates Jackson’s own credit risk in
determining discount rates.
Volatility assumptions are now based on a weighting of available market data on implied volatility for durations up to ten years,
at which point the projected volatility is held constant. Non-performance risk is incorporated into the calculation through the use of
discount interest rates sourced from a AA corporate credit curve. Other risk margins, particularly for market illiquidity and policyholder
behaviour are also incorporated into the model through the use of explicitly conservative assumptions. On a periodic basis, Jackson
rationalises the resulting fair values based on comparisons to other models and market movements.
With the exception of the GMDB, GMIB, GMWB and GMAB features of VA contracts, the financial guarantee features of Jackson’s
contracts are in most circumstances not explicitly valued, but the impact of any interest guarantees would be reflected as they are earned
in the current account value (i.e. the US GAAP liability).
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.
g Reinsurance
The principal reinsurance ceded by Jackson outside the Group is on term life insurance, direct and assumed accident and health business
and GMIB variable annuity guarantees. In 2009, the premiums for such ceded business amounted to £82 million (2008: £68 million).
Net commissions received on ceded business and claims incurred ceded to external reinsurers totalled £12 million and £66 million
respectively, during 2009 (2008: £10 million and £49 million respectively). There were no deferred gains or losses on reinsurance
contracts in either 2009 or 2008. The reinsurance asset for business ceded outside the Group was £667 million (2008: £800 million).
h Effect of changes in assumptions used to measure insurance assets and liabilities
a Measurement basis for embedded derivatives of variable annuity business and other policyholder liability
Certain variable annuity products sold by Jackson include Guaranteed Minimum Withdrawal Benefits (GMWB) which, in accordance
with the Group’s accounting policies, are measured within the IFRS balance sheet at fair value. This requires a number of assumptions
related to projected future cash flows, including those driven by policyholder behaviours such as lapses, fund selections and withdrawals
utilisation. During 2009 the GMWB utilisation assumptions were revised to take account of the more recent experience of policyholder
behaviour. Previously policyholder behaviour for the utilisation of GMWB was assumed to be largely driven by the extent to which
benefits were ‘in the money’. For 2009, the assumption has been altered to take account of recent experience which shows that the
attained age of the policyholder is the key factor in determining utilisation levels. This has led to a release in policyholder liabilities of
£96 million which is offset by a corresponding DAC amortisation charge of £68 million to give an overall impact on profit before tax of
£28 million. This assumption change has been offset by sundry other assumption changes such that the overall impact on operating
profit of policyholder liability assumption changes, after taking into account DAC amortisation offsets, is a charge of £4 million.
In 2008 there were no changes of assumptions that had a material effect on the Jackson results. There was a change in estimation
technique relating to the measurement of the Guaranteed Minimum Withdrawal Benefit (GMWB) features of Jackson’s variable annuity
products and the reinsurance of the Guaranteed Minimum Income Benefit (GMIB). In 2008 these features were valued using implied
current equity volatility levels rather than historic long-term levels and the use of AA corporate bond rates rather than LIBOR based swap
rates as the reference basis for determining the discount rate. The cumulative effect of these two changes was to reduce the total loss in
2008 by £47 million.
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201
Notes on the Group financial statements > D: Life assurance businesses > continued
D3: US insurance operations continued
b Deferred acquisition costs
Income statement – amortisation for variable annuity business
Under IFRS 4, the Group applies US GAAP to the insurance assets and liabilities of Jackson. Under US GAAP, acquisition costs for
Jackson’s fixed and variable annuity business are deferred and then amortised in line with the expected emergence of margins. The
amortisation profile is dependant on assumptions which, for variable annuity business, the key assumption is the expected level of equity
market returns. For 2009 and recent previous years a rate of 8.4 per cent has been applied using, as is industry practice, a mean reversion
methodology.
The mean reversion methodology is applied with the objective of adjusting the amortisation of deferred acquisition costs that would
otherwise be highly volatile for the fact that the expected level of future gross profits fluctuates for altered variable annuity asset values
arising from changes in equity market levels at the end of each reporting period.
The mean reversion methodology achieves this objective by dynamic adjustment to the level of expectations of short-term future
investment returns. Under the methodology the projected returns for the next five years are, for the purposes of determining the
amortisation profile, set so that normally combined with the actual returns for the current and preceding two years the average rate of
return is 8.4 per cent. The mean reversion methodology does, however, include a cap of 15 per cent per annum on the projected return
for each of the next five years. Projected returns after the next five years are set at 8.4 per cent. For 2008 following the fall in equity
markets in that year, this capping effect applied to restrict the projected returns below the rate of approximately 20 per cent per annum
level that would have otherwise applied to the first five years. Although equity markets rose during the year, the return in 2008 was such
that the cap remains in place at 31 December 2009, albeit at a lower level.
The DAC amortisation reflected in the 2008 results, after incorporating the mean reversion, increased by some £140 million, of which
£40 million arises due to the capping feature. In 2009, following improvements in equity markets, no such DAC acceleration arose during
the period and DAC amortisation fell accordingly.
Statement of changes in equity – ‘shadow DAC adjustments’
Consequent upon the positive unrealised valuation movement in 2009 of £2,669 million (2008: negative £2,104 million) there is a debit
of £1,069 million (2008: £831 million credit) for altered ‘shadow’ amortisation booked within other comprehensive income. These
adjustments reflect movement from period to period, in the changes to the pattern of reported gross profits that would have happened
if the assets had been sold, crystallising the gain or loss, and the proceeds reinvested at the yields currently available in the market. At
31 December 2009 the cumulative ‘shadow DAC balance’ was negative £10 million (2008: positive £1,192 million).
i Sensitivity of IFRS basis profit and equity to market and other risks
i Currency fluctuations
Consistent with the Group’s accounting policies, the profits of the Group’s US operations are translated at average exchange rates and
shareholders’ equity at the closing rate for the reporting period. For 2009, the rates were US$1.57 (2008: US$1.85) and US$1.61 (2008:
US$1.44) to £1 sterling, respectively. A 10 per cent increase or decrease in these rates would reduce or increase profit (loss) before tax
attributable to shareholders, profit (loss) for the year and shareholders’ equity attributable to US insurance operations respectively as
follows:
Profit (loss) before tax attributable to shareholders note i
Profit (loss) for the year
Shareholders’ equity attributable to US insurance operations
A 10% increase in
exchange rates
A 10% decrease in
exchange rates
2009 £m
2008 £m
2009 £m
2008 £m
(44)
(54)
(274)
59
51
(158)
54
65
335
(72)
(62)
193
Note
i
Sensitivity on profit (loss) before tax i.e. aggregate of the operating profit based on longer-term investment returns and short-term fluctuations,
as discussed in note B1.
202 Prudential plc > Annual Report 2009
ii Other sensitivities
The principal determinants of variations in operating profit based on longer-term returns are:
• growth in the size of assets under management covering the liabilities for the contracts in force;
• variations in fees and other income, offset by variations in market value adjustment payments and, where necessary, strengthening
of liabilities;
• incidence of guarantees and the effectiveness of the related hedge programme;
• spread returns for the difference between investment returns and rates credited to policyholders;
For the purpose of determining longer-term returns, adjustment is necessary for the normalisation of investment returns to remove the
effects of short-term volatility in investment returns.
• amortisation of deferred acquisition costs.
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 2009 and 2008 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 death benefit claims. 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. Due to the significant market movements during 2008, Jackson exceeded the cap on future equity market
returns, resulting in a higher level of sensitivity to market movements than would have been recognised had the cap not been met
at the end of 2008. Given the low market return in 2008 this cap remained in place at 31 December 2009 and so the higher level of
sensitivity remains.
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.
iii Exposure to equity risk
As noted in note D3(e), Jackson is exposed to equity risk through the options embedded in the fixed indexed liabilities and GMDB and
GMWB guarantees included in certain VA benefits. This risk is managed using a comprehensive equity hedging programme to minimise
the risk of a significant economic impact as a result of increases or decreases in equity market levels while taking advantage of naturally
offsetting exposures in Jackson’s operations. Jackson purchases external futures and options that hedge the risks inherent in these
products, while also considering the impact of rising and falling separate account fees.
As a result of this hedging programme, if the equity markets were to increase further in the future, Jackson’s free-standing
derivatives would decrease in value. However, over time, this movement would be broadly offset by increased separate account fees
and reserve decreases, net of the related changes to amortisation of deferred acquisition costs. Due to the nature of the free-standing
and embedded derivatives, this hedge, while highly effective on an economic basis, may not completely mute the immediate impact of
the market movements as the free-standing derivatives reset immediately while the hedged liabilities reset more slowly and fees are
recognised prospectively. The opposite impacts would be observed if the equity markets were to decrease.
At 31 December 2009 based on the hedges in place at that time, it is estimated that an immediate decrease in the equity markets of
10 per cent would result in an accounting benefit, net of related DAC amortisation, before tax of up to £60 million, excluding the impact
on future separate account fees. After related deferred tax there would have been an estimated increase in shareholders’ equity at
31 December 2009 of up to £40 million. An immediate decrease in the equity markets of 20 per cent is estimated to result in an
accounting benefit, net of related DAC amortisation, before tax of up to £110 million, excluding the impact on future separate account
fees. After related deferred tax there would have been an estimated increase in shareholders’ equity at 31 December 2009 of up to £80
million. An immediate increase in the equity markets of 10 and 20 per cent is estimated to result in an approximately equal and opposite
estimated effect on profit and shareholders’ equity as that disclosed above for a decrease.
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203
Notes on the Group financial statements > D: Life assurance businesses > continued
D3: US insurance operations continued
At 31 December 2008, based on the hedges in place at that time, it was estimated that an immediate decrease in the equity markets at
10 per cent would result in an accounting charge, net of related DAC amortisation, before tax of up to £20 million, excluding the impact
on future separate account fees. After related deferred tax, it was estimated that there would have been a decrease in shareholders’
equity of up to £15 million. An immediate decrease in the equity markets of 20 and 40 per cent was estimated to result in an accounting
charge, net of related DAC amortisation, before tax of up to £40 million and £90 million respectively excluding the impact of future
separate account fees. After related deferred tax there would have been an estimated reduction in shareholders’ equity at 31 December
2008 of up to £30 million and £60 million respectively. The difference in the effects of a decrease in the equity markets at 31 December
2009 as compared to 2008 was due to a high number of GMDB and GMWB guarantees being ‘in the money’ at 31 December 2008. As a
result, the adverse effects on provisions for policyholder liabilities from a decreasing equity market at 31 December 2008 more than
offset the benefits from the hedging instruments held at that time.
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.
In addition, 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 2009 and 31 December 2008. The table below shows the sensitivity
to a 10 and 20 per cent (2008: 10, 20 and 40 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.
2009 £m
2008 £m
A decrease
of 20%
A decrease
of 10%
A decrease
of 40%
A decrease
of 20%
A decrease
of 10%
Pre-tax profit, net of related changes in amortisation of DAC
Related deferred tax effects
Net sensitivity of profit after tax and shareholders’ equity
(117)
41
(76)
(58)
20
(38)
(255)
89
(166)
(141)
49
(92)
(98)
34
(64)
The disclosure of the effect of a 40 per cent fall for 2008 was included because of the exceptional market conditions at that time.
These conditions have now abated and the disclosure is no longer appropriate.
In the equity risk sensitivity analysis given above, the Group has, for 2009, 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.
iv Exposure to interest rate risk
Notwithstanding the market risk exposure described in note D3(e), except in the circumstances of interest rate scenarios where the
guarantee rates included in contract terms are higher than crediting rates that can be supported from assets held to cover liabilities,
the accounting measurement of fixed annuity liabilities of Jackson products is not generally sensitive to interest rate risk. This position
derives from the nature of the products and the US GAAP basis of measurement described in notes D3(d) and D3(f). The GMWB
features attaching to variable annuity business represents embedded derivatives which are fair valued and so will be sensitive to
changes in interest rate.
Debt securities and related derivatives are marked to fair value. Value movements on derivatives, again net of related changes
to amortisation of DAC and deferred tax, are recorded within profit and loss. Fair value movements on debt securities, net of related
changes to amortisation of DAC and deferred tax, are recorded within other comprehensive income. The estimated sensitivity of these
items and policyholder liabilities to a one per cent and two per cent decrease and increase in interest rates at 31 December 2009 and
2008 and is as follows:
204 Prudential plc > Annual Report 2009
Profit and loss
Direct effect
Derivatives value change
Policyholder liabilities
Related effect on amortisation of DAC
Pre-tax profit effect:
Operating profit based on longer-term
investment returns
Short-term fluctuations in investment returns
Related effect on charge for deferred tax
Net profit effect
Other comprehensive income
Direct effect on carrying value of debt securities
Related effect on amortisation of DAC
Related effect on movement in deferred tax
Net effect
Total net effect on IFRS equity
2009 £m
2008 £m
A 2%
decrease
A 1%
decrease
A 1%
increase
A 2%
increase
A 2%
decrease
A 1%
decrease
A 1%
increase
A 2%
increase
(319)
(418)
364
(148)
(185)
162
159
170
(156)
370
334
(328)
(575)
(517)
498
(268)
(218)
215
283
182
(193)
639
350
(395)
(144)
(229)
(373)
131
(242)
(62)
(109)
(171)
60
(111)
56
117
173
(60)
113
109
267
376
(131)
245
(128)
(466)
(594)
206
(388)
(59)
(212)
(271)
94
(177)
64
208
272
(95)
177
146
448
594
(207)
387
2,183
(764)
(497)
1,179
(413)
(268)
(1,179)
413
268
(2,183)
764
497
922
680
498
387
(498)
(385)
(922)
(677)
2,476
(619)
(650)
1,207
819
1,238
(310)
(325)
(1,238)
310
325
(2,476)
619
650
603
426
(603)
(1,207)
(426)
(820)
j Duration of liabilities
The table below shows the carrying value of policyholder liabilities. Separately, the Group uses cash flow projections of expected benefit
payments as part of the determination of the value of in-force business when preparing EEV basis results. The table below also shows the
maturity profile of the cash flows used for that purpose for 2009 and 2008:
2009 £m
2008 £m
Fixed
annuity
and other
business
(including
GICs and
similar
contracts)
Fixed
annuity
and other
business
(including
GICs and
similar
contracts)
Variable
annuity
Total
Policyholder liabilities
27,672
20,639
48,311
30,823
Variable
annuity
14,538
Total
45,361
Expected maturity:
0 to 5 years
5 to 10 years
10 to 15 years
15 to 20 years
20 to 25 years
Over 25 years
%
52
27
10
5
3
3
%
50
28
12
6
2
2
%
49
26
11
6
3
5
%
46
28
14
7
3
2
The maturity tables shown above have been prepared on a discounted basis. Details of undiscounted cash flows for investment contracts
are shown in note G2.
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205
Notes on the Group financial statements > D: Life assurance businesses > continued
D4: Asian insurance operations
a Summary statement of financial position
Assets
Intangible assets attributable to shareholders:
Goodwillnote iii
Deferred acquisition costs and other intangible assets
Total
Intangible assets attributable to with-profit funds:
Deferred acquisition costs and other intangible assets
Deferred tax assets
Other non-investment and non-cash assetsnote iii
Investments of long-term business and other operations:
Investment properties
Investments accounted for using the equity method
Financial investments:
Loansnote ii
Equity securities and portfolio holdings in unit trusts
Debt securitiesnote c
Other investments
Deposits
Total investments
Cash and cash equivalents
Total assets
With-profits
business
note i
£m
Unit-linked
assets and
liabilities
£m
Asian insurance operations
2009
2008
Other
£m
Total
£m
Total
£m
–
–
–
97
–
234
–
–
781
3,691
4,988
73
14
9,547
225
–
–
–
–
–
83
–
–
27
7,224
2,462
44
196
9,953
235
80
822
902
–
132
563
11
2
399
267
2,534
141
536
3,890
377
80
822
902
97
132
880
11
2
1,207
11,182
9,984
258
746
23,390
837
111
1,247
1,358
113
101
1,416
20
–
1,705
8,077
11,113
144
750
21,809
1,501
10,103
10,271
5,864
26,238
26,298
206 Prudential plc > Annual Report 2009
Equity and liabilities
Equity
Shareholders’ equity
Minority interests
Total equity
Liabilities
Policyholder liabilities and unallocated surplus of
with-profits funds:
Contract liabilities (including amounts in respect
of contracts classifies as investment contract
under IFRS 4)
Unallocated surplus of with-profits funds
Total
Other non-insurance liabilities:
Operational borrowings attributable to
shareholders-financed operations
Deferred tax liabilities
Other non-insurance liabilities
Total liabilities
Total equity and liabilities
With-profits
business
note i
£m
Unit-linked
assets and
liabilities
£m
Asian insurance operations
2009
2008
Other
£m
Total
£m
Total
£m
–
–
–
–
–
–
1,462
1
1,463
1,462
1
1,463
2,167
7
2,174
8,808
53
8,861
–
266
976
10,103
10,103
9,717
–
9,717
–
12
542
10,271
10,271
3,333
–
3,333
210
106
752
4,401
5,864
21,858
53
21,911
210
384
2,270
24,775
26,238
20,909
160
21,069
130
441
2,484
24,124
26,298
Notes
i
The statement of financial position for with-profits business comprises the with-profits assets and liabilities of the Hong Kong, Malaysia and Singapore
with-profits operations. Assets and liabilities of other participating business are included in the column for ‘other business’.
ii The loans of the Group’s Asian insurance operations of £1,207 million (2008: £1,705 million) comprise mortgage loans of £13 million (2008:
iii
£238 million), policy loans of £437 million (2008: £675 million) and other loans of £757 million (2008: £792 million). The mortgage and policy loans
are secured by properties and life insurance policies respectively. The majority of the other loans are commercial loans held by the Malaysian
operation and which are all investment graded by two local rating agencies.
Further segmental analysis:
No goodwill attributable to any individual country included in the Asia total of £80 million (2008: £111 million) exceeds 10 per cent of the Group
goodwill attributable to shareholders of £1,310 million (2008: £1,341 million).
Included within ‘Other non-investment and non-cash assets’ of £880 million (2008: £1,416 million), was ‘Property, plant and equipment’ of
£94 million (2008: £144 million). No individual country in Asia held property, plant and equipment at the end of the year which exceeds 10 per
cent of the Group total of £367 million (2008: £635 million).
Summary policyholder liabilities (net of reinsurance) and unallocated surplus
At 31 December 2009, the policyholder liabilities (net of reinsurance of £18 million (2008: £24 million)) and unallocated surplus for Asian
operations of £21.9 billion (2008: £21.0 billion) comprised the following:
Singapore
Hong Kong
Taiwan
Malaysia
Japan
Other countries
Total Asian operations
2009 £m
2008 £m
6,960
5,762
545
1,823
1,094
5,709
5,426
5,100
4,024
1,587
1,100
3,808
21,893
21,045
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207
Notes on the Group financial statements > D: Life assurance businesses > continued
D4: Asian insurance operations continued
b 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 Asian insurance operations from the
beginning of the year to the end of the year is as follows:
At 1 January 2008
Premiums
New businessnote ii
In-force
Surrenders
Maturities/Deaths
Net cash flows
Shareholders transfer post tax
Investment-related items and other movements
Foreign exchange translation differences note i
With-profits
business
£m
Unit-linked
assets and
liabilities
£m
6,547
6,971
391
647
1,038
(354)
(181)
503
(23)
(1,320)
2,387
1,252
1,009
2,261
(614)
(14)
1,633
–
(3,158)
1,774
Other
£m
3,661
233
630
863
(223)
(159)
481
–
185
1,428
Asian
insurance
operations
Total
£m
17,179
1,876
2,286
4,162
(1,191)
(354)
2,617
(23)
(4,293)
5,589
At 31 December 2008/1 January 2009
8,094
7,220
5,755
21,069
Premiums
New businessnote ii
In-force
Surrenders
Maturities/Deaths
Net cash flows
Change in reserving basis in Malaysianote iii
Change in other reserving basis
Shareholders’ transfers post tax
Investment-related items and other movementsnote iv
Foreign exchange translation differencesnote i
Disposal of Taiwan agency businessnote v
At 31 December 2009
46
777
823
(361)
(253)
209
–
–
(20)
1,431
(853)
–
8,861
643
1,223
1,866
(666)
(19)
1,181
(9)
–
–
2,661
(612)
(724)
9,717
517
601
1,118
(174)
(70)
874
(54)
(4)
–
150
(604)
(2,784)
3,333
1,206
2,601
3,807
(1,201)
(342)
2,264
(63)
(4)
(20)
4,242
(2,069)
(3,508)
21,911
Notes
i Movements in the year have been translated at the average exchange rate for the year ended 31 December 2009. The closing balance has been
ii
translated at the closing spot rates as at 31 December 2009. Differences upon retranslation are included in foreign exchange differences of negative
£2,069 million.
The increase in policyholder liabilities due to new business premium for the with-profits business fell by £345 million to £46 million. This is
predominantly driven by a fall in sales of single premium with-profits policies in Hong Kong following the withdrawal of the PruSaver product in 2009.
The increase in policyholder liabilities due to new business premium for Asia unit-linked business was lower by £609 million in 2009, in line with
decreases in single premium sales during the year.
iii The change in reserving basis in Malaysia of £63 million reflects the change made following the adoption of a risk based capital (RBC) approach to the
local regulatory reporting in that country.
iv The positive investment related items and other movements for with-profits (£1,431 million) and unit-linked business (£2,661 million) were mainly
driven from Asian equity market gains in the period.
The disposal of Taiwan agency business reflects the liabilities transferred at the date of disposal.
v
208 Prudential plc > Annual Report 2009
Information on credit risks of debt securities
c
The following table summarises the credit quality of the debt securities of the Asian insurance operations as at 31 December 2009 by
rating agency ratings:
2009 £m
2008 £m
S&P – AAA
S&P – AA+ to AA-
S&P – A+ to A-
S&P – BBB+ to BBB-
S&P – Other
Moody’s – Aaa
Moody’s – Aa1 to Aa3
Moody’s – A1 to A3
Moody’s – Baa1 to Baa3
Moody’s – Other
Fitch
Other
Total debt securities
With-
profits
business
Unit-
linked
business
Other
business
1,778
657
749
472
397
4,053
86
38
12
17
–
153
–
782
295
345
463
103
3
186
592
284
107
517
1,209
1,686
33
32
283
16
–
364
38
851
15
279
14
7
15
330
1
517
4,988
2,462
2,534
Total
2,259
1,594
1,496
682
917
6,948
134
349
309
40
15
847
39
2,150
9,984
Total
2,632
3,746
808
902
253
8,341
494
108
398
60
50
1,110
41
1,621
11,113
Of the £517 million (2008: £555 million) debt securities for other business which are not rated in the table above, £225 million (2008:
£231 million) are in respect of government bonds and £265 million (2008: £221 million) are in respect of corporate bonds rated as
investment grade by local external ratings agencies, and £22 million (2008: £nil) structured deposits issued by banks which are
themselves rated but where the specific deposits have not been.
Products and guarantees
d
The life insurance products offered by the Group’s Asian operations include a range of with-profits and non-participating term, whole
life, endowment and unit-linked policies. The Asian operations also offer health, disability, critical illness and accident coverage to
supplement its core life products.
The terms and conditions of the contracts written by the Asian operations and, in particular, the products’ options and guarantees,
vary from territory to territory depending upon local market circumstances.
In general terms, the Asian participating products provide savings and protection where the basic sum assured can be enhanced by
a profit share (or bonus) from the underlying fund as determined at the discretion of the insurers. The Asian operations’ non-participating
term, whole life and endowment products offer savings and/or protection where the benefits are guaranteed or determined by a set of
defined market-related parameters. Unit-linked products combine savings with protection, the cash value of the policy depends on the
value of the underlying unitised funds. Health and Protection (H&P) policies provide mortality or morbidity benefits and include health,
disability, critical illness and accident coverage. H&P products are commonly offered as supplements to main life policies but can be
sold separately.
Subject to local market circumstances and regulatory requirements, the guarantee features described in note D2(d) 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.
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Cash value and interest rate guarantees are of three types:
• Maturity values
Maturity values are guaranteed for non-participating products and on the guaranteed portion of participating products. Declared
annual bonuses are also guaranteed once vested. Future bonus rates and cash dividends are not guaranteed on participating products.
• Surrender values
Surrender values are guaranteed for non-participating products and on the guaranteed portion of participating products. The
surrender value of declared reversionary bonuses are also guaranteed once vested. Market value adjustments and surrender penalties
are used where the law permits such adjustments in cash values.
D
D
209
Notes on the Group financial statements > D: Life assurance businesses > continued
D4: Asian insurance operations continued
• Interest rate guarantees
It is common in Asia for regulations or market-driven demand and competition to provide some form of capital value protection
and minimum crediting interest rate guarantees. This would be reflected within the guaranteed maturity and surrender values.
The guarantees are borne by shareholders for non-participating and investment-linked (non-investment guarantees only)
products. Participating product guarantees are predominantly supported by the segregated life funds and their estates.
Whole of life contracts with floor levels of policyholder benefits that accrue at rates set at inception and do not vary subsequently with
market conditions are written in the Korean life operations. This is to a much lesser extent than the policies written by the Taiwan agency
business which was sold in the first half of 2009, as Korea has a much higher proportion of linked and health business. The Korean
business has non-linked liabilities and linked liabilities at 31 December 2009 of £349 million and £1,173 million respectively (2008:
£312 million and £742 million respectively).
The other area of note in respect of guarantees is the Japanese business where pricing rates are higher than current bond yields.
Lapse risk is a feature in that policyholders could potentially surrender their policies on guaranteed terms if interest rates significantly
increased leaving the potential for losses if bond values had depreciated significantly. However, the business is matched to a relatively
short realistic liability duration.
The method for determining liabilities of insurance contracts for UK GAAP, and IFRS, purposes for some Asian operations is based
on US GAAP principles and this method applies to contracts with cash value and interest rate guarantees. Following standard US GAAP
procedure, premium deficiency reserve calculations are performed each year to establish whether the carrying values of the liabilities
are sufficient.
On the US GAAP basis the calculations are deterministic, that is to say based on a single set of projections, and expected long-term
rates of return are applied.
e Exposure to market risk
The Asian operations sell with-profits and unit-linked policies and, although the with-profits business generally has a lower terminal
bonus element than in the UK, the investment portfolio still contains a proportion of equities and, to a lesser extent, property. Non-
participating business is largely backed by debt securities or deposits. The exposure to market risk of the Group arising from its Asian
operations is therefore at modest levels. This arises from the fact that the Asian operations have a balanced portfolio of with-profits,
unit-linked and other types of business.
f Process for setting assumptions and determining liabilities
The future policyholder benefit provisions for Asian businesses in the Group’s IFRS accounts and previously under the MSB, are
determined in accordance with methods prescribed by local GAAP adjusted to comply, where necessary, with UK GAAP.
For Asian operations in countries where local GAAP is not well established and in which the business written is primarily non-
participating and linked business, US GAAP is used as the most appropriate reporting basis. This basis is applied in Japan and Vietnam
and, materially for 2008 but less so for 2009 following the sale of the agency business, in Taiwan. The future policyholder benefit
provisions for non-linked business are determined using the net level premium method, with an allowance for surrenders, maintenance
and claims expenses. Rates of interest used in establishing the policyholder benefit provisions vary by operation depending on the
circumstances attaching to each block of business.
g Reinsurance
The Asian businesses cede only minor amounts of business outside the Group with immaterial effects on reported profit. During 2009,
reinsurance premiums for externally ceded business were £119 million (2008: £76 million) and the reinsurance assets were £18 million
(2008: £24 million) in aggregate.
h Effect of changes in bases, estimates and assumptions used to measure insurance assets and liabilities
a Exceptional credit of £63 million regarding the liability measurement for Malaysia long-term business
For the Malaysia life business, under the basis applied previously, 2008 IFRS basis liabilities were determined on the local regulatory basis
using prescribed interest rates such that a high degree of prudence resulted.
As of 1 January 2009, the local regulatory basis has been replaced by the Malaysian authority’s risk-based capital (RBC) framework.
In the light of this development, the Company has remeasured the liabilities by reference to the method applied under the new RBC
framework, which is more realistic than the previous approach, but with an overlay constraint to the method such that negative reserves
derived at an individual policyholder level are not included. This change has resulted in a one-off release from liabilities at 1 January 2009
of £63 million.
Changes in key assumptions
b
Excluding the change in Malaysia as explained above, the result for Asian operations was increased in 2009 by the effect of a number of
other individually small assumptions changes of, in aggregate, £4 million. For 2008 the result for Asian operations was reduced by the
effect of a number of individually small assumptions charges of, in aggregate, £21 million.
210 Prudential plc > Annual Report 2009
c Deferral and amortisation of acquisition costs
Under IFRS, the basis of accounting for insurance assets and liabilities reflects ‘grandfathered’ GAAP under the Modified Statutory Basis
(MSB). In general, this requires the deferral and amortisation of acquisition costs in line with the emergence of margins. In 2008, the
basis of deferral and amortisation was adjusted for a number of territories to better reflect the MSB requirement as follows:
For the India life operation, reflecting the initial development stage of the business, acquisition costs had previously not been
deferred. In 2008, £19 million of deferred acquisition costs, net of amortisation in the year, were established.
For the Korea life business, refinements were made to move to a more appropriate basis which resulted in a credit of £35 million
(£9 million of which related to the 1 January 2008 balance).
For Singapore, refinements were made with a £21 million benefit in 2008 (of which £7 million related to the 1 January 2008 position)
where the local risk based capital approach does not provide an appropriate basis of implicit allowance for acquisition costs for certain
products and in Hong Kong, adjustments were made with a net overall effect of a credit to profit of £10 million in 2008.
i Sensitivity of IFRS basis profit and equity to market and other risks
Currency translation
Consistent with the Group’s accounting policies, the profits of the Asian insurance operations are translated at average exchange rates
and shareholders’ equity at the closing rate for the reporting period. For 2009, the rates for the most significant operations are given in
note B4.
A 10 per cent increase or decrease in these rates would have reduced or increased profit before tax attributable to shareholders,
profit for the year and shareholders’ equity, excluding goodwill, attributable to Asian operations respectively as follows:
A 10% increase in
exchange rates
A 10% decrease in
exchange rates
2009 £m
2008 £m
2009 £m
2008 £m
Profit (loss) before tax attributable to shareholdersnote i
Profit (loss) for the year
Shareholders’ equity, excluding goodwill, attributable to Asian operations
(40)
(35)
(129)
(14)
(6)
(202)
49
43
158
18
8
246
Note
i
Sensitivity on profit before tax i.e. aggregate of the operating profit based on longer-term investment returns, short-term fluctuations in investment
returns, and actuarial gains and losses on defined benefit pension schemes but excluding the loss on sale and results for Taiwan agency business, as
discussed in note B1.
Other risks
i With-profits business
Similar principles to those explained for UK with-profits business apply to profit emergence for the Asian with-profits business.
Correspondingly, the profit emergence reflects bonus declaration and is relatively insensitive to period by period fluctuations in
insurance risk or interest rate movements.
ii Unit-linked business
As for the UK insurance operations, the profits and shareholders’ equity related to the Asian operations is primarily driven by charges
related to invested funds. For the Asian operations, substantially all of the contracts are classified as insurance contracts under IFRS 4,
i.e. containing significant insurance risk. The sensitivity of profits and equity to changes in insurance risk is minor and, to interest rate
risk, not material.
F
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A
N
C
I
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L
S
T
A
T
E
M
E
N
T
S
D
D
211
Notes on the Group financial statements > D: Life assurance businesses > continued
D4: Asian insurance operations continued
iii Other business
a Interest rate risk for Taiwan
For 2008 the principal other business of Asian operations that was most sensitive to movements in interest rates was the whole of life
business written in Taiwan. In June 2009 the Company completed the sale of its agency distribution business and associated liabilities
and its agency force in Taiwan to China Life Insurance Company Ltd. as explained in note I1. For 2009 the assets and liabilities of the
element of Taiwan business retained by the Company are relatively less sensitive to variances in interest rates, with a reasonably possible
decrease in interest rates of 0.5 per cent leading to an increase in IFRS pre-tax profits of £24 million. After adjusting these results for
deferred tax the reasonably possible effect on shareholders’ equity is £19 million. A 0.5 per cent increase in interest rates is estimated to
have an approximately equal and opposite effect on profit and shareholders’ equity.
b Interest rate risk for other business excluding Taiwan
Asian operations offer a range of insurance and investment products, predominately with-profits and non-participating term, whole life
endowment and unit-linked. Excluding with-profit and unit-linked business along with Taiwan, the results of the Asian business are
sensitive to the vagaries of routine movements in interest rates.
For the purposes of analysing sensitivity to variations in interest rates, it has been determined for the majority of territories that a
movement of one per cent in the 10 year government bond rate can be considered reasonably possible. At 31 December 2009, 10 year
government bond rates vary from territory to territory and range from 1.3 per cent to 11.45 per cent (2008: 1.17 per cent to 10.18 per
cent). An exception to this arises in Japan where reasonably possible interest rate movements have been determined as 0.5 per cent
respectively. (2008: Japan 0.5 per cent, Vietnam 1.5 per cent). These reasonably possible changes would have the following impact:
Pre-tax profit
Related deferred tax (where applicable)
Net effect on profit and equity
2009 £m
2008 £m
A decrease
of 1%
note i
A decrease
of 1%
note i
67
(17)
50
56
(11)
45
Note
i
One per cent sensitivity has been used in all territories (except Japan (0.5 per cent)) (2008: Japan 0.5 per cent, Vietnam 1.5 per cent).
The pre-tax impacts, if they arose, would mostly be recorded within the category short-term fluctuations in investments returns in the Group’s
supplementary analysis of profit before tax.
At 31 December 2009, an increase in the rates of one per cent (Japan (0.5 percent)) is estimated to have the effect of decreasing pre-tax profit by
£87 million. After adjusting these results for deferred tax the reasonable possible effect on shareholders’ equity is a decrease of £65 million.
212 Prudential plc > Annual Report 2009
c Equity price risk
The non-linked shareholder business has limited exposure to equity and property investment (£278 million at 31 December 2009).
Generally changes in equity and property investment values are not automatically matched by investments in policyholder liabilities.
However for the Vietnam business, to the extent that equity investment appreciation is realised through sales of securities then
policyholders’ liabilities are adjusted to the extent that policyholders participate.
The estimated sensitivity to a 10 and 20 per cent (2008: 10, 20 and 40 per cent) change in equity and property prices for shareholder-
backed Asian other business, which would be reflected in the short-term fluctuation component of the Group’s segmental analysis of
profit before tax, at 31 December 2009 and 2008 would be as follows:
Pre-tax profit
Related deferred tax (where applicable)
Net effect on profit and equity
2009 £m
2008 £m
A decrease
of 20%
A decrease
of 10%
A decrease
of 40%
A decrease
of 20%
A decrease
of 10%
(58)
8
(50)
(29)
4
(25)
(176)
5
(171)
(88)
3
(85)
(44)
1
(43)
A 10 or 20 per cent, (2008: 10, 20 or 40 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. The low tax rate effect, which is particularly evident in 2008 relates to
the availability of losses in some of the territories.
The disclosure of the effect of a 40 per cent fall for the 2008 year-end was included because of the exceptional market conditions at
that time. These conditions have now abated and the disclosure is no longer appropriate.
In the equity risk sensitivity analysis given above the Group has, for 2009, 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.
d Insurance risk
Many of the territories in Asia are exposed to mortality/morbidity risk and provision is made within IFRS policyholder liabilities on a
prudent regulatory basis to cover the potential exposure. If these prudent assumptions were strengthened by five per cent (estimated at
one in ten year shock) then it is estimated that post tax IFRS profit would be impacted by approximately £9 million (with a corresponding
change to IFRS shareholders’ equity). Mortality/morbidity has a symmetrical effect on portfolio and so a weakening of
mortality/morbidity assumptions would have an approximately equal and opposite similar impact.
j Duration of liabilities
The table below shows the carrying value of policyholder liabilities. Separately the Group uses cash flow projections of expected benefit
payments as part of the determination of the value of in-force business when preparing EEV basis results. The table below also shows the
maturity profile of the cash flows, taking account of expected future premiums and investment returns used for that purpose for 2009
and 2008:
Policyholder liabilities
Expected maturity:
0 to 5 years
5 to 10 years
10 to 15 years
15 to 20 years
20 to 25 years
Over 25 years
2009 £m
2008 £m
21,858
20,909
%
24
21
15
12
9
19
%
23
21
15
13
10
18
213
F
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A
N
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I
A
L
S
T
A
T
E
M
E
N
T
S
D
D
Notes on the Group financial statements > D: Life assurance businesses > continued
D5: Capital position statement for life assurance businesses
a Summary statement
The Group’s estimated capital position for life assurance businesses with reconciliations to shareholders’ equity is shown below.
Available capital for each fund or group of companies is determined by reference to local regulation at 31 December 2009 and 2008.
2009 £m
Other
UK life
assurance
subsidi-
PAC with- aries and
funds
note ii
profits
fund
Total
SAIF
WPSF
note i
Parent
company
and
share-
holders’
equity of
other
subsidi-
opera- Prudential aries and
funds
Capital)
Total
life
tions
Asian
life
M&G
assurance assurance (including
Jackson
subsidi-
aries
Group
total
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
788
–
788
1,114
3,011
–
3,011
–
1,382
80
1,462
–
5,181
80
5,261
1,114
173 (1,507) 3,847
1,310
77
1,153
1,326 (1,430) 5,157
1,114
–
–
1,902
3,011
1,462
6,375
1,326 (1,430) 6,271
–
9,966
– (3,001)
9,966
(3,001)
–
–
–
–
53 10,019
– (3,001)
(2)
–
(7)
–
(9)
–
(124)
–
(3,092)
154
(786)
–
(4,011)
154
–
–
–
–
–
2,221
–
2,221
65
65
– (1,294)
(1,294)
–
–
–
–
–
65
– (1,294)
2
–
703
705
6,432
6,432
(171)
(295)
194
400
1,128
(523)
(333) 5,281
–
6,432
6,432
1,607
2,488
1,129 11,656
31 December 2009
Group shareholders’ equity
Held outside long-term funds:
Net assets
Goodwill
Total
Held in long-term fundsnote iii
Total Group shareholders’ equity
Adjustments to regulatory basis
Unallocated surplus of
with-profits fundsnote v
Shareholders’ share of realistic liabilities
Deferred acquisition costs of
non-participating business not
recognised for regulatory reporting
purposes and goodwill
Jackson surplus notesnote iv
Investment and policyholder liabilities
valuation differences between
IFRS and regulatory basis for
Jacksonnote viii
Adjustment from IAS 19 basis pension
deficit attributable to WPSF to
pension liability for regulatory
purposesnote vii
Valuation difference on PAL between
IFRS basis and regulatory basis
Other adjustments to restate these
amounts to a regulatory basis
(with SAIF and the WPSF on a
Peak 2 realistic basis)note v
Total adjustments
Total available capital resources of life
assurance businesses on local
regulatory bases
214 Prudential plc > Annual Report 2009
31 December 2009
Policyholder liabilities
With-profits liabilities of UK
regulated with-profits funds:
Insurance contracts
Investment contracts
(with discretionary
participation features)
Total
Other liabilities:
Insurance contracts:
With-profits liabilities
of non-UK regulated
funds
Unit-linked, including
variable annuity
Other life assurance
business
Investment contracts without
discretionary participation
features (principally
unit-linked and similar
contracts in the UK
and GIC liabilities
of Jackson)note vi
Total
Total policyholder liabilities
shown in the consolidated
statement of financial position
SAIF
WPSF
note i
Total
PAC with-
profits fund
2009 £m
Other UK
life assurance
subsidiaries
and funds
note ii
Asian life
assurance
subsidiaries
Total life
assurance
operations
Jackson
9,285
28,449
37,734
396
9,681
24,384
52,833
24,780
62,514
–
–
–
–
–
–
–
–
4,766
42,500
100
4,866
24,880
67,380
3,942
3,942
–
–
–
–
1,998
1,998
6,793
20,639
9,717
39,147
291
12,726
13,017
18,113
25,707
3,287
60,124
–
291
–
–
14,724
15,015
13,794
38,700
1,965
48,311
46
15,805
16,992
119,018
9,972
67,557
77,529
38,700
48,311
21,858
186,398
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
A
D
215
Notes on the Group financial statements > D: Life assurance businesses > continued
D5: Capital position statement for life assurance businesses continued
2008 £m
Other
UK life
assurance
subsidi-
PAC with- aries and
funds
note ii
profits
fund
Total
SAIF
WPSF
note i
Parent
company
and
share-
holders’
equity of
other
subsidi-
opera- Prudential aries and
funds
Capital)
Total
life
tions
Asian
life
M&G
assurance assurance (including
Jackson
subsidi-
aries
Group
total
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
735
–
735
920
1,655
1,698
–
1,698
–
1,698
2,056
111
2,167
–
2,167
4,489
111
4,600
920
5,520
147
1,153
1,300
–
(1,839)
77
(1,762)
–
2,797
1,341
4,138
920
1,300
(1,762)
5,058
8,254
(2,028)
8,254
(2,028)
–
–
–
–
160
–
8,414
(2,028)
(3)
–
(10)
–
(13)
–
(128)
–
(3,962)
173
(876)
–
(4,979)
173
–
–
–
3
–
–
–
–
4,819
–
4,819
(147)
(147)
(1,350)
(1,350)
–
–
–
–
–
–
(147)
(1,350)
643
646
(474)
30
(41)
161
5,362
5,362
(602)
1,060
(757)
5,063
–
5,362
5,362
1,053
2,758
1,410
10,583
31 December 2008
Group shareholders’ equity
Held outside long-term funds:
Net assets
Goodwill
Total
Held in long-term fundsnote iii
Total Group shareholders’ equity
Adjustments to regulatory basis
Unallocated surplus of with-profits fundsnote v
Shareholders’ share of realistic liabilities
Deferred acquisition costs of
non-participating business not
recognised for regulatory
reporting purposes
Jackson surplus notesnote iv
Investment and policyholder liabilities
valuation differences between
IFRS and regulatory basis
for Jacksonnote viii
Adjustment from IAS 19 basis pension
deficit attributable to WPSF to
pension liability for regulatory
purposesnote vii
Valuation difference on PAL between
IFRS basis and regulatory basis
Other adjustments to restate these
amounts to a regulatory basis
(with SAIF and the WPSF on
a Peak 2 realistic basis)note v
Total adjustments
Total available capital resources
of life assurance businesses
on local regulatory bases
216 Prudential plc > Annual Report 2009
31 December 2008
Policyholder liabilities
With-profits liabilities of UK
regulated with-profits funds:
Insurance contracts
Investment contracts
(with discretionary
participation features)
Total
Other liabilities:
Insurance contracts:
With-profits liabilities of
non-UK regulated
funds
Unit-linked, including
variable annuity
Other life assurance
business
Investment contracts without
discretionary participation
features (principally
unit-linked and similar
contracts in the UK
and GIC liabilities
of Jackson)note vi
Total
Total policyholder liabilities shown
in the consolidated statement
of financial position
SAIF
WPSF
note i
Total
PAC with-
profits fund
2008 £m
Other UK
life assurance
subsidiaries
and funds
note ii
Asian life
assurance
subsidiaries
Total life
assurance
operations
Jackson
9,260
26,466
35,726
494
9,754
22,873
49,339
23,367
59,093
–
–
–
–
–
–
–
–
4,416
40,142
79
4,495
23,446
63,588
3,407
3,407
–
–
–
–
1,872
1,872
6,041
14,538
7,220
29,671
264
12,625
12,889
16,228
27,938
5,755
62,810
–
264
–
–
14,497
14,761
11,584
33,853
2,885
45,361
32
14,501
16,414
110,389
10,018
63,836
73,854
33,853
45,361
20,909
173,977
Notes
i WPSF unallocated surplus includes amounts related to the Hong Kong branch. Policyholder liabilities of the Hong Kong branch are included in the
amounts of Asian life assurance subsidiaries.
Excluding PAC shareholders’ equity that is included in ‘parent company and shareholders’ equity of other subsidiaries and funds’.
ii
iii The term shareholders’ equity held in long-term funds refers to the excess of assets over liabilities attributable to shareholders of funds which are
required by law to be maintained with segregated assets and liabilities.
iv For regulatory purposes the Jackson surplus notes are accounted for as capital.
v Other adjustments to shareholders’ equity and unallocated surplus include amounts for the value of non-participating business for UK regulated
with-profits funds, deferred tax, admissibility and other items measured differently on the regulatory basis. For Jackson the principal reconciling
item is deferred tax related to the differences between IFRS and regulatory basis as shown in the table above and other methodology differences.
Insurance business accounted for as financial instruments under IAS 39.
vi
vii In determining the IAS 19 adjustment for the purposes of this table the deficit in the Group’s main pension scheme used for the calculation includes
amounts for investments in Prudential insurance policies (see note I2).
viii The investment and policyholder liabilities valuation difference between IFRS and regulatory bases for Jackson is mainly due to not all investments
being carried at fair value under the regulatory basis and also due to the valuation difference on annuity reserves.
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Notes on the Group financial statements > D: Life assurance businesses > continued
D5: Capital position statement for life assurance businesses continued
b Basis of preparation, capital requirements and management
Each of the Group’s long-term business operations is capitalised to a sufficiently strong level for its individual circumstances. Details
by the Group’s major operations are shown below.
i UK insurance operations
The FSA rules which govern the Prudential regulation of insurance form part of the Prudential Sourcebook for Insurers, the General
Prudential Sourcebook and Interim Prudential Sourcebook for Insurers. Overall, the net requirements of the General Prudential
Sourcebook are intended to align the capital adequacy requirements for insurance business more closely with those of banking and
investment firms and building societies, for example, by addressing tiers of capital, rather than looking at net admissible assets. An
insurer must hold capital resources equal at least to the Minimum Capital Requirement (MCR).
The Prudential Sourcebook for Insurers also contains rules on Individual Capital Assessments. Under these rules and the rules of
the General Prudential Sourcebook all insurers must assess for themselves the amount of capital needed to back their business. If the
FSA views the results of this assessment as insufficient, it may draw up its own Individual Capital Guidance for a firm, which can be
superimposed as a requirement.
PAC WPSF and SAIF
Under FSA rules, insurers with with-profits liabilities of more than £500 million must hold capital equal to the higher of the MCR and the
Enhanced Capital Requirement (ECR). The ECR is intended to provide a more risk responsive and ‘realistic’ measure of a with-profit
insurer’s capital requirements, whereas the MCR is broadly speaking equivalent to the previous required minimum margin under the
Interim Prudential Sourcebook and satisfies the minimum EU Standards.
Determination of the ECR involves the comparison of two separate measurements of the firm’s resources requirement, which
the FSA refers to as the ‘twin peaks’ approach.
The two separate peaks are:
i The requirement comprised by the mathematical reserves plus the ‘Long-Term Insurance Capital Requirement’ (LTICR), together
known as the ‘regulatory peak’; and
ii a calculation of the ‘realistic’ present value of the insurer’s expected future contractual liabilities together with projected ‘fair’
discretionary bonuses to policyholders, plus a risk capital margin, together known as the ‘realistic peak’.
Available capital of the WPSF and SAIF of £6.4 billion (2008: £5.4 billion) represents the excess of assets over liabilities on the FSA
realistic basis. Unlike the previously discussed FRS 27 basis, realistic liabilities on the regulatory basis include the shareholders’ share
of future bonuses. These amounts are shown before deduction of the risk capital margin (RCM) which is estimated to be £1.4 billion at
31 December 2009 (2008: £2.1 billion).
The FSA’s basis of setting the RCM is to target a level broadly equivalent to a Standard & Poor’s credit rating of BBB and to judge this
by ensuring there are sufficient assets to absorb a one in 200 year event. The RCM calculation achieves this by setting rules for the
determination of margins to cover defined stress changes in asset values and yields for market risk, credit risk and termination risk for
with-profits policies.
As noted in section D2(f)(ii), PAC has discretion in its management actions in the case of adverse investment conditions.
Management actions encompass, but are not confined to, investment allocation decisions, levels of reversionary bonuses, crediting rates
and total claim values. To illustrate the flexibility of management actions, rates of regular bonus are determined for each type of policy
primarily by targeting them at a prudent proportion of the long-term expected future investment return on the underlying assets. The
expected future investment return is reduced as appropriate for each type of policy to allow for items such as expenses, charges, tax and
shareholders’ transfers. However, the rates declared may differ by product type, or by date of payment of the premiums or date of issue
of the policy, if the accumulated annual bonuses are particularly high or low relative to a prudent proportion of the achieved investment
return.
When target bonus levels change, the PAC board has regard to the overall financial strength of the long-term fund when determining
the length of time over which it will seek to achieve the amended product target bonus level.
In normal investment conditions, PAC expects changes to regular bonus rates to be gradual over time and changes are not expected
to exceed one per cent per annum over any year. However, discretion is retained as to whether or not a regular bonus is declared each
year, and there is no limit on the amount by which regular bonus rates can be changed.
As regards smoothing of maturity and death benefits, in normal circumstances PAC does not expect most pay-out values on policies
of the same duration to change by more than 10 per cent up or down from one year to the next, although some larger changes may occur
to balance pay-out values between different policies. Greater flexibility may be required in certain circumstances, for example, following
a significant rise or fall in market values (either sudden or over a period of years) and in such situations the PAC board may decide to vary
the standard bonus smoothing limits to protect the overall interests of policyholders.
For surrender benefits, any substantial fall in the market value of the assets of the with-profits sub-fund would lead to changes in the
application of MVRs for accumulating with-profits policies, firstly to increase the size of MVRs already being applied and, secondly, to
extend the range of policies for which an MVR is applied.
218 Prudential plc > Annual Report 2009
Other UK life assurance subsidiaries and funds
The available capital of £1,607 million (2008: £1,053 million) reflects the excess of regulatory basis assets over liabilities of the
subsidiaries and funds, before deduction of the capital resources requirement of £952 million (2008: £884 million).
The capital resources requirement for these companies broadly reflects a formula which, for active funds, equates to a percentage of
regulatory reserves plus a percentage of death strains. Death strains represent the payments made to policyholders upon death in excess
of amounts explicitly allocated to fund the provisions for policyholders claims and maturities.
ii Jackson
The regulatory framework for Jackson is governed by the requirements of the US NAIC approved risk-based capital standards. Under
these requirements life insurance companies report on a formula-based capital standard that they calculate by applying factors to various
asset, premium and reserve items. The formula takes into account the risk characteristics of a company, including asset risk, insurance
risk, interest rate risk and business risk.
The available capital of Jackson shown above of £2,488 million (2008: £2,758 million) reflects US regulatory basis assets less liabilities
including asset valuation reserves. The asset valuation reserve is designed to provide for future credit-related losses on debt securities
and losses on equity investments. Available capital includes a reduction for the effect of the interest maintenance reserve, which is
designed by state regulators to defer recognition of non-credit related realised capital gains and losses and to recognise them rateably
in the future.
Jackson’s risk-based capital ratio is significantly in excess of regulatory requirements. Effective for 2008 reporting, the local regulator
granted Jackson three permitted practices. One permitted practice allowed Jackson to carry interest rate swaps at book value, as if
statutory hedge accounting were in place, instead of at fair value as would have been otherwise required. Jackson was also required to
demonstrate the effectiveness of its interest rate swap programme pursuant to the Michigan Insurance Code. The local regulator also
granted a permitted practice to allow Jackson to recognise book to tax differences that will reverse within the next three years (instead
of one year as required by the NAIC) in determining the admissible tax asset (subject to a limitation of 15 per cent of capital and surplus
versus the 10 per cent limitation imposed by the NAIC guidance). Finally, the local regulator granted a permitted practice to allow
Jackson to use an average interest rate in calculating certain regulatory capital requirements. In 2009 the permitted practice with respect
to the interest rate swaps was renewed until 1 October 2010, while the other two expired on 1 October 2009. The total effect of these
permitted practices was to increase statutory surplus by £117 million and £588 million at 31 December 2009 and 2008 respectively,
and reduce authorised control level required capital by £57 million at 31 December 2008.
iii Asian operations
The available capital shown above of £1,129 million (2008: £1,410 million) represents the excess of local regulatory basis assets over
liabilities before deduction of required capital of £438 million (2008: £407 million). These amounts have been determined applying the
local regulations in each of the operations.
The businesses in Asia are subject to local capital requirements in the jurisdictions in which they operate. The Hong Kong business
branch of PAC and its capital requirements are subsumed within those of the PAC long-term fund. For the other material Asian
operations, the details of the basis of determining regulatory capital and regulatory capital requirements are as follows:
Singapore
In Singapore a risk-based regulatory framework applies rather than one based on a net premium approach.
For participating business, a gross premium reserve, determined using prudent best estimate assumptions and which makes
allowance for future bonus, is held. The amount held is subject to a minimum of the higher of the assets attributed to participating
business and a gross premium reserve calculated on specified assumptions, but without allowance for future bonus, that include
prescribed provisions for adverse deviations (PADs).
For non-participating business, gross premium reserves are held. For linked business the value of units is held together with
a non-unit reserve calculated in accordance with standard actuarial methodology.
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Notes on the Group financial statements > D: Life assurance businesses > continued
D5: Capital position statement for life assurance businesses continued
Indonesia
Policy reserves for traditional business are determined on a modified net premium basis. The valuation interest rates are capped
at nine per cent for local currency products and five per cent for foreign currency products.
For linked business the value of units is held together with a non-unit reserve calculated in accordance with standard actuarial
methodology. Solvency capital is determined using risk-based capital approach. Insurance companies in Indonesia are expected to
maintain the level of net assets above 120 per cent of solvency capital. Due to the 2008 financial crisis, the local regulator provided
relief in solvency capital and the measure continues until further notice.
Japan
Mathematical reserves for traditional business are determined on a net premium basis using prescribed mortality and interest rates.
Interest rates reflect the original pricing assumptions.
For linked business the value of units is held together with a non-unit reserve calculated in accordance with standard actuarial
methodology.
With regard to solvency, the adjusted solvency capital assets of the Company must exceed 200 per cent of the risk related capital
requirement value at risk. It is thus a risk-based capital approach.
Malaysia
A new risk-based capital framework was adopted from 1 January 2009 to replace the previous framework that used a net premium
approach.
For participating business, a gross premium reserve on the guaranteed and non-guaranteed benefits determined using best estimate
assumptions is held. The amount held is subject to a minimum of a gross premium reserve on the guaranteed benefits, determined using
best estimate assumptions along with provisions of risk margin for adverse deviations (PRADs) discounted at the risk-free rate.
For non-participating business, gross premium reserves determined using best estimate assumptions along with provisions of risk
margin for adverse deviations (PRADs) discounted at the risk-free rate are held. For linked business the value of units is held together
with a non-unit reserve calculated in accordance with standard actuarial methodology.
The risk-free rate is derived from a yield curve of zero-coupon spot yields of Malaysian Government Securities.
Vietnam
Mathematical reserves are calculated using a modified net premium approach, using a stable set of assumptions agreed with the
regulator.
The capital requirement is determined as four per cent of reserves plus a specified percentage of 0.1 per cent of sums at risk for
policies with original term less than or equal to five years or 0.3 per cent of sums at risk for policies with original term of more than five
years. An additional capital requirement of Vietnamese Dong 200 billion is also required for companies transacting unit-linked business.
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. A risk-based regulatory framework is adopted immediately 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 Group capital requirements
In addition to the requirements at individual company level, FSA requirements under the IGD apply additional prudential requirements
for the Group as a whole. Discussion of the Group’s estimated IGD position at 31 December 2009, together with market risk sensitivity
disclosure provided to key management, is provided in the business review section of the Group’s 2009 Annual Report and in section C.
220 Prudential plc > Annual Report 2009
c Movements in total available capital
Total available capital for the Group’s life assurance operations has changed during 2009 as follows:
Other UK
life assurance
subsidiaries
and funds
note iii
1,053
23
26
–
505
1,607
WPSF
note i
5,362
18
–
–
1,052
6,432
2009 £m
Asian life
assurance
subsidiaries
note iv
1,410
2
(101)
178
(360)
1,129
Jackson
note ii
2,758
–
–
128
(398)
2,488
Other UK
life assurance
subsidiaries
and funds
note iii
982
(624)
372
–
323
1,053
WPSF
note i
8,720
(149)
–
–
(3,209)
5,362
2008 £m
Asian life
assurance
subsidiaries
note iv
874
(7)
60
134
349
1,410
Jackson
note ii
2,251
–
–
(57)
564
2,758
Group
total
10,583
43
(75)
306
799
11,656
Group
total
12,827
(780)
432
77
(1,973)
10,583
Available capital at 31 December 2008
Changes in assumptions
Changes in management policy
Changes in regulatory requirements
New business and other factors
Available capital at 31 December 2009
Detail on the movement for 2008 is as follows:
Available capital at 31 December 2007
Changes in assumptions
Changes in management policy
Changes in regulatory requirements
New business and other factors
Available capital at 31 December 2008
Notes
i WPSF
The increase in 2009 reflects primarily the positive investment returns earned on the opening available capital and £18 million positive effect of
changes in assumptions on a regulatory basis compared to the £65 million effect of change in assumptions on the IFRS basis as shown in note D2 (i).
The decrease in 2008 reflected primarily the negative investment returns earned on the opening available capital and £149 million negative effect
ii
of changes in assumptions on a regulatory basis compares to the £83 million effect of change in assumptions on an IFRS basis as shown in note D2(i).
Jackson
The decrease of £270 million in 2009 reflects an underlying increase of £33 million (applying the 2009 year end exchange rate of $1.61:£1) and
£303 million of exchange translation loss.
The increase of £507 million in 2008 reflected an underlying decrease of £358 million (applying the 2008 year end exchange rate of $1.44:£1)
and £865 million of exchange translation gain.
The underlying increase/decrease of the available capital of Jackson in 2009 and 2008 includes the effects of capital contributions, dividends
paid to the parent company, impairment losses and also the effects of hedging transactions.
iii Other UK life assurance subsidiaries and funds
The effect from the changes in assumptions of valuation interest rates on insurance liabilities is broadly matched by the corresponding effect on
assets leaving no significant impact on the available capital.
iv Asian life assurance subsidiaries
The decrease of £281 million in 2009 reflects an underlying decrease of £152 million (applying the relevant 2009 year end exchange rates) and
£129 million of exchange translation loss. This underlying decrease of available capital includes the effects of the change to a risk-based capital
framework in Malaysia from 1 January 2009 as explained in section b above and also the sale of the Taiwan agency business in June 2009 as
described in note I1.
d Transferability of available capital
For PAC and all other UK long-term insurers, long-term business assets and liabilities must, by law, be maintained in funds separate from
those for the assets and liabilities attributable to non-life insurance business or to shareholders. Only the ‘established surplus’, the excess
of assets over liabilities in the long-term fund determined through a formal valuation, may be transferred so as to be available for other
purposes. Distributions from the with-profits sub-fund to shareholders reflect the shareholders’ one-ninth share of the cost of declared
policyholders’ bonuses.
Accordingly, the excess of assets over liabilities of the PAC long-term fund is retained within that company. The retention of
the capital enables it to support with-profits and other business of the fund by, for example, providing the benefits associated with
smoothing and guarantees. It also provides investment flexibility for the fund’s assets by meeting the regulatory capital requirements
that demonstrate solvency and by absorbing the costs of significant events or fundamental changes in its long-term business without
affecting the bonus and investment policies.
221
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Notes on the Group financial statements > D: Life assurance businesses > continued
D5: Capital position statement for life assurance businesses continued
For other UK long-term business subsidiaries, the amounts retained within the companies are at levels which provide an appropriate
level of capital strength in excess of the regulatory minimum.
For Jackson, capital retention is maintained at a level consistent with an appropriate rating by Standard & Poor’s. Currently Jackson
is rated AA. Jackson can pay dividends on its capital stock only out of earned surplus unless prior regulatory approval is obtained.
Furthermore, dividends which exceed the greater of 10 per cent of Jackson’s statutory surplus or statutory net gain from operations
for the prior year require prior regulatory approval.
For Asian subsidiaries, the amounts retained within the companies are at levels that provide an appropriate level of capital strength
in excess of the local regulatory minimum. For ring-fenced with-profits funds, the excess of assets over liabilities is retained with
distribution tied to the shareholders’ share of bonuses through declaration of actuarially determined surplus. The Singapore and
Malaysian businesses may, in general, remit dividends to the UK, provided the statutory insurance fund meets the capital adequacy
standard required under local statutory regulations.
Available capital of the non-insurance business units is transferable to the life assurance businesses after taking account of an
appropriate level of operating capital, based on local regulatory solvency targets, over and above basis liabilities. The economic capital
model described in section D1 (concentration of risks) takes into account restrictions on mobility of capital across the Group with capital
transfers to and from business units triggered at a solvency level consistent with these targets. The model takes into account restrictions
on the availability to the Group of the estate of the various with-profits funds throughout the Group.
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.
f Intra-group arrangements in respect of SAIF
Should the assets of SAIF be inadequate to meet the guaranteed benefit obligations to the policyholders of SAIF, the PAC long-term fund
would be liable to cover any such deficiency.
Due to the quality and diversity of the assets in SAIF and the ability of SAIF to revise guaranteed benefits in the event of an asset
shortfall, the directors believe that the probability of either the PAC long-term fund or the Group’s shareholders’ funds, under their
obligation to maintain the capital position of long-term funds generally, having to contribute to SAIF is remote.
The Group’s asset management operations are based in the UK, Asia and the US where they operate different models and under
different brands tailored to their markets.
Asset management in the UK is undertaken through M&G which is made up of three distinct businesses, being Retail, Wholesale and
Finance, and whose operations include retail asset management, institutional fixed income, pooled life and pension funds, property and
private finance.
Asset management in Asia serves both the life companies in Asia by managing the life funds and funds underlying the investment
linked products and third-party customers through mutual fund business. Asia offers mutual fund investment products in a number of
countries within the region, allowing customers to participate in debt, equity and money market investments.
Asset management in the US is undertaken through PPM America which manages assets for the Group’s US, UK and Asian affiliates
plus also provides investment services to other affiliated and unaffiliated institutional clients including CDOs, private investment funds,
institutional accounts and mutual funds. In addition, broker-dealer activities are undertaken in the US where trades in securities are
carried out for both third-party customers and for its own account.
Other operations covers unallocated corporate activities and includes the head office functions.
222 Prudential plc > Annual Report 2009
Notes on the Group financial statements > E: Asset management
(including US broker-dealer) and other operations
E1: Income statement for asset management operations
a The profit included in the income statement in respect of asset management operations for the year is as follows:
Revenue*
Charges
Profit before tax
Comprising:
Operating profit based on longer-term investment returns†
Short-term fluctuations in investment returns‡
Shareholders’ share of actuarial gains and losses on defined
benefit pension schemes
Profit before tax
2009 £m
US
500
(496)
4
4
–
–
4
Asia
217
(162)
55
55
–
–
55
Asset management operations
2008 £m
Total
1,516
(1,163)
353
297
70
(14)
353
Total
664
(524)
140
345
(195)
(10)
140
M&G
799
(505)
294
238
70
(14)
294
*Included within revenue for M&G of £799 million (2008: £53 million) are realised and unrealised net gains of £176 million (2008: losses of £673 million) in
respect of consolidated investment funds and Prudential Capital. The investment funds are managed on behalf of third-parties and are consolidated under
IFRS in recognition of the control arrangements for the funds. The investment losses in respect of the investment funds are non-recourse to M&G and the
Group and are added back through charges and consequently there is no impact on the profit before tax. Excluding the anomaly in respect of the
consolidated investment funds the revenue for M&G would be £697 million (2008: £494 million) and the charges, £403 million (2008: £413 million.)
†No impairments were recorded in 2009. In 2008 operating profit based on longer-term investment returns includes a £28 million charge for an impairment
loss on a holding in Lehman Brothers.
‡Short-term fluctuations for M&G are primarily in respect of unrealised value movements on Prudential Capital’s bond portfolio.
b M&G operating profit based on longer-term investment returns:
Asset management fee income
Other income
Staff costs
Other costs
Underlying profit before performance-related fees
Performance-related fees
Operating profit from asset management operations
Operating profit from Prudential Capital
Total M&G operating profit based on longer-term investment returns
2009 £m
2008 £m
457
13
(205)
(100)
165
12
177
61
238
455
25
(184)
(111)
185
43
228
58
286
The difference between the fees and other income shown above in respect of asset management operations, and the revenue figure for
M&G shown in the main table primarily relates to income and investment gains (losses) earned by Prudential Capital and by investment
funds controlled by the asset management operations which are consolidated under IFRS.
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Notes on the Group financial statements > E: Asset management
(including US broker-dealer) and other operations > continued
E2: Statement of financial position for asset management operations
Assets, liabilities and shareholders’ funds included in the Group consolidated statement of financial position in respect of asset
management operations are as follows:
Asset management operations
2009 £m
2008 £m
M&G
US
Asia
Total
Total
Assets
Intangible assets:
Goodwill
Deferred acquisition costs
Total
Other non-investment and non-cash assets
Financial investments:
Loans note i
Equity securities and portfolio holdings in unit trusts
Debt securities note ii
Other investments note v
Deposits
Total financial investments
Cash and cash equivalents note v
Total assets
Equity and liabilities
Equity
Shareholders’ equity note iii
Minority interests
Total equity
Liabilities
Intra Group debt represented by operational borrowings
at Group levelnote iv
Net asset value attributable to external holders of consolidated
unit trusts and similar funds note v
Other non-insurance liabilities
Total liabilities
Total equity and liabilities
1,153
8
1,161
607
1,413
129
1,149
106
38
2,835
820
5,423
1,326
3
1,329
2,038
410
1,646
4,094
5,423
16
–
16
161
–
–
–
2
13
15
40
232
111
–
111
–
–
121
121
232
61
–
61
82
–
8
15
5
12
40
110
293
222
–
222
–
–
71
71
293
1,230
8
1,238
850
1,413
137
1,164
113
63
2,890
970
5,948
1,659
3
1,662
2,038
410
1,838
4,286
5,948
1,230
6
1,236
295
1,763
23
991
462
64
3,303
1,472
6,306
1,642
1
1,643
1,278
1,065
2,320
4,663
6,306
Notes
i
Loans
The M&G loans of £1,413 million (2008: £1,763 million) relate to loans and receivables managed by Prudential Capital. These assets are generally
secured but have no external credit ratings. Internal ratings prepared by the Group’s asset management operations as part of the risk management
process, are £92 million A+ to A- (2008: £nil), £835 million BBB+ to BBB- (2008: £1,100 million), £330 million BB+ to BB- (2008: £663 million) and
£156 million B+ to B- (2008: £nil).
ii Debt securities
Of the total debt securities of £1,164 million in 2009 (2008: £991 million) £1,149 relates to M&G (2008: £975 million), of which £1,072 million were
rated AAA to A– by Standard and Poor’s or Aaa rated by Moody’s (2008: £959 million).
iii M&G includes those assets and liabilities in respect of Prudential Capital.
iv Intra Group debt represented by operational borrowings at Group level
Operational borrowings for M&G are in respect of Prudential Capital’s short-term fixed income security programme and comprise £2,031 million
(2008: £1,269 million) of commercial paper and £7 million (2008: £9 million) of medium-term notes.
v Consolidated unit trusts and similar funds
The M&G statement of financial position shown above includes investment funds which are managed on behalf of third-parties. In respect of these
funds, the statement of financial position includes cash and cash equivalents of £269 million, £158 million of other investments, £(17) million of other
net assets and liabilities and the net asset value attributable to external unit holders of £410 million which are non-recourse to M&G and the Group.
224 Prudential plc > Annual Report 2009
E3: Regulatory capital positions
Asset management operations in the UK, Hong Kong, Singapore, Malaysia, Vietnam and China are subject to regulatory requirements
based on fixed operating expenses and other operating considerations. The movement in the year of the surplus regulatory capital
position of these operations, combined with the movement in the IFRS basis shareholders’ funds for other asset management operations,
is as follows:
Capital surplus position
Beginning of year
Exchange movement
Movement in capital requirement
Gains during the year
Capital injection
Distributions made
End of year
2009 £m
2008 £m
M&G
US
Asia
Total
Total
Asset management operations
157
(1)
73
(8)
–
–
221
113
(4)
–
5
–
(5)
109
160
(11)
(6)
41
1
(31)
154
430
(16)
67
38
1
(36)
484
272
67
(3)
136
–
(42)
430
The movement in the year reflects changes in regulatory requirements whilst gains are driven by profits generated during the year.
Distributions consist of dividends paid up to the parent company.
The M&G figures include those for Prudential Capital.
E4: Sensitivity of profit and equity to market and other financial risk
i Currency translation
Consistent with the Group’s accounting policies, the profits of the Asia and PPM America asset management operations are translated at
average exchange rates and shareholders’ equity at the closing rate for the reporting period. For 2009, the rates for the most significant
operations are given in note B4.
A 10 per cent increase in the relevant Asian exchange rates would have reduced reported profit before tax attributable to
shareholders and shareholders’ equity, excluding goodwill attributable to Asia and PPM America asset management operations, by £5
million (2008: £5 million) and £23 million (2008: £26 million) respectively.
ii Other sensitivities to other financial risks for asset management operations
The principal sensitivities to other financial risk of asset management operations are credit risk on the bridging loan portfolio
(as described in note E2) of the Prudential Capital operation and the indirect effect of changes to market values of funds under
management. Due to the nature of the asset management operations there is limited direct sensitivity to movements in interest rates.
Total debt securities held at 31 December 2009 by asset management operations were £1,164 million (2008: £991 million), the majority
of which are held by the Prudential Capital operation. Debt securities held by M&G and Prudential Capital are in general variable rate
bonds and so market value is limited in sensitivity to interest rate movements and consequently any change in interest rates would not
have a material impact on profit or shareholder’s equity. Asset management operations do not hold significant investments in property
or equities.
E5: Other operations
Other operations consist of unallocated corporate activities relating to Group Head Office and the Asia regional head office, with net
income and expenditure for the year of negative £395 million (2008: negative £260 million) as detailed in note B1. An analysis of the
assets and liabilities of other operations is shown in note B6.
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
E
225
Notes on the Group financial statements > F: Income statement notes
F1: Segmental information
Gross premiums earned
Outward reinsurance premiums
Earned premiums, net of reinsurance
Investment return note ii
Other income
Total revenue, net of reinsurance
Benefits and claims
Outward reinsurers’ share of benefits
and claims
Movement in unallocated surplus of
with-profits funds
Benefits and claims and movements
in unallocated surplus of with-profits
funds, net of reinsurance
Acquisition costs and other operating
Year ended 31 December 2009 £m
Insurance operations
Asset management
UK
US
Asia
M&G
5,757
(122)
5,635
17,366
176
9,197
(82)
9,115
5,070
(18)
5,345
(119)
5,226
4,357
110
23,177 14,167
9,693
(18,521) (13,297)
(8,083)
214
(1,893)
12
–
39
334
(20,200) (13,285)
(7,710)
–
–
–
420
379
799
–
–
–
–
US
–
–
–
68
432
500
–
–
–
–
Unallo-
cated
segment corporate
Total
Asia
Group
total
– 20,299
(323)
–
– 20,299
(323)
–
– 19,976
74 27,355
1,222
143
– 19,976
(466) 26,889
1,234
12
217 48,553
(454) 48,099
– (39,901)
– (39,901)
–
265
–
265
– (1,559)
– (1,559)
– (41,195)
– (41,195)
expenditure
(1,508)
(383)
(1,536)
(505)
(496)
(162)
(4,590)
18 (4,572)
Finance costs: interest on core structural
borrowings of shareholder-financed
operations
Loss on sale of Taiwan agency business
–
–
(13)
–
–
(559)
–
–
–
–
–
–
(13)
(559)
(196)
–
(209)
(559)
Total charges, net of reinsurance
(21,708) (13,681)
(9,805)
(505)
(496)
(162) (46,357)
(178) (46,535)
Profit (loss) before tax (being tax
attributable to shareholders’
and policyholders’ returns) note i
Tax charge attributable to
policyholders’ returns
Profit (loss) from continuing operations
1,469
486
(112)
294
(750)
–
(68)
–
before tax attributable to shareholders
719
486
(180)
294
4
–
4
55
2,196
(632) 1,564
–
(818)
–
(818)
55
1,378
(632)
746
This is represented in the segmental analysis of profit from continuing operations before tax attributable to shareholders in note B1
as follows:
Year ended 31 December 2009 £m
Insurance operations
Asset management
UK
US
Asia
M&G
US
Asia
Unallo-
cated
segment corporate
Total
Group
total
Operating profit based on longer-term
investment returns
Short-term fluctuations in investment
returns on shareholder-backed
business
Shareholders’ share of actuarial and
other gains and losses on defined
benefit pension schemes
Loss on sale and results for Taiwan
agency business
Profit (loss) from continuing operations
657
459
410
238
108
27
31
70
(46)
–
–
–
–
(14)
(621)
–
before tax attributable to shareholders
719
486
(180)
294
4
–
–
–
4
55
1,823
(418) 1,405
–
–
–
236
(200)
36
(60)
(14)
(74)
(621)
–
(621)
55
1,378
(632)
746
226 Prudential plc > Annual Report 2009
Year ended 31 December 2008 £m
Insurance operations
Asset management
UK
US
Asia
M&G
US
–
–
–
40
369
409
–
–
–
–
–
–
–
(301)
353
52
–
–
–
–
Unallo-
cated
segment corporate
Total
Asia
Group
total
– 18,993
(204)
–
– 18,993
(204)
–
– 18,789
73 (30,000)
1,086
129
– 18,789
(202) (30,202)
1,146
60
202 (10,125)
(142) (10,267)
–
–
–
4,620
389
5,815
–
–
–
4,620
389
5,815
– 10,824
– 10,824
Gross premiums earned
Outward reinsurance premiums
Earned premiums, net of reinsurance
Investment return note ii
Other income
7,628
(61)
7,567
(20,134)
141
6,032
(67)
5,965
(5,449)
1
5,333
(76)
5,257
(4,229)
93
Total revenue, net of reinsurance note iii
(12,426)
517
1,121
Benefits and claims
Outward reinsurers’ share of benefits
and claims
Movement in unallocated surplus
of with-profits funds
Benefits and claims and movements
in unallocated surplus of with-profits
funds, net of reinsurance
Acquisition costs and other operating
expenditure
Finance costs: interest on core structural
borrowings of shareholder-financed
operations
7,048
(1,152)
(1,276)
146
205
38
4,769
–
1,046
11,963
(947)
(192)
(739)
(211)
(882)
29
(402)
(150)
(2,355)
(104)
(2,459)
–
(11)
–
Total charges, net of reinsurance note iii
11,224
(1,169)
(1,074)
(Loss) profit before tax (being tax
attributable to shareholders’
and policyholders’ returns) note i
Tax credit attributable to policyholders’
returns
(Loss) profit before tax attributable to
shareholders
(1,202)
(652)
1,579
–
377
(652)
47
45
92
–
29
81
–
81
–
–
(11)
(161)
(172)
(402)
(150)
8,458
(265)
8,193
7
–
7
52
(1,667)
(407)
(2,074)
–
1,624
–
1,624
52
(43)
(407)
(450)
This is represented in the segmental analysis of profit from continuing operations before tax attributable to shareholders in note B1
as follows:
Operating profit based on longer-term
investment returns
Short-term fluctuations in investment
returns on shareholder-backed
business
Shareholders’ share of actuarial and
other gains and losses on defined
benefit pension schemes
Results for the sold Taiwan
agency business
(Loss) profit before tax
attributable to shareholders
Year ended 31 December 2008 £m
Insurance operations
Asset management
UK
US
Asia
M&G
US
Asia
Unallo-
cated
segment corporate
Total
Group
total
589
406
231
286
(212)
(1,058)
(138)
(195)
–
–
–
–
377
(652)
(2)
(10)
1
92
–
81
7
–
–
–
7
52
1,571
(288)
1,283
–
(1,603)
(118)
(1,721)
–
–
(12)
(1)
(13)
1
–
1
52
(43)
(407)
(450)
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Notes
i
ii
The measure is the formal profit (loss) before tax measure under IFRS but is not the result attributable to shareholders.
Investment return principally comprises:
– Interest and dividends;
– Realised and unrealised gains and losses on securities and derivatives classified as fair value through profit and loss under IAS 39; and
– Realised gains and losses, including impairment losses, on securities classified as available-for-sale under IAS 39.
iii Total revenue for 2008 was negative £10,267 million whilst charges were a credit of £8,193 million. These abnormal effects arose from the basis of
preparation whereby revenue includes investment appreciation, which was negative in 2008, and charges reflect the allocation, where appropriate,
of investment return to policyholder benefits.
F
227
Notes on the Group financial statements > F: Income statement notes > continued
F2: Revenue
Long-term business premiums
Insurance contract premiums
Investment contracts with discretionary participation feature premiums
Inwards reinsurance premiums
Less: reinsurance premiums ceded
Earned premiums, net of reinsurance note iv
Realised and unrealised gains and losses on securities at fair value through profit and loss
Realised and unrealised gains and losses on derivatives at fair value through profit and loss
Realised gains and losses on available-for-sale securities, previously recognised in other
comprehensive income
Realised gains and losses on loans
Interest notes i,ii
Dividends
Other investment income
Investment income
Fee income from investment contract business and asset management notes iii,iv
Income from venture investments of the PAC with-profits funds
Other income
Total revenue
Notes
i
The segmental analysis of interest income is as follows:
Insurance operations:
UK
US
Asia
Asset management operations:
M&G
US
Asia
Total segment
Unallocated corporate
Total
2009 £m
2008 £m
19,347
789
163
(323)
19,976
18,175
1,164
(420)
(115)
5,575
1,755
755
17,575
964
454
(204)
18,789
(34,157)
(5,261)
(487)
210
6,739
2,023
731
26,889
(30,202)
1,234
–
1,234
1,109
37
1,146
48,099
(10,267)
2009
£m
3,848
1,051
522
140
2
2
5,565
10
5,575
2008
£m
4,802
1,520
49
310
1
2
6,684
55
6,739
ii
iii
Interest income includes £17 million (2008: £11 million) accrued in respect of impaired securities.
Fee income includes £1 million (2008: £7 million) relating to financial instruments that are not held at fair value through profit and loss.
These fees primarily related to prepayment fees, late fees and syndication fees.
iv The following table provides additional segmental analysis of revenue from external customers:
Revenue from external customers:
Insurance operations
Asset management
Unallocated corporate
Intragroup revenue eliminated on consolidation
Total revenue from external customers
Asia
US
UK
Intragroup
Total
2009 £m
5,336
213
–
(70)
5,479
9,097
499
–
(67)
9,529
5,822
513
12
(145)
6,202
(11)
(271)
–
282
–
20,244
954
12
–
21,210
228 Prudential plc > Annual Report 2009
Asia
US
UK
Intragroup
Total
2008 £m
Revenue from external customers:
Insurance operations
Asset management
Unallocated corporate
Intragroup revenue eliminated on consolidation
Total revenue from external customers
Revenue from external customers is made up of the following:
5,348
202
–
(73)
5,477
5,955
414
–
(45)
6,324
7,711
497
61
(172)
8,097
Earned premiums, net of reinsurance
Fee income from investment contract business and asset management (included within ‘Other income’)
Total revenue from external customers
(10)
(280)
–
290
–
2009
£m
19,976
1,234
21,210
19,004
833
61
–
19,898
2008
£m
18,789
1,109
19,898
In their capacity as fund managers to fellow Prudential Group subsidiaries, M&G, the US and the Asian asset management businesses
earn fees for investment management and related services. Intragroup fees included within asset management revenue were
£271 million (2008: £280 million) earned £134 million (2008: £162 million) by M&G, £67 million (2008: £45 million) by the US asset
management segment and £70 million (2008: £73 million) by the Asian asset management segment. In 2009, the remaining £11 million
(2008: £10 million) of intragroup revenue was recognised by UK insurance operations. These services are charged at appropriate arm’s
length prices, typically priced as a percentage of funds under management.
In Asia, revenue from external customers from no individual country exceeds 10 per cent of the Group total. The largest country is
Hong Kong with a total revenue from external customers of £1,013 million (2008: £1,170 million).
Due to the nature of the business of the Group, there is no reliance on any major customers.
F3: Acquisition costs and other operating expenditure
Acquisition costs notes i,ii
Staff and pension costs I2
Administrative and operating cost note iii
Total acquisition costs and other operating expenditure notes iv,v
2009 £m
2008 £m
1,033
1,172
2,367
4,572
1,185
913
361
2,459
Notes
i
Acquisition costs in 2009 comprise amounts related to insurance contracts of £871 million (2008: £1,048 million), and investment contracts and asset
management contracts of £162 million (2008: £137 million). These costs include amortisation of £290 million (2008: £520 million) and £15 million
(2008: £15 million) respectively.
ii Acquisition costs also include fee expenses relating to financial liabilities held at amortised cost of £nil (2008: £nil).
iii Administrative and operating costs include the movement in amounts attributable to external unit holders of the consolidated investment funds of the
Group of a charge of £615 million (2008: a credit of £963 million).
iv The total depreciation and amortisation expense is £377 million (2008: £618 million). Of this amount, £305 million (2008: £535 million) relates to
amortisation of deferred acquisition costs of insurance contracts and asset management contracts, which is primarily borne by the insurance
operations. The segmental analysis of total depreciation and amortisation expense is as follows:
2009
£m
2008
£m
Insurance operations:
UK
US
Asia
Asset management operations:
M&G
US
Asia
Total segment
Unallocated corporate
Total
25
88
246
2
2
4
367
10
377
29
283
279
6
1
4
602
16
618
229
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
F
Notes on the Group financial statements > F: Income statement notes > continued
F3: Acquisition costs and other operating expenditure continued
v
Interest expense, excluding interest on core structural borrowings of shareholder-financed operations, amounted to £89 million (2008: £278 million)
and is included within total acquisition costs and other operating expenditure as part of investment management expenses. The segmental analysis of
this interest expense is as follows:
Insurance operations:
UK
US
Asia
Asset management operations:
M&G
US
Asia
Total segment
Unallocated corporate
Total
2009
£m
2008
£m
28
32
1
–
–
–
61
28
89
66
90
–
34
–
–
190
88
278
F4: Finance costs: Interest on core structural borrowings of shareholder-financed operations
Finance costs consist of £196 million (2008: £161 million) interest on core debt of the parent company and £13 million
(2008: £11 million) on US insurance operations’ surplus notes.
F5: Tax
a Total tax (charge) credit by nature of expense
An analysis of the total tax benefit (expense) of continuing operations recognised in the income statement by nature of benefit (expense)
is as follows:
Current tax (expense) benefit:
Corporation tax
Adjustments in respect of prior years
Total current tax
Deferred tax arising from:
Origination and reversal of temporary differences
Expense in respect of a previously unrecognised tax loss, tax credit or temporary
difference from a prior period
Write down or reversal of a previous write down of a deferred tax asset
Total deferred tax (charge) credit
Total tax (charge) credit
The total tax (expense) benefit arises as follows:
Current tax (expense) benefit:
UK
Foreign
Deferred tax (charge) credit:
UK
Foreign
Total
2009 £m
2008 £m
(500)
(29)
(529)
(225)
359
134
(340)
1,629
(4)
–
(344)
(873)
(77)
(3)
1,549
1,683
2009 £m
2008 £m
(527)
(2)
(529)
(368)
24
(344)
(873)
280
(146)
134
1,478
71
1,549
1,683
The total tax charge of £873 million for 2009 (2008: credit of £1,683 million) comprises a charge of £895 million (2008: credit of £1,758
million) for UK tax and a credit of £22 million (2008: charge of £75 million) for overseas tax. This tax charge comprises tax attributable
to policyholders and unallocated surplus of with-profits funds, unit-linked policies and shareholders. The tax charge attributable to
shareholders of £55 million for 2009 (2008: credit of £59 million) comprises a charge of £176 million (2008: credit of £95 million) for
UK tax and a credit of £121 million (2008: charge of £36 million) for overseas tax.
230 Prudential plc > Annual Report 2009
The prior year adjustments primarily relate to a change in assumptions regarding available foreign tax credits on overseas dividends and
other changes that arose as a result of routine revision of tax returns.
The total deferred tax (charge) credit arises as follows:
Unrealised gains and losses on investments
Balances relating to investment and insurance contracts
Short-term timing differences
Capital allowances
Unused tax losses
Deferred tax (charge) credit
2009 £m
2008 £m
(35)
(12)
(105)
1
(193)
(344)
1,521
(239)
(29)
2
294
1,549
In 2009, a deferred tax charge of £546 million (2008: credit of £561 million) has been taken through other comprehensive income. Other
movements in deferred tax totalling a £69 million credit is mainly comprised of foreign exchange movements. When these amounts are
taken with the deferred tax charge shown above the result is an increase of £0.8 billion in the Group’s net deferred tax liability (2008:
decrease of £2.1 billion).
b Reconciliation of effective tax rate
The total tax charge is attributable to shareholders and policyholders as summarised in the income statement.
i Summary of pre-tax profit (loss) and tax (charge) credit
The income statement includes the following items:
Profit (loss) before tax
Tax (charge) credit attributable to policyholders’ returns
Profit (loss) before tax attributable to shareholders
Tax attributable to shareholders’ profits (losses):
Tax (charge) credit
Less: tax attributable to policyholders’ returns
Tax (charge) credit attributable to shareholders’ returns
Profit (loss) from continuing operations after tax
2009 £m
2008 £m
1,564
(818)
746
(873)
818
(55)
691
(2,074)
1,624
(450)
1,683
(1,624)
59
(391)
ii Overview
For the purposes of explaining the relationship between tax expense and accounting profit, it is appropriate to consider the sources of
profit and tax by reference to those that are attributable to shareholders and policyholders, as follows:
2009 £m
2008 £m
Attributable to Attributable to
policyholders*
shareholders
Total
Attributable to Attributable to
policyholders*
shareholders
Total
Profit (loss) before tax
Taxation charge:
Expected tax rate
Expected tax charge
Variance from expected tax charge note v(ii)
Actual tax (charge) credit
Average effective tax rate
746
31%
(233)
178
(55)
7%
818
1,564
(450)
(1,624)
(2,074)
100%
(818)
–
(818)
100%
67%
(1,051)
178
(873)
56%
42%
188
(129)
59
13%
100%
1,624
–
1,624
100%
87%
1,812
(129)
1,683
81%
*For the column entitled ‘Attributable to policyholders’, the profit before tax represents income, net of post-tax transfers to unallocated surplus of with-
profits funds, before tax attributable to policyholders and unallocated surplus of with-profits funds and unit-linked policies.
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
Due to the requirements of the financial reporting standards IAS 1 and IAS 12, the profit (loss) before tax and tax charge reflect the
aggregate of amounts that are attributable to shareholders and policyholders.
Profit (loss) before tax comprises profit attributable to shareholders and pre-tax profit attributable to policyholders of linked and
with-profits funds and unallocated surplus of with-profits funds.
The total tax charge for linked and with-profits business includes tax expense on unit-linked and with-profits funds attributable to
policyholders, the unallocated surplus of with-profits funds and the shareholders’ profits. This feature arises from the basis of taxation
applied to life and pension business, principally in the UK, but with similar bases applying in certain Asian operations, and is explained
in note (iii) below.
F
231
Notes on the Group financial statements > F: Income statement notes > continued
F5: Tax continued
Furthermore, the basis of preparation of Prudential’s financial statements incorporates the additional feature that, as permitted under
IFRS 4, the residual equity of the Group’s with-profits funds, i.e. unallocated surplus, is recorded as a liability with transfers to and from
that liability reflected in pre-tax profits. This gives rise to anomalous effective tax rates for profits attributable to policyholders (as
described in note (iv) below).
In meeting the reconciliation requirements set out in paragraph 81(c) of IAS 12, the presentation shown in this disclosure note seeks
to ensure that the explanation of the relationship between tax expense and accounting profit draw properly the distinction between the
elements of the profit and tax charge that are attributable to policyholders and shareholders as explained below in notes (iv) and (v)
respectively. Due to the nature of the basis of taxation of UK life and pension business (as described in note (iii) below), and the
significance of the results of the business to the Group, it is inappropriate to seek to explain the effective tax rate on profit before tax by
the traditional approach that would apply for other industries.
The shareholder elements are the components of the profit and tax charge that are of most direct relevance to investors, and it is this
aspect that the IAS 12 reconciliation requirement is seeking to explain for companies that do not need to account for both with-profits
and unit-linked funds, where tax is borne by the Company on the policyholders’ behalf and which is not contemplated by the IFRS
requirement.
iii Basis of taxation for UK life and pension business
Different rules apply under UK tax law for taxing pension business and life insurance business and there are detailed rules for
apportioning the investment return and profits of the fund between the types of business.
The investment return referable to pension business, and some other less significant classes of business, is exempt from taxation,
but tax is charged on the profit that shareholders derive from writing such business at the corporate rate of tax. The rules for taxing life
insurance business are more complex. Initially, the UK regime seeks to tax the regulatory basis investment return less management
expenses (I-E) on this business as it arises. However, in determining the actual tax charge, a calculation of the shareholder profits for
taxation purposes from writing life insurance business also has to be made and compared with the I-E profit.
If the shareholder profit is higher than the I-E amount, extra income is attributable to the I-E calculation until the I-E profit equals the
shareholder profit. If on the other hand, the I-E profit is the greater, then an amount equal to the shareholder profit is taxed at the
corporate rate of tax, with the remainder of the I-E profit being taxed at the lower policyholder rate of tax.
The purpose of this approach is to ensure that the Company is always at a minimum taxed on the profit, as defined for taxation
purposes by reference to the Company’s regulatory returns (rather than IFRS basis results), that it has earned. The shareholders’ portion
of the long-term business is taxed at the shareholders’ rate, with the remaining portion taxed at rates applicable to the policyholders.
It is to be noted that the calculations described are determined using data from the regulatory basis returns rather than the IFRS
basis results. The differences between the regulatory and accounting bases are very significant and extremely complex rendering any
explanation in general purpose financial statements to be of little if any use to users.
iv Profits attributable to policyholders and related tax
As noted above, it is necessary under IFRS requirements to include the total tax charge of the Company (both policyholder and
shareholder elements) in the tax charge disclosed in the income statement.
For with-profits business, total pre-tax profits reflect the aggregate of profits attributable to policyholders and shareholders.
However, amounts attributable to the equity of with-profits funds are carried in the liability for unallocated surplus. Also, as described
in note (iii), UK with-profits business is taxed on a basis that affects policyholders’ unallocated surplus of with-profits funds and
shareholders. For the PAC with-profits sub-fund, transfers to and from unallocated surplus are recorded in the income statement,
so that after charging the total tax borne by the fund, the net balance reflects the statutory transfer from the fund for the year. The
statutory transfer represents 10 per cent of the actuarially determined surplus for the year that is attributable to shareholders.
For SAIF, similar transfers are made. However, in the case of SAIF, a net nil balance is derived, reflecting the lack of shareholder
interest in the financial performance of the fund (other than through asset management arrangements).
The accounting anomaly that arises under IFRS is that due to the fact that the net of tax profit attributable to with-profits
policyholders is zero, the Company’s presentation of pre-tax profit attributable to policyholders reflects an amount that is the mirror
image of the tax charge attributable to policyholders.
For unit-linked business, pre-tax profits also reflect the aggregate of profits attributable to policyholders and shareholders. The pre-
tax profits attributable to policyholders represent fees earned that are used to pay tax borne by the Company on policyholders’ behalf.
The net of tax profit attributable to policyholders for unit-linked business is thus zero.
The combined effect of these features is such that providing a reconciliation of the tax charge attributable to policyholders to an
expected charge based on the standard corporate rate of tax on IFRS basis profits attributable to policyholders is not relevant.
In summary, for accounting purposes, in all cases and for all reporting periods, the apparent effective rate for profit attributable to
policyholders and unallocated surplus is 100 per cent. However, it is to be noted that the 100 per cent rate does not reflect a rate paid on
the profits attributable to policyholders. It instead reflects the basis of accounting for unallocated surplus coupled with the distinction
made for performance reporting between sources of profit attributable to shareholders, policyholders and unallocated surplus and IFRS
requirements in respect of reporting of all pre-tax profits and all tax charges irrespective of policyholder or shareholder economic interest.
232 Prudential plc > Annual Report 2009
v Reconciliation of tax charge on profit (loss) attributable to shareholders
Asian
insurance
operations
US
insurance
operations
2009 £m
UK
insurance
operations
Other
operations
Total
Profit (loss) before tax attributable to shareholders:
Operating profit based on longer-term
investment returns note iii
Short-term fluctuations in investment returns
Shareholders’ share of actuarial and other gains and
losses on defined benefit pension schemes
Loss on sale and results for Taiwan agency business
Total
Expected tax rates: note i
Operating profit based on longer-term
investment returnsnote iii
Short-term fluctuations in investment returns
Shareholders’ share of actuarial and other gains
and losses on defined benefit pension schemes
Loss on sale and results for Taiwan agency business
Expected tax (charge) credit based on expected tax rates:
Operating profit based on longer-term
investment returns note iii
Short-term fluctuations in investment returns
Shareholders’ share of actuarial and other gains and losses
on defined benefit pension schemes
Loss on sale and results for Taiwan agency business
Total
Variance from expected tax charge: note ii
Operating profit based on longer-term
investment returns note iii
Short-term fluctuations in investment returns
Shareholders’ share of actuarial and other gains and losses
on defined benefit pension schemes
Loss on sale and results for Taiwan agency business
Total
Actual tax (charge) credit:
Operating profit based on longer-term
investment returns note iii
Short-term fluctuations in investment returns
Shareholders’ share of actuarial and other gains and losses
on defined benefit pension schemes
Loss on sale and results for Taiwan agency business
Total
Actual tax rate: Operating profit based on
longer-term investment returns
Total
410
31
–
(621)
(180)
24%
25%
–
25%
(98)
(8)
–
155
49
35
15
–
(137)
(87)
(63)
7
–
18
(38)
459
27
–
–
486
35%
35%
–
–
(161)
(9)
–
–
657
108
(46)
–
719
28%
28%
28%
–
(184)
(30)
13
–
(170)
(201)
77
195
–
–
272
(84)
186
–
–
102
(29)
–
–
–
(29)
(213)
(30)
13
–
(230)
32%
32%
(121)
(130)
(28)
–
(279)
28%
36%
28%
–
34
47
8
–
89
8
14
–
–
22
42
61
8
–
111
35%
40%
1,405
36
(74)
(621)
746
29%
–
28%
25%
(409)
–
21
155
(233)
91
224
–
(137)
178
(318)
224
21
18
(55)
23%
7%
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
15%
(21)%
18%
(21)%
Notes
i
Expected tax rates for profit (loss) attributable to shareholders:
• The expected tax rates shown in the table above reflect the corporate tax rates generally applied to taxable profits of the relevant country jurisdictions.
• For Asian operations the expected tax rates reflect the corporate tax rates weighted by reference to the source of profits of operations contributing
to the aggregate business result.
• The expected tax rate for Other operations reflects the mix of business between UK and overseas operations, which are taxed at a variety of rates.
The rates will fluctuate from year to year dependent on the mix of profits.
ii
For 2009, the principal variances arise from differences between the standard corporation tax rate and actual rates due to a number of factors, including:
a For Asian long-term operations, profits in certain countries which are not taxable partly offset by the inability to fully recognise deferred tax assets
on losses being carried forward;
b For Jackson, the ability to fully recognise deferred tax assets on losses brought forward which we were previously unable to recognise together
with income subject to a lower level of taxation and the benefit of a deduction from taxable income of a proportion of dividends received
attributable to the variable annuity business;
c For UK insurance operations, adjustments in respect of the prior year tax charge and different tax bases of UK life business;
d For Other operations, the ability to now recognise a deferred tax asset on various tax losses which we were previously unable to recognise offset
by adjustments in respect of the prior year tax charge; and
e The actual tax rate in relation to Asia excluding the result for the sold Taiwan agency business would have been 13 per cent for the period.
iii Operating profit based on longer-term investment returns is net of attributable restructuring costs and development expenses.
F
233
Notes on the Group financial statements > F: Income statement notes > continued
F5: Tax continued
Profit (loss) before tax attributable to shareholders:
Operating profit based on longer-term
investment returns note iii
Short-term fluctuations in investment returns
Shareholders’ share of actuarial and other gains
and losses on defined benefit pension schemes
Results for sold Taiwan agency business
Total
Expected tax rates:note i
Operating profit based on longer-term
investment returnsnote iii
Short-term fluctuations in investment returns
Shareholders’ share of actuarial and other gains
and losses on defined benefit pension schemes
Results for sold Taiwan agency business
Expected tax credit (charge) based on expected tax rates:
Operating profit based on longer-term
investment returnsnote iii
Short-term fluctuations in investment returns
Shareholders’ share of actuarial and other gains
and losses on defined benefit pension schemes
Results for sold Taiwan agency business
Total
Variance from expected tax charge:note ii
Operating profit based on longer-term
investment returnsnote iii
Short-term fluctuations in investment returns
Shareholders’ share of actuarial and other gains
and losses on defined benefit pension schemes
Results for sold Taiwan agency business
Total
Actual tax credit (charge):
Operating profit based on longer-term
investment returnsnote iii
Short-term fluctuations in investment returns
Shareholders’ share of actuarial and other gains
and losses on defined benefit pension schemes
Results for sold Taiwan agency business
Total
Actual tax rate: Operating profit based on longer-term
investment returns
Total
Asian
insurance
operations
US
insurance
operations
2008 £m
UK
insurance
operations
Other
operations
Total
231
(138)
406
(1,058)
(2)
1
92
23%
28%
25%
25%
(54)
38
1
–
(15)
(51)
(3)
–
(4)
(58)
(105)
35
1
(4)
(73)
45%
79%
–
–
(652)
35%
35%
–
–
(142)
370
–
–
228
17
(173)
–
–
(156)
(125)
197
–
–
72
31%
11%
589
(212)
–
–
377
28%
28%
–
–
(165)
59
–
–
(106)
57
(8)
–
–
49
(108)
51
–
–
(57)
18%
15%
57
(313)
(11)
–
(267)
17%
28%
28%
–
(10)
88
3
–
81
56
(19)
(1)
–
36
46
69
2
–
117
(81%)
44%
1,283
(1,721)
(13)
1
(450)
29%
32%
27%
25%
(371)
555
4
–
188
79
(203)
(1)
(4)
(129)
(292)
352
3
(4)
59
23%
13%
Notes
i
ii
Expected tax rates for profit attributable to shareholders:
The tax rate of 23 per cent reflects the mix of business between UK and overseas operations, which are taxed at a variety of rates. The rate will
fluctuate from year to year dependent on the mix of profits between jurisdictions.
For 2008, the principal variances arise from differences between the standard corporation tax rate and actual rates due to a number of factors,
including:
a For Asian long-term operations, tax losses in several jurisdictions which are not expected to be available for relief against future profits, and losses
on investments in jurisdictions which do not provide corresponding tax relief;
b For Jackson, the inability to fully recognise deferred tax assets on losses being carried forward which has partially been offset by the benefit of a
deduction from taxable income of a proportion of dividends received attributable to the variable annuity business;
c For UK insurance operations, prior year adjustments arising from the routine revisions of tax returns, the settlement of outstanding issues with
HMRC at an amount below that previously provided and the different tax bases of UK life business; and
d For Other operations, the settlement of issues with HMRC at amounts below those previously provided and a reduction in amounts previously
provided on outstanding issues with HMRC which has been partially offset by the inability to recognise a deferred tax asset on various tax losses.
iii Operating profit based on longer-term investment returns is net of attributable restructuring costs and development expenses.
234 Prudential plc > Annual Report 2009
F6: Allocation of investment return between policyholders and shareholders
Investment return is attributable to policyholders and shareholders. A key feature of the accounting policies under IFRS is that the
investment return included in the income statement relates to all investment assets of the Group, irrespective of whether the return
is attributable to shareholders, or to policyholders or the unallocated surplus of with-profits funds, the latter two of which have no net
impact on shareholders’ profit. The table below provides a breakdown of the investment return for each regional operation attributable
to each type of business.
Asian operations
Policyholders returns
Assets backing unit-linked liabilities
With-profits business
Shareholder returns
Total
US operations
Policyholders returns
2009 £m
2008 £m
2,539
1,519
4,058
373
4,431
(2,552)
(1,611)
(4,163)
7
(4,156)
Assets held to back (separate account) unit-linked liabilities
3,760
(5,925)
Shareholder returns
Realised gains and losses (including impairment losses on available-for-sale bonds)
Value movements on derivative hedging programme for general account business
Interest/dividend income and value movements on other financial instruments
for which fair value movements are booked in the income statement
Total
UK operations
Policyholder returns
Scottish Amicable Insurance Fund (SAIF)
Assets held to back unit-linked liabilities
With-profits fund (excluding SAIF)
Shareholder returns
Prudential Retirement Income Limited (PRIL)
Other business
Total
Unallocated corporate
Shareholder returns
Group Total
Policyholder returns
Shareholder returns
Total
(529)
340
1,567
1,378
5,138
1,438
2,947
10,461
14,846
1,827
1,113
2,940
(651)
(311)
1,478
516
(5,409)
(2,095)
(2,971)
(14,595)
(19,661)
(684)
(90)
(774)
17,786
(20,435)
(466)
(202)
22,664
4,225
26,889
(29,749)
(453)
(30,202)
F
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The returns as shown in the table above, are delineated between those returns allocated to policyholders and those allocated to
shareholders. In making this distinction, returns allocated to policyholders are those from investments in which shareholders have no
direct economic interest, namely:
• Unit-linked business in the UK, Asia and SAIF in the UK, for which the investment return is wholly attributable to policyholders;
• Separate account business of US operations, the investment return of which is also wholly attributable to policyholders; and
• With-profits business (excluding SAIF) in the UK and Asia (in which the shareholders’ economic interest, and the basis of recognising
IFRS basis profits, is restricted to a share of the actuarially determined surplus for distribution (in the UK 10 per cent)). Except for this
surplus the investment return of the with-profit funds is attributable to policyholders (through the asset-share liabilities) or the
unallocated surplus, which is accounted for as a liability under IFRS 4.
F
235
Notes on the Group financial statements > F: Income statement notes > continued
F6: Allocation of investment return between policyholders and shareholders continued
The investment return related to the types of business above does not impact shareholders’ profits directly. However there is an indirect
impact, for example, investment-related fees or the effect of investment return on the shareholders’ share of the cost of bonuses of with-
profits funds.
Investment returns for unit-linked and similar products have reciprocal impact on benefits and claims, with a decrease in market
returns on the attached pool of assets affecting policyholder benefits on these products. Similarly for with-profits funds there is a close
correlation between increases or decreases in investment returns and the level of combined charge for policyholder benefits and
movement on unallocated surplus that arises from such returns.
Shareholder returns
For shareholder-backed non-participating business of the UK (comprising PRIL and other non-linked non-participating business) and
of the Asian operations, the investment return is not directly attributable to policyholders and therefore does impact shareholders’ profit
directly. However, it should be noted that for UK shareholder-backed annuity business, principally PRIL, where the durations of asset and
liability cash flows are closely matched, the discount rate applied to measure liabilities to policyholders (under ‘grandfathered’ UK GAAP
and under IFRS 4) reflects movements in asset yields (after allowances for the future defaults) of the backing portfolios. Therefore, the
net impact on the shareholders’ profits of the investment return of the assets backing liabilities of the UK shareholder-backed annuity
business is after taking into account the consequential effect on the movement in policyholder liabilities.
Changes in shareholder investment returns for US operations reflect primarily movements in the investment income, movements
in the value of the derivative instruments held to manage the general account assets and liability portfolio, and realised gains and losses.
However, separately reflecting Jackson’s types of business an allocation is made to policyholders through the application of crediting
rates. The shareholder investment return for US operations also includes the fair value movement of the derivatives and the movement
on the related liabilities of the variable annuity guarantees under Jackson’s dynamic hedging programme.
The majority of the investments held to back the US non-participating business are debt securities for which the available-for-sale
designation is applied for IFRS basis reporting. Under this designation the return included in the income statement reflects the aggregate
of investment income and realised gains and losses (including impairment losses). However, movements in unrealised appreciation or
depreciation are recognised in other comprehensive income. The return on these assets is attributable to shareholders.
F7: Benefits and claims and movements in unallocated surplus of with-profits funds, net of reinsurance
Benefits and claims represent payments, including final bonuses, to policyholders in respect of maturities, surrenders and deaths plus
the change in technical provisions (which primarily represents the movement in amounts owed to policyholders). Benefits and claims
are amounts attributable to policyholders. The movement in unallocated surplus of with-profits funds represents the transfer to (from)
the unallocated surplus each year through a charge (credit) to the income statement of the annual excess (shortfall) of income over
expenditure of the with-profits funds, after declaration and attribution of the cost of bonuses to policyholders and shareholders.
Benefits and claims and movements in unallocated surplus of with-profits funds net of reinsurance can be further analysed as follows:
Claims incurred
Increase in policyholder liabilities
Movement in unallocated surplus of with-profits funds
Claims incurred
Decrease in policyholder liabilities
Movement in unallocated surplus of with-profits funds
Asia
(1,814)
(6,230)
334
(7,710)
Asia
(1,552)
314
1,046
(192)
2009 £m
US
UK
Total
(4,092)
(9,193)
–
(9,875)
(8,432)
(1,893)
(15,781)
(23,855)
(1,559)
(13,285)
(20,200)
(41,195)
2008 £m
US
UK
Total
(3,666)
2,719
–
(10,992)
18,186
4,769
(947)
11,963
(16,210)
21,219
5,815
10,824
236 Prudential plc > Annual Report 2009
Notes on the Group financial statements > G: Financial assets and liabilities
G1: Financial instruments – designation and fair values
The Group designates all financial assets as either fair value through profit and loss, available-for-sale, or as loans and receivables.
Financial liabilities are designated as either fair value through profit and loss, amortised cost, or as investment contracts with discretionary
participating features accounted for under IFRS 4 as described in note A4.
Financial assets
Cash and cash equivalents
Deposits
Equity securities and portfolio holdings in unit trusts
Debt securitiesnote i
Loansnote ii
Other investmentsnote iii
Accrued investment income
Other debtors
Financial liabilities
Core structural borrowings of shareholder-financed
operationsnotes i,H13
Operational borrowings attributable to
shareholder-financed operationsH13
Borrowings attributable to with-profits fundsH13
Obligations under funding, securities lending and sale
and repurchase agreements
Net asset value attributable to unit holders of
consolidated unit trust and similar funds
Investment contracts with discretionary participation
featuresnote iv
Investment contracts without discretionary participation
features
Other creditors
Derivative liabilities
Other liabilities
Fair value
through
profit
and loss
–
–
69,354
79,083
–
5,132
–
–
153,569
Fair value
through
profit
and loss
2009 £m
Available-
for-sale
Loans and
receivables
–
–
–
22,668
–
–
–
–
22,668
5,307
12,820
–
–
8,754
–
2,473
762
30,116
2009 £m
Total
carrying
value
5,307
12,820
69,354
101,751
8,754
5,132
2,473
762
206,353
Fair value
5,307
12,820
69,354
101,751
8,686
5,132
2,473
762
Amortised
cost
IFRS 4
basis value
Total
carrying
value
Fair value
–
–
–
–
–
3,394
3,424
2,751
1,284
2,751
1,281
3,482
3,540
3,809
3,809
24,880
24,880
–
–
3,394
–
105
2,751
1,179
–
3,482
3,809
–
13,840
–
1,501
–
19,255
–
–
1,965
1,612
–
877
–
–
–
–
15,260
24,880
15,805
1,612
1,501
877
59,395
15,866
1,612
1,501
877
F
I
N
A
N
C
I
A
L
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A
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E
N
T
S
G
237
Notes on the Group financial statements > G: Financial assets and liabilities > continued
G1: Financial instruments – designation and fair values continued
Financial assets
Cash and cash equivalents
Deposits
Equity securities and portfolio holdings in unit trusts
Debt securitiesnote i
Loansnote ii
Other investmentsnote iii
Accrued investment income
Other debtors
Financial liabilities
Core structural borrowings of shareholder-financed
operationsnotes i,H13
Operational borrowings attributable to
shareholder-financed operationsH13
Borrowings attributable to with-profits fundsH13
Obligations under funding, securities lending and
sale and repurchase agreements
Net asset value attributable to unit holders of
consolidated unit trust and similar funds
Investment contracts with discretionary participation
featuresnote iv
Investment contracts without discretionary
participation features
Other creditors
Derivative liabilities
Other liabilities
Fair value
through
profit
and loss
–
–
62,122
71,225
–
6,301
–
–
139,648
Fair value
through
profit
and loss
–
–
158
–
3,843
–
11,616
–
4,832
–
20,449
2008 £m
Available-
for-sale
Loans and
receivables
–
–
–
23,999
–
–
–
–
23,999
5,955
7,294
–
–
10,491
–
2,513
1,232
27,485
2008 £m
Total
carrying
value
5,955
7,294
62,122
95,224
10,491
6,301
2,513
1,232
191,132
Fair value
5,955
7,294
62,122
95,224
10,043
6,301
2,513
1,232
Amortised
cost
IFRS 4
basis value
Total
carrying
value
Fair value
2,958
1,977
1,150
5,572
–
–
2,885
1,496
–
890
–
–
–
–
–
2,958
1,977
1,308
5,572
3,843
23,446
23,446
–
–
–
–
14,501
1,496
4,832
890
60,823
16,928
23,446
2,137
1,977
1,320
5,676
3,843
–
14,568
1,496
4,832
890
Notes
i
As at 31 December 2009, £659 million (2008: £620 million) of convertible bonds were included in debt securities and £347 million
(2008: £363 million) were included in borrowings.
Loans and receivables are reported net of allowance for loan losses of £44 million (2008: £27 million).
ii
iii See note G3 for details of the derivative assets included. The balance also contains the PAC with-profits fund’s participation in various investment
funds and limited liability property partnerships.
iv It is impractical to determine the fair value of investment contracts with discretionary participation features due to the lack of a reliable basis to
v
measure such features.
For financial liabilities designated as fair value through profit and loss there was no impact on profit from movements in credit risk during 2009
and 2008.
238 Prudential plc > Annual Report 2009
Determination of fair value
The fair values of the financial assets and liabilities as shown in the table above have been determined on the following bases.
The fair values of the financial instruments for which fair valuation is required under IFRS are determined by the use of current market
bid prices for quoted investments, or by using quotations from independent third-parties, such as brokers and pricing services or by using
appropriate valuation techniques. Investments valued using valuation techniques include financial investments which by their nature do
not have an externally quoted price based on regular trades and financial investments for which markets are no longer active as a result of
market conditions e.g. market illiquidity. The valuation techniques used include comparison to recent arm’s length transactions, reference
to other instruments that are substantially the same, discounted cash flow analysis, option adjusted spread models and, if applicable,
enterprise valuation. These techniques may include a number of assumptions relating to variables such as credit risk and interest rates.
Changes in assumptions relating to these variables could positively or negatively impact the reported fair value of these instruments.
When determining the inputs into the valuation techniques used priority is given to publicly available prices from independent sources,
when available, but overall the source of pricing is chosen with the objective of arriving at a fair value measurement which reflects the
price at which an orderly transaction would take place between market participants on the measurement date.
The fair value estimates are made at a specific point in time, based upon available market information and judgements about the
financial instruments, including estimates of the timing and amount of expected future cash flows and the credit standing of
counterparties. Such estimates do not reflect any premium or discount that could result from offering for sale at one time the Group’s
entire holdings of a particular financial instrument, nor do they consider the tax impact of the realisation of unrealised gains or losses
from selling the financial instrument being fair valued. In some cases the fair value estimates cannot be substantiated by comparison to
independent markets, nor can the disclosed value be realised in immediate settlement of the financial instrument.
At 31 December 2008 illiquid market conditions resulted in inactive markets for certain of the Group’s financial instruments namely
certain asset-backed securities held by Jackson. As a result, there was generally limited observable market information for these
instruments. Fair value estimates for financial instruments deemed to be in an illiquid market are based on judgements regarding current
economic conditions, liquidity discounts, currency, credit and interest rate risks, loss experience and other factors. These fair values are
estimates and involve considerable uncertainty and variability as a result of the inputs selected and may differ significantly from the
values that would have been used had the ready market existed, and the differences could be material. At 31 December 2008 Jackson
utilised internal valuation models as best estimate of fair values of all non-agency Residential Mortgage-Backed Securities (RMBS) and
Asset-Backed Securities (ABS) and certain Commercial Mortgage-Backed Securities (CMBS). The use of internal models for these
securities (which are accounted for on an available-for-sale basis) resulted in a fair value that was higher than those provided from pricing
services and brokers of £760 million on a total amortised cost of £3.5 billion. During 2009, improvements were observed in the level of
liquidity for these sectors of structured securities with the result that Jackson was able to rely on external prices for these securities as
the most appropriate measure of fair value. At 31 December 2009, nearly all of the non-agency RMBS, ABS and certain CMBS which at
31 December 2008 were valued using internal models due to the dislocated market conditions in 2008 were valued using external prices.
The loans and receivables have been shown net of provisions for impairment. The fair value of loans has been estimated from
discounted cash flows expected to be received. The rate of discount used was the market rate of interest.
The estimated fair value of derivative financial instruments reflects the estimated amount the Group would receive or pay in an arm’s
length transaction. This amount is determined using quoted prices if exchange listed, quotations from independent third-parties or
valued internally using standard market practices. In accordance with the Group’s risk management framework, all internally generated
valuations are subject to assessment against external counterparties’ valuations.
The fair value of borrowings is based on quoted market prices, where available.
Section A4 provides details of the determination of fair value for investment contracts without fixed and guaranteed terms (notably
UK unit-linked policies). 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.
Level 1, 2 and 3 fair value measurement hierarchy of Group financial instruments
In March 2009 IFRS 7 ‘Financial Instruments: Disclosures’ was amended by the IASB to require certain additional disclosures to be
included in IFRS financial statements. This includes, as is presented below, a table of financial instruments carried at fair value analysed
by level of the IFRS 7 defined fair value hierarchy. This hierarchy is based on the inputs of the fair value measurement and reflects the
lowest level input that is significant to that measurement. IFRS 7 does not require comparatives to be provided in the year of adoption
but we have chosen to provide the table at both 31 December 2009 and 31 December 2008.
F
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G
239
Notes on the Group financial statements > G: Financial assets and liabilities > continued
G1: Financial instruments – designation and fair values continued
The classification criteria and its application to Prudential can be summarised as follows:
Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities
Level 1 principally includes exchange listed equities, mutual funds with quoted prices, exchange traded derivatives such as futures and
options, and national government bonds unless there is evidence that trading in a given instrument is so infrequent that the market could not
possibly be considered active. It also includes other financial instruments (including net assets attributable to unit holders of consolidated
unit trusts and similar funds) where there is clear evidence that the year end valuation is based on a traded price in an active market.
Level 2: Inputs other than quoted prices included within level 1 that are observable either directly (i.e. as prices) or indirectly
(i.e. derived from prices)
Level 2 principally includes corporate bonds and other non-national government debt securities which are valued using observable
inputs, together with over-the-counter derivatives such as forward exchange contracts and non-quoted investment fund valued with
observable inputs. It also includes net assets attributable to unitholders of consolidated unit trusts and similar funds and investment
contract liabilities that are valued using observable inputs.
The nature of Prudential’s operations in the US and the UK mean that a significant proportion of the assets backing non-linked
shareholder backed business are held in corporate bonds, structured securities and other non-national government debt securities.
These assets, in line with market practice, are generally valued using independent pricing providers in the US and third party broker
quotes in the UK and Asia either directly or via third parties such as IDC or Bloomberg. Such assets have generally been classified as level
2 as the nature of broker quotations means that it does not strictly meet the definition of a level 1 asset. However these valuations are
determined using independent external quotations from multiple sources and are subject to a number of monitoring controls such as
monthly price variances, stale price reviews and variance analysis on prices achieved on subsequent trades.
In addition level 2 includes debt securities that are valued internally using standard market practices. Of the total level 2 debt
securities of £83,301 million at 31 December 2009, £6,426 million are valued internally. The majority of such securities use matrix pricing,
which is based on assessing the credit quality of the underlying borrower to derive a suitable discount rate relative to government
securities. Under matrix pricing, the debt securities are priced taking the credit spreads of comparable quoted public debt securities and
applying these to the equivalent debt instruments factoring a specified liquidity premium. The majority of the parameters used in this
valuation technique are readily observable in the market and, therefore, are not subject to interpretation.
Level 3: Significant inputs for the asset or liability that are not based on observable market data (unobservable inputs)
Level 3 principally includes investments in private equity funds, investments in property funds which are exposed to bespoke properties
or risks, investments which are internally valued or subject to a significant number of unobservable assumptions and certain derivatives
which are bespoke or long dated. It also includes debt securities which are rarely traded or traded only in privately negotiated
transactions and hence where it is difficult to assert that these have been based on observable market data. The inherent nature of the
vast majority of these assets means that, in normal market conditions, there is unlikely to be significant change in the specific underlying
assets classified as level 3.
At 31 December 2009 the Group held £5,190 million, three per cent of the fair valued financial instruments, within level 3.
Of this amount £3,510 million was held by the Group’s participating funds and therefore shareholders’ profit and equity are not
impacted by movements in the valuation of these financial instruments. Total level 3 assets represented 3.7 per cent of the total assets
of the participating funds at 31 December 2009. Total level 3 liabilities were £348 million out of total participating fund liabilities of
£104,817 million at 31 December 2009.
Of the £1,684 million level 3 items, net of derivative liabilities which support non-linked shareholder-backed business (3.6 per cent
of the total assets net of derivative liabilities backing this business), £1,653 million are externally valued and £31 million are internally
valued. Internal valuations, which represent only 0.04 per cent of the total assets net of derivative liabilities supporting non-linked
shareholder-backed business, are inherently more subjective than external valuations.
If the value of all level 3 investments backing non-linked shareholder-backed business was varied by 10 per cent, the change in
valuation would be £3 million, which would reduce shareholders’ equity by this amount before tax. Of this amount a £5 million increase
would pass through the income statement substantially as part of short-term fluctuations outside of operating profit offset by a £8 million
decrease included as part of other comprehensive income, being unrealised movements on assets classified as available-for-sale.
240 Prudential plc > Annual Report 2009
With-profits
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Borrowing attributable to the with-profits fund held at fair value
Investment contract without discretionary participation features held at fair value
Net asset value attributable to unit holders of consolidated unit trusts
and similar funds
Total
Percentage of total
Unit-linked and variable annuity
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Investment contract without discretionary participation features held at fair value
Net asset value attributable to unit holders of consolidated unit trusts
and similar funds
Total
Percentage of total
Non-linked shareholder-backed
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Investment contract without discretionary participation features held at fair value
Net asset value attributable to unit holders of consolidated unit trusts
and similar funds
Total
Percentage of total
Group total
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Borrowing attributable to the with-profits fund held at fair value
Investment contract without discretionary participation features held at fair value
Net asset value attributable to unit holders of consolidated unit trusts
and similar funds
Total
Percentage of total
31 December 2009 £m
Level 1
Level 2
Level 3
Total
28,688
7,063
79
(54)
35,776
–
–
(1,354)
34,422
44%
38,616
3,283
30
–
41,929
–
(1,324)
40,605
119%
557
5,783
155
(20)
6,475
–
(110)
6,365
14%
67,861
16,129
264
(74)
84,180
–
–
(2,788)
81,392
52%
799
39,051
1,199
(504)
40,545
(105)
–
475
1,213
2,170
(25)
3,833
–
–
29,962
47,327
3,448
(583)
80,154
(105)
–
(305)
(323)
(1,982)
40,135
51%
3,510
5%
78,067
100%
4
5,525
80
–
5,609
(12,242)
(7)
(6,640)
(19)%
36
38,725
787
(703)
38,845
(1,598)
(342)
36,905
82%
839
83,301
2,066
(1,207)
84,999
(105)
(13,840)
–
40
–
–
40
–
(2)
38
0%
179
1,068
632
(195)
1,684
–
38,620
8,848
110
–
47,578
(12,242)
(1,333)
34,003
100%
772
45,576
1,574
(918)
47,004
(1,598)
(42)
(494)
1,642
4%
654
2,321
2,802
(220)
5,557
–
–
44,912
100%
69,354
101,751
5,132
(1,501)
174,736
(105)
(13,840)
(654)
(367)
(3,809)
70,400
45%
5,190
3%
156,982
100%
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
G
241
Notes on the Group financial statements > G: Financial assets and liabilities > continued
G1: Financial instruments – designation and fair values continued
With-profits
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Borrowing attributable to with-profits fund held at fair value
Investment contracts without discretionary participation features held at fair value
Net asset value attributable to unit holders of consolidated unit trusts
and similar funds
Total
Percentage of total
Unit-linked and variable annuity
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Borrowing attributable to with-profits fund held at fair value
Investment contracts without discretionary participation features held at fair value
Net asset value attributable to unit holders of consolidated unit trusts
and similar funds
Total
Percentage of total
Non-linked shareholder-backed
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Borrowing attributable to with-profits fund held at fair value
Investment contracts without discretionary participation features held at fair value
Net asset value attributable to unit holders of consolidated unit trusts
and similar funds
Total
Percentage of total
Group total
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Borrowing attributable to with-profits fund held at fair value
Investment contract without discretionary participation held at fair value
Net asset value attributable to unit holders of consolidated unit trusts
and similar funds
Total
Percentage of total
31 December 2008 £m
Level 1
Level 2
Level 3
Total
30,427
6,765
77
(166)
37,103
–
–
(1,010)
36,093
49%
29,097
2,650
117
–
31,864
–
–
(877)
30,987
126%
745
6,514
427
(38)
7,648
–
–
(311)
7,337
16%
60,269
15,929
621
(204)
76,615
–
–
885
34,858
1,569
(2,861)
34,451
(158)
–
509
1,342
2,122
–
3,973
–
–
31,821
42,965
3,768
(3,027)
75,527
(158)
–
(384)
(381)
(1,775)
33,909
46%
3,592
5%
73,594
100%
114
3,615
87
–
3,816
–
(10,309)
–
(6,493)
(26)%
27
35,451
1,210
(1,521)
35,167
–
(1,307)
(815)
33,045
73%
1,026
73,924
2,866
(4,382)
73,434
(158)
(11,616)
–
33
–
–
33
–
–
–
33
0%
318
3,996
692
(246)
4,760
–
–
29,211
6,298
204
–
35,713
–
(10,309)
(877)
24,527
100%
1,090
45,961
2,329
(1,805)
47,575
–
(1,307)
(65)
(1,191)
4,695
11%
827
5,371
2,814
(246)
8,766
–
–
45,077
100%
62,122
95,224
6,301
(4,832)
158,815
(158)
(11,616)
(2,198)
(1,199)
(446)
(3,843)
74,417
52%
60,461
42%
8,320
6%
143,198
100%
242 Prudential plc > Annual Report 2009
Reconciliation of movements in level 3 financial instruments measured at fair value
The following table reconciles the value of level 3 financial instruments at 1 January 2009 to that presented at 31 December 2009.
Total gains and losses recorded in the income statement in the year represents realised gains and losses, including interest and
dividend income unrealised gains and losses on financial instruments classified at fair value through profit and loss and foreign
exchange movements on an individual entity’s overseas investments. All these amounts are included within ‘investment return’
within the income statement.
Total gains and losses recorded in other comprehensive income includes unrealised gains and losses on debt securities held as
available-for-sale within Jackson and foreign exchange movements arising from the retranslation of the Group’s overseas subsidiaries
and branches.
As highlighted earlier in this note, at 31 December 2008 Jackson had utilised internal valuations for certain structured securities
given the illiquidity of the market at that time. These assets have therefore been classified as level 3 given the unobservable nature of the
assumptions within the internal valuation models used. During the first half of 2009 improvements were observed in the level of liquidity
for these structured securities such that external prices based on observable inputs from pricing services or brokers were used to value
nearly all of the structured securities at 31 December 2009. There is therefore a transfer of £2,072 million from level 3 to level 2 during
2009 in respect of these securities. The remaining transfers in or out of level 3 represent sundry individual asset reclassifications, none
of which are materially significant as highlighted in the table opposite.
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
G
243
Notes on the Group financial statements > G: Financial assets and liabilities > continued
G1: Financial instruments – designation and fair values continued
Total
gains/
losses
recorded
in other
compre-
hensive
income
£m
Total
gains/
losses in
income
statement
£m
(3)
(14)
(211)
(2)
(1)
(11)
(89)
–
At 1 Jan
2009
£m
509
1,342
2,122
–
3,973
(230)
(101)
(381)
3,592
9
–
(221)
(101)
–
33
–
–
33
–
33
318
3,996
692
(246)
4,760
(65)
4,695
827
5,371
2,814
(246)
–
2
–
–
2
–
2
(47)
(15)
130
93
161
17
178
(50)
(27)
(81)
91
Purchases
£m
Sales
£m
Settled
£m
Transfers
into
level 3
£m
Transfers
out of
level 3
£m
At
31 Dec
2009
£m
26
50
403
–
479
49
528
–
16
–
–
16
(1)
15
21
104
153
(64)
(56)
(225)
(55)
(23)
–
(17)
–
–
–
142
–
–
–
(54)
475
1,213
–
–
2,170
(25)
(359)
(17)
142
(54)
3,833
–
(359)
–
(17)
–
142
–
(323)
(54)
3,510
–
–
–
–
–
–
–
(55)
(473)
(308)
23
–
(8)
–
–
(8)
–
(8)
–
(2)
–
–
–
–
–
–
–
(1)
(1)
–
(4)
–
–
(4)
–
(4)
–
40
–
–
40
(2)
38
–
200
(24)
(2,177)
179
1,068
43
(1)
(2)
–
632
(195)
–
1
–
–
1
–
1
(34)
(565)
(76)
–
(675)
214
(813)
(2)
242
(2,203)
1,684
6
(669)
(35)
(575)
(165)
–
–
214
47
170
556
(64)
–
(813)
(111)
(698)
(363)
–
–
(2)
–
(27)
–
–
–
242
–
(42)
(2,203)
1,642
–
342
(24)
(2,235)
654
2,321
43
(1)
(2)
–
2,802
(220)
8,766
(67)
(775)
709
(1,172)
(27)
384
(2,261)
5,557
(446)
8,320
26
(41)
6
(769)
48
757
–
(1,172)
–
(27)
(1)
–
(367)
383
(2,261)
5,190
With-profits
Equity securities and portfolio
holdings in unit trusts
Debt securities
Other investments
(including derivative assets)
Derivative liabilities
Total financial investments,
net of derivative liabilities
Net asset value attributable to
unit holders of consolidated
unit trusts and similar funds
Total
Unit-linked and variable annuity
Equity securities and portfolio
holdings in unit trusts
Debt securities
Other investments
(including derivative assets)
Derivative liabilities
Total financial investments,
net of derivative liabilities
Net asset value attributable to
unit holders of consolidated
unit trusts and similar funds
Total
Non-linked shareholder-backed
Equity securities and portfolio
holdings in unit trusts
Debt securities
Other investments
(including derivative assets)
Derivative liabilities
Total financial investments,
net of derivative liabilities
Net asset value attributable to unit
holders of consolidated unit trusts
and similar funds
Total
Group total
Equity securities and portfolio
holdings in unit trusts
Debt securities
Other investments
(including derivative assets)
Derivative liabilities
Total financial investments,
net of derivative liabilities
Net asset value attributable to unit
holders of consolidated unit trusts
and similar funds
Total
244 Prudential plc > Annual Report 2009
Of the total gains and losses in the income statement the loss of £(41) million in the year comprises, £(205) million relates to financial
instruments still held at the end of the year, which can be analysed as £(41) million for equity securities, £(44) million for debt securities,
£(221) million for other investments, £76 million for derivative liabilities and £25 million for net asset value attributable to unit holders of
consolidated unit trusts and similar funds.
Transfers between level 1 and level 2
There have been no significant transfers between level 1 and level 2 during the year.
Interest income and expense
The interest income on financial assets not at fair value through profit and loss for the year ended 31 December 2009 from continuing
operations was £1,998 million (2008: £2,532 million).
The interest expense on financial liabilities not at fair value through profit and loss for the year ended 31 December 2009 from
continuing operations was £366 million (2008: £645 million).
G2: Market risk
Interest rate risk
The following table shows an analysis of the classes of financial assets and liabilities and their direct exposure to interest rate risk. Each
applicable class of the Group’s financial assets or liabilities is analysed between those exposed to fair value interest rate risk, cash flow
interest rate risk and those with no direct interest rate risk exposure:
Financial assets
Cash and cash equivalents
Deposits
Debt securities
Loans
Other investments (including derivatives)
Financial liabilities
Core structural borrowings of shareholder-financed operations
Operational borrowings attributable to shareholder-financed operations
Borrowings attributable to with-profits funds
Obligations under funding, securities lending and sale
and repurchase agreements
Investment contracts without discretionary participation features
Derivative liabilities
Other liabilities
2009 £m
Fair value
interest
rate risk
Cash flow
interest
rate risk
Not directly
exposed to
interest
rate risk
–
896
95,817
5,923
1,381
104,017
3,394
2,128
804
611
1,098
647
79
8,761
–
11,884
5,550
2,816
368
20,618
–
620
312
2,871
867
286
92
5,048
5,307
40
384
15
3,383
9,129
–
3
168
–
13,840
568
706
15,285
Total
5,307
12,820
101,751
8,754
5,132
133,764
3,394
2,751
1,284
3,482
15,805
1,501
877
29,094
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
G
245
Notes on the Group financial statements > G: Financial assets and liabilities > continued
G2: Market risk continued
Financial assets
Cash and cash equivalents
Deposits
Debt securities
Loans
Other investments (including derivatives)
Financial liabilities
Core structural borrowings of shareholder-financed operations
Operational borrowings attributable to shareholder-financed operations
Borrowings attributable to with-profits funds
Obligations under funding, securities lending and sale
and repurchase agreements
Investment contracts without discretionary participation features
Derivative liabilities
Other liabilities
2008 £m
Fair value
interest
rate risk
Cash flow
interest
rate risk
Not directly
exposed to
interest
rate risk
Total
5,955
7,294
95,224
10,491
6,301
–
6,084
5,532
3,485
686
5,955
84
339
27
4,076
15,787
10,481
125,265
–
454
482
4,683
–
785
105
6,509
–
3
97
–
11,616
2,862
567
15,145
2,958
1,977
1,308
5,572
14,501
4,832
890
32,038
–
1,126
89,353
6,979
1,539
98,997
2,958
1,520
729
889
2,885
1,185
218
10,384
Liquidity analysis
i) Contractual maturities of financial liabilities
The following table sets out the contractual maturities for applicable classes of financial liabilities, excluding derivative liabilities
and investment contracts and 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 liabilities
Core structural borrowings of
shareholder-financed operationsH13
Operational borrowings attributable
Total
carrying
value
1 year
or less
After 1
year to
5 years
After 5
years to
10 years
After 10
years to
15 years
After 15
years to
20 years
Over No stated
20 years maturity
Total
2009 £m
3,394
148
588
733
1,394
877
1,343
1,422
6,505
to shareholder-financed operationsH13
2,751
2,351
435
9
Borrowings attributable to
with-profits fundsH13
Obligations under funding, securities lending
and sale and repurchase agreements
Other liabilities
Net asset value attributable to unit holders of
consolidated unit-trusts and similar funds
Other creditors
1,284
228
882
102
3,482
877
3,482
643
3,809
1,612
3,809
1,612
–
11
–
–
–
14
–
–
9
–
–
–
–
–
9
–
–
–
–
–
31
–
2,844
–
–
–
–
–
205
1,417
–
211
3,482
879
–
–
3,809
1,612
17,209 12,273
1,916
858
1,403
886
1,374
1,838 20,548
246 Prudential plc > Annual Report 2009
Total
carrying
value
1 year
or less
After 1
year to
5 years
After 5
years to
10 years
After 10
years to
15 years
After 15
years to
20 years
Over No stated
20 years maturity
Total
2008 £m
Financial liabilities
Core structural borrowings of
shareholder-financed operationsH13
2,958
369
Operational borrowings attributable
to shareholder-financed operationsH13
1,977
1,590
Borrowings attributable to
with-profits fundsH13
Obligations under funding, securities lending
and sale and repurchase agreements
Other liabilities
Net asset value attributable to unit holders of
consolidated unit-trusts and similar funds
Other creditors
1,308
232
5,572
890
3,843
1,496
5,572
646
3,843
1,496
422
357
807
–
11
–
–
525
1,273
437
780
1,059
4,865
18
249
–
5
–
–
18
18
–
–
–
–
–
–
–
–
–
–
65
78
–
–
–
–
–
2,066
113
1,479
–
228
–
–
5,572
890
3,843
1,496
18,044
13,748
1,597
797
1,291
455
923
1,400
20,211
ii) Maturity analysis of derivatives
The following table provides a maturity analysis of derivative assets and liabilities:
Net derivative position
Net derivative position
2009 £m
Total
carrying
value
1 year
or less
After 1
After 3
year to years to
5 years
3 years
After
5 years
279
340
10
(1)
–
Total
349
2008 £m
Total
carrying
value
1 year
or less
After 3
After 1
year to years to
5 years
3 years
After
5 years
Total
(2,462)
(2,464)
12
(1)
–
(2,453)
The net derivative positions as shown in the table above comprise the following derivative assets and liabilities:
Derivative assets
Derivative liabilities
Net derivative position
2009 £m
2008 £m
1,780
(1,501)
279
2,370
(4,832)
(2,462)
The majority of derivative assets and liabilities have been included at fair value within the one year or less column representing the basis
on which they are managed (i.e. to manage principally asset or liability value exposures). Contractual maturities are not considered
essential for an understanding of the timing of the cash flows for these instruments and in particular the Group has no cash flow hedges.
The only exception is certain identified interest rate swaps which are fully expected to be held until maturity solely for the purposes of
matching cash flows on separately held assets and liabilities. For these instruments the undiscounted cash flows (including contractual
interest amounts) due to be paid under the swap contract assuming conditions are consistent with those at year end are included in the
column relating to the contractual maturity of the derivative.
The table below shows the maturity profile for investment contracts on an undiscounted basis to the nearest billion. This maturity
profile has been based on the cash flow projections of expected benefit payments as part of the determination of the value of in-force
business when preparing EEV basis results.
F
I
N
A
N
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Notes on the Group financial statements > G: Financial assets and liabilities > continued
G2: Market risk continued
Life assurance investment contracts
3
11
13
13
11
17
68
41
2009 £bn
1 year
or less
After 1
year to
5 years
After 5
years to
10 years
After 10
years to
15 years
After 15
years to
20 years
Total
undis-
Over
20 years
counted Carrying
value
value
2008 £bn
1 year
or less
After 1
year to
5 years
After 5
years to
10 years
After 10
years to
15 years
After 15
years to
20 years
Total
undis-
Over
20 years
counted Carrying
value
value
Life assurance investment contracts
3
18
12
12
9
13
67
38
Most investment contracts have options to surrender early, albeit these are often subject to surrender or other penalties. It is therefore
the case that most contracts could be said to have a contractual maturity of less than one year, but in reality the additional charges and
term of the contracts means these are unlikely to be exercised in practice and the more useful information is to present information on
expected payment.
The maturity profile above excludes certain corporate unit-linked business with gross policyholder liabilities of £9 billion (2008:
£8 billion) which has no stated maturity but which is repayable on demand.
This table has been prepared on an undiscounted basis and accordingly the amounts shown for life assurance investment contracts
differ from those disclosed on the statement of financial position. Durations of long-term business contracts, covering insurance and
investment contracts, on a discounted basis are included in section D.
The vast majority of the Group’s financial assets are held to back the Group’s policyholder liabilities. Although asset/liability
matching is an important component of managing policyholder liabilities (both those classified as insurance and those classified as
investments), this profile is mainly relevant for managing market risk rather than liquidity risk. Within each business unit this
asset/liability matching is performed on a portfolio by portfolio basis.
In terms of liquidity risk a large proportion of the policyholder liabilities contain discretionary surrender values or surrender charges,
meaning that many of the Group’s liabilities are expected to be held for the long term. Much of the Group’s investment portfolios is in
marketable securities, which can therefore be converted quickly to liquid assets.
For the reasons above an analysis of the Group’s assets by contractual maturity is not considered necessary to evaluate the nature
and extent of the Group’s liquidity risk.
Credit risk
The Group’s maximum exposure to credit risk before any allowance for collateral or allocation of losses to policyholders is represented
by the carrying value of financial instruments on the balance sheet that have exposures to credit risk. These assets comprise cash and
cash equivalents, deposits, debt securities, loans and derivative assets, the carrying value of which are disclosed at the start of this note
and note G3 for derivative assets. The collateral in place in relation to derivatives is described in G4. Notes D2, D3 and D4, describe the
security for these loans held by the Group, as disclosed at the start of this note.
Of the total loans and receivables held £64 million (2008: £21 million) are past their due date but have not been impaired. Of the total
past due but not impaired, £53 million are less than one year past their due date and £11 million is more than six months but less than one
year past their due date (2008: £21 million and nil respectively). The Group expects full recovery of these loans and receivables. No
further analysis has been provided of the age of financial assets that are past due at the end of the reporting period but not impaired
as the amounts are immaterial.
No further analysis has been provided of the element of loans and receivables that was neither past due nor impaired for the
total portfolio. This is on the grounds of immateriality of the difference between the neither past due nor impaired elements and the
total portfolio.
Financial assets that would have been past due or impaired had the terms not been renegotiated amounted to £55 million
(2008: £1 million).
There was no collateral held against loans that are past due and impaired or that are past due but not impaired at 31 December
2009 (2008: £nil).
In addition, during the year the Group took possession of £15 million (2008: £66 million) of other collateral held as security,
which mainly consists of assets that could be readily convertible into cash.
248 Prudential plc > Annual Report 2009
Currency risk
As at 31 December 2009, the Group held 19 per cent (2008: 20 per cent) and 13 per cent (2008: 13 per cent) of its financial assets and
financial liabilities respectively, in currencies, mainly US dollar and Euro, other than the functional currency of the relevant business unit.
The financial assets, of which 74 per cent (2008: 77 per cent) are held by the PAC with-profits fund, allow the PAC with-profits fund
to obtain exposure to foreign equity markets.
The financial liabilities, of which 34 per cent (2008: 38 per cent) are held by the PAC with-profits fund, mainly relate to foreign
currency borrowings.
The exchange risks inherent in these exposures are mitigated through the use of derivatives, mainly forward currency contracts
(note G3 below).
The amount of exchange losses recognised in the income statement in 2009, except for those arising on financial instruments
measured at fair value through profit and loss, is £201 million (2008: £638 million gains). This constitutes £41 million losses (2008:
£32 million gains) on Medium Term Notes (MTN) liabilities and £160 million of net losses (2008: £606 million net gains), mainly arising
on investments of the PAC with-profits fund. The gains/losses on MTN liabilities are fully offset by value movements on cross-currency
swaps, which are measured at fair value through profit and loss.
G3: Derivatives and hedging
Derivatives
The Group enters into a variety of exchange traded and over-the-counter derivative financial instruments, including futures, options,
forward currency contracts and swaps such as interest rate swaps, cross-currency swaps, swaptions and credit default swaps.
All over-the-counter derivative transactions are conducted under standardised ISDA (International Swaps and Derivatives
Association Inc) master agreements and the Group has collateral agreements between the individual Group entities and relevant
counterparties in place under each of these market master agreements.
The total fair value balances of derivative assets and liabilities as at 31 December 2009 were as follows:
Derivative assets
Derivative liabilities
Derivative assets
Derivative liabilities
UK
insurance
operations
US
insurance
operations
Asian
insurance
Asset
operations management
Unallocated
to a segment
2009 £m
910
(709)
201
519
(461)
58
150
(146)
4
48
(49)
(1)
153
(136)
17
2008 £m
UK
insurance
operations
US
insurance
operations
Asian
Asset
insurance
operations management
Unallocated
to a segment
1,326
(3,401)
(2,075)
675
(863)
(188)
15
(32)
(17)
74
(292)
(218)
280
(244)
36
Group
total
1,780
(1,501)
279
Group
total
2,370
(4,832)
(2,462)
The above derivative assets are included in ‘other investments’ in the primary statements.
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249
Notes on the Group financial statements > G: Financial assets and liabilities > continued
G3: Derivatives and hedging continued
The notional amount of the derivatives, distinguishing between UK insurance and US operations, was as follows:
As at 31 December 2009
Cross-currency swaps*
Equity index call options
Swaptions
Futures
Forwards*
Inflation swaps
Credit default swaps
Single stock options
Credit derivatives
Put options
Equity options
Total return swaps
Interest rate swaps*
As at 31 December 2008
Cross-currency swaps*
Equity index call options
Swaptions
Futures
Forwards*
Inflation swaps
Credit default swaps
Single stock options
Credit derivatives
Put options
Equity options
Total return swaps
Interest rate swaps*
2009 £m
UK insurance operations
Notional amount on which
future payments are based
US insurance operations
Notional amount on which
future payments are based
Asset
Liability
Asset
Liability
808
–
900
2,267
20,235
2,337
90
–
–
–
30
420
5,529
881
–
900
2,987
20,184
2,205
12
–
–
–
552
421
5,710
376
–
12,694
–
–
–
–
–
–
9,072
3,246
–
1,579
168
–
5,263
1,534
–
–
–
–
189
–
562
–
3,957
2008 £m
UK insurance operations
Notional amount on which
future payments are based
US insurance operations
Notional amount on which
future payments are based
Asset
Liability
Asset
Liability
838
17
980
3,286
14,315
2,559
123
1
–
–
2
479
5,074
1,014
32
980
4,055
16,489
2,482
14
1
–
–
4
514
5,245
448
–
28,863
–
–
–
–
–
31
6,573
3,785
–
1,704
218
–
–
460
–
–
–
–
177
–
5
313
4,514
*In addition, the other operations, including the Group Treasury function and the Asian operations, have cross-currency swap assets and liabilities with
notional amounts of £819 million (2008: £1,503 million) and £122 million (2008: £605 million) respectively, forward currency contracts assets and liabilities
with notional amounts of £570 million (2008: £1,419 million) and £958 million (2008: £2,310 million) respectively, interest rate swaps assets and liabilities
of £793 million (2008: £1,407 million) and of £522 million (2008: £2,316 million), respectively, and cliquet options assets of £7 million (2008: £1,525 million).
250 Prudential plc > Annual Report 2009
These derivatives are used for efficient portfolio management to obtain cost effective and efficient exposure to various markets in
accordance with the Group’s investment strategies and to manage exposure to interest rate, currency, credit and other business risks.
See also note D3 for use of derivatives by the Group’s US operations.
The Group uses various interest rate derivative instruments such as interest rate swaps to reduce exposure to interest rate volatility.
The UK insurance operations use various currency derivatives in order to limit volatility due to foreign currency exchange rate
fluctuations arising on securities denominated in currencies other than sterling. See also note G2 above. In addition, total return swaps
and interest rate swaps are held for efficient portfolio management.
As part of the efficient portfolio management of the PAC with-profits fund, the fund may, from time to time, invest in cash-settled
forward contracts over Prudential plc shares, which are accounted for consistently with other derivatives. This is in order to avoid a
mismatch of the with-profits investment portfolio with the investment benchmarks set for its equity-based investment funds. The
contracts will form part of the long-term investments of the with-profits fund. These contracts are subject to a number of limitations
for legal and regulatory reasons.
Some of the Group’s products, especially those sold in the US, have certain guarantee features linked to equity indexes. A mismatch
between product liabilities and the performance of the underlying assets backing them, exposes the Group to equity index risk. In order
to mitigate this risk, the relevant business units purchase swaptions, equity options and futures to match asset performance with liabilities
under equity-indexed products.
The US operations and some of the UK operations hold large amounts of interest-rate sensitive investments that contain credit risks
on which a certain level of defaults is expected. These entities have purchased some swaptions in order to manage the default risk on
certain underlying assets and hence reduce the amount of regulatory capital held to support the assets.
Hedging
The Group has formally assessed and documented the effectiveness of the following hedges under IAS 39.
Fair value hedges
The Group uses interest rate derivatives to hedge the interest exposures on its US$300 million, 6.5 per cent perpetual subordinated
capital securities. In addition, the Group similarly used interest rate derivatives to hedge the exposure on its US$1 billion, 6.5 per cent
perpetual subordinated capital securities until this hedge was cancelled in March 2009. Where the hedge relationship is de-designated
and re-designated, the fair value adjustment to the hedged item up to the point of de-designation continues to be reported as part of the
basis of the hedged item and is amortised to the income statement based on a recalculated effective interest rate over the residual period
to the first break clause date of the perpetual subordinated capital securities.
The Group has chosen to designate as a fair value hedge certain fixed to floating rate swaps which hedge the fair value exposure to
interest rate movements of certain of the Group’s operational borrowings.
The fair value of the derivatives designated as fair value hedges above at 31 December 2009, were an asset of £7 million and liability
of £1 million (2008: asset of £17 million and liability of £nil). Movements in the fair value of the hedging instruments of a net loss of
£11 million (2008: net loss of £4 million) and the hedged items of a net gain of £11 million (2008: net gain of £7 million) are recorded
in the income statement in respect of the fair value hedges above.
Cash flow hedges
The Group has no cash flow hedges in place.
Net investment hedges
The Group entered into a series of rolling one to three-month period forward currency transactions which together formed a net
investment hedge of the currency exposure of the net investments in the US operations. The programme ceased in August 2009.
At 31 December 2008 US$600 million of the forward currency contracts were designated as a partial net investment hedge of the
currency exposure of the net investments in the US operations. The fair value of the forward currency contracts at 31 December 2008
was a liability of £56 million, of which a liability of £17 million was designated as a net investment hedge of the currency exposure of the
net investments in the US operations.
In addition, the Group has designated perpetual subordinated capital securities totalling US$1.55 billion as a net investment hedge
to edge the currency risks related to the net investment in Jackson. The carrying value of the subordinated capital securities was
£963 million (2008: £1,059 million) as at 31 December 2009. The foreign exchange gain of £118 million (2008: loss of £299 million)
on translation of the borrowings to pounds sterling at the statement of financial position date is recognised in the translation reserve
in shareholders’ equity.
The net investment hedges were 100 per cent effective.
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251
Notes on the Group financial statements > G: Financial assets and liabilities > continued
G4: Derecognition and collateral
Securities lending and reverse repurchase agreements
The Group has entered into securities lending (including repurchase agreements) whereby blocks of securities are loaned to third-
parties, primarily major brokerage firms. The amounts above the fair value of the loaned securities required to be held as collateral by the
agreements depend on the quality of the collateral, calculated on a daily basis. The loaned securities are not removed from the Group’s
consolidated statement of financial position, rather they are retained within the appropriate investment classification. Collateral typically
consists of cash, debt securities, equity securities and letters of credit. At 31 December 2009, the Group had lent £10,446 million
(2008: £12,617 million) of which £7,910 million (2008: £9,701 million) was lent by the PAC with-profits fund of securities and held
collateral under such agreements of £10,669 million (2008: £13,497 million) of which £8,086 million (2008: £9,924 million) was held
by the PAC with-profits fund.
At 31 December 2009, the Group had entered into reverse repurchase transactions under which it purchased securities and
had taken on the obligation to resell the securities for the purchase price of £1,587 million (2008: £588 million), together with
accrued interest.
Collateral and pledges under derivative transactions
At 31 December 2009, the Group had pledged £644 million (2008: £1,154 million) for liabilities and held collateral of £586 million
(2008: £829 million) in respect of over-the-counter derivative transactions.
G5: Impairment of financial assets
In accordance with the Group’s accounting policy set out in note A4, impairment reviews were performed for available-for-sale securities
and loans and receivables. In addition, impairment reviews were undertaken for the reinsurers’ share of insurance contract liabilities.
During the year ended 31 December 2009, impairment losses of £647 million (2008: £525 million) were recognised for available-for-
sale securities and loans and receivables. These were £630 million (2008: £497 million) in respect of available-for-sale securities held by
Jackson and £17 million (2008: £28 million) in respect of loans and receivables. The 2009 impairment charge for loans and receivables of
£17 million relates to loans held by the UK with-profits fund and mortgage loans held by Jackson. The 2008 impairment charge for loans
and receivables of £28 million related primarily to loans held by the UK with-profits fund.
Impairment losses recognised on available-for-sale securities amounted to £630 million (2008: £497 million). Of this amount, 86 per
cent (2008: 29 per cent) has been recorded on structured asset-backed securities, primarily due to reduced cash flow expectations on
such securities that are collateralised by diversified pools of primarily below investment grade securities. Of the losses related to the
impairment of fixed maturity securities, the top five individual corporate issuers made up 11 per cent (2008: 27 per cent), reflecting a
deteriorating business outlook of the companies concerned.
The impairment losses have been recorded in ‘investment return’ in the income statement.
In 2009, the Group realised gross losses on sales of available-for-sale securities of £134 million (2008: 184 million) with 60 per cent
(2008: 55 per cent) of these losses related to the disposal of fixed maturity securities of five (2008: six) individual issuers, which were
disposed of to rebalance the portfolio in the US operations in response to the unstable mortgage lending.
The effect of those reasonably likely changes in the key assumptions underlying the estimates that underpin the assessment of
whether impairment has taken place depends on the factors described in note A3. A key indicator of whether such impairment may
arise in future, and the potential amounts at risk, is the profile of gross unrealised losses for fixed maturity securities accounted for on
an available-for-sale basis by reference to the time periods by which the securities have been held continuously in an unrealised loss
position and by reference to the maturity date of the securities concerned.
For 2009 the amounts of gross unrealised losses for fixed maturity securities classified as available-for-sale under IFRS in an
unrealised loss position was £966 million (2008: £3,178 million). Notes B1 and D3 provide further details on the impairment charges
and unrealised losses of Jackson’s available-for-sale securities.
252 Prudential plc > Annual Report 2009
Notes on the Group financial statements > H: Other information on statement
of financial position items
H1: Intangible assets attributable to shareholders
a Goodwill
2009 £m 2008 £m
Cost
At 1 January 1,461 1,461
Disposal of Taiwan Agency business (44) –
Additional consideration paid on previously acquired businesses 13 –
At 31 December 1,430 1,461
Aggregate impairment
At 1 January and 31 December (120) (120)
Net book amount at 31 December 1,310 1,341
Impairment testing
Goodwill does not generate cash flows independently of other groups of assets and thus is assigned to cash generating units (CGUs) for
the purposes of impairment testing. These CGUs are based upon how management monitors the business and represent the lowest level
to which goodwill can be allocated on a reasonable basis. An allocation to CGUs of the Group’s goodwill attributable to shareholders is
shown below:
2009 £m 2008 £m
M&G 1,153 1,153
Other 157 188
1,310 1,341
‘Other’ represents goodwill amounts allocated across CGUs in Asia and US operations. These goodwill amounts are not individually
material.
Assessment of whether goodwill may be impaired
With the exception of M&G, the goodwill attributable to shareholders in the statement of financial position mainly relates to acquired life
businesses. The Company routinely compares the aggregate of net asset value and acquired goodwill on an IFRS basis of acquired life
business with the value of the business as determined using the EEV methodology, as described in note D1. Any excess of IFRS over EEV
carrying value is then compared with EEV basis value of current and projected future new business to determine whether there is any
indication that the goodwill in the IFRS statement of financial position may be impaired. The assumptions underpinning the Group’s EEV
basis of reporting are included in the EEV basis supplementary information in this Annual Report.
Goodwill is tested for impairment by comparing the CGUs carrying amount, including any goodwill, with its recoverable amount.
M&G
The recoverable amount for the M&G CGU has been determined by calculating its value in use. This has been calculated by aggregating
the present value of future cash flows expected to be derived from the M&G operating segment (based upon management projections).
The discounted cash flow valuation has been based on a five-year plan prepared by M&G, and approved by management, and cash
flow projections for later years.
The value in use is particularly sensitive to a number of key assumptions as follows:
i The set of economic, market and business assumptions used to derive the five-year plan. The direct and secondary effects of recent
developments, e.g. the fall in global equity markets, are considered by management in arriving at the expectations for the financial
projections for the plan.
ii The assumed growth rate on forecast cash flows beyond the terminal year of the plan. A growth rate of 2.5 per cent (2008: 2.5 per
cent) has been used to extrapolate beyond the plan period representing management’s best estimate view of the long-term growth
rate of the business after considering the future and past growth rates and external sources of data.
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iii The risk discount rate. Differing discount rates have been applied in accordance with the nature of the individual component
businesses. For retail and institutional business a risk discount rate of 12 per cent (2008: 12 per cent) has been applied to post-tax
cash flows. The pre-tax risk discount rate was 16 per cent (2008: 16 per cent). Management have determined the risk discount rate
by reference to an average implied discount rate for comparable UK listed asset managers calculated by reference to risk-free rates,
equity risk premiums of five per cent and an average ‘beta’ factor for relative market risk of comparable UK listed asset managers.
A similar approach has been applied for the other component businesses of M&G.
H
iv That asset management contracts continue on similar terms.
Management believes that any reasonable change in the key assumptions would not cause the recoverable amount of M&G to fall
below its carrying amount.
253
Notes on the Group financial statements > H: Other information on statement
of financial position items > continued
H1: Intangible assets attributable to shareholders continued
Japanese life company
The aggregate goodwill impairment of £120 million at 31 December 2009 and 2008 relates to the goodwill held in relation to the
Japanese life operation which was impaired in 2005.
b Deferred acquisition costs and other intangible assets
Deferred acquisition costs and other intangible assets in the Group consolidated statement of financial position attributable to
shareholders consist of:
2009 £m 2008 £m
Deferred acquisition costs (DAC) related to insurance contracts as classified under IFRS 4 3,823 5,097
Deferred acquisition costs related to investment management contracts,
including life assurance contracts classified as financial instruments and investment
management contracts under IFRS 4 107 108
3,930 5,205
Present value of acquired in-force policies for insurance contracts as classified under IFRS 4 52 64
Present value of future profits of acquired investment management contracts,
including life assurance contracts classified as financial instruments and investment
management contracts under IFRS 4 1 1
Distribution rights 66 79
119 144
Total of deferred acquisition costs and other intangible assets 4,049 5,349
Arising in:
UK insurance operations 127 134
US insurance operations note i 3,092 3,962
Asian insurance operations 822 1,247
Asset management operations 8 6
4,049 5,349
Note
i The amount in respect of US insurance operations comprises entirely of DAC and includes £1,938 million (2008: £1,676 million) in respect of variable
annuity business, £1,164 million (2008: £1,134 million) in respect of other business and £(10) million (2008: £1,152 million) in respect of cumulative
shadow DAC.
The movement in the year comprises:
2009 £m 2008* £m
Balance at 1 January 5,349 2,836
Additions 1,071 959
Amortisation to income statement (316) (551)
Exchange differences (550) 1,274
Change in shadow DAC note D3h (1,069) 831
DAC movement on sale of Taiwan agency business (436) –
Balance at 31 December 4,049 5,349
*As a result of changes following the implementation of amendments to IAS 1, exchange losses of £239 million relating to US operations charge in shadow
DAC have been reclassified as exchange movement within exchange differences in the table above. This is explained further in note A5. There is no
impact on shareholders’ equity or the income statement from this change.
Amortisation is included in the ‘acquisition costs and other operating expenditures’ line in the income statement.
254 Prudential plc > Annual Report 2009
Deferred acquisition costs related to insurance contracts attributable to shareholders
The movement in deferred acquisition costs relating to insurance contracts attributable to shareholders is as follows:
2009 £m 2008 £m
Deferred acquisition costs at 1 January 5,097 2,644
Additions 1,054 887
Amortisation (286) (520)
Exchange differences (537) 1,255
Change in shadow DAC (1,069) 831
DAC movement on sale of Taiwan agency business (436) –
Deferred acquisition costs at 31 December 3,823 5,097
Deferred acquisition costs related to investment management contracts attributable to shareholders
Incremental costs associated with the origination of investment management contracts written by the Group’s insurance and asset
management businesses are capitalised and amortised as the related revenue is recognised.
2009 £m 2008 £m
At 1 January
Gross amount 148 136
Accumulated amortisation (40) (23)
Net book amount 108 113
Additions (through internal development) 14 12
Amortisation (15) (17)
At 31 December 107 108
Comprising:
Gross amount 162 148
Accumulated amortisation (55) (40)
Net book amount 107 108
Present value of acquired in-force business of long-term business contracts attributable to shareholders
The present value of acquired in-force business (PVAIF) relating to investment contracts without discretionary participation features
represents the contractual right to benefit from providing these investment management services in the future. The fair value is
measured as the present value of the future profits of the asset management component of these contracts. These contracts are
accounted for under the provisions of IAS 18. The remainder of the PVAIF balance relates to insurance contracts and is accounted
for under UK GAAP as permitted by IFRS 4.
The present value of future profits of acquired asset management contracts relates to unit-linked contracts acquired as part of
the M&G acquisition in 1999.
Amortisation is charged to the ‘acquisition costs and other operating expenditure’ line in the income statement over the period
of provision of asset management services as those profits emerge.
2009 £m 2008 £m
Insurance Investment Insurance Investment
contracts management contracts management
At 1 January
Cost 184 12 161 12
Accumulated amortisation (120) (11) (102) (8)
Net book amount 64 1 59 4
Exchange differences (6) – 14 –
Amortisation charge (6) – (9) (3)
At 31 December 52 1 64 1
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Comprising:
Cost 175 12 184 12
Accumulated amortisation (123) (11) (120) (11)
H
Net book amount 52 1 64 1
255
Notes on the Group financial statements > H: Other information on statement
of financial position items > continued
H1: Intangible assets attributable to shareholders continued
Distribution rights attributable to the Asian insurance operations
Distribution rights relate to facilitation fees paid in respect of the bancassurance partnership arrangements in Asia for the bank
distribution of Prudential’s insurance products for a fixed period of time. The distribution rights amounts are amortised over the term
of the distribution contracts.
2009 £m 2008 £m
At 1 January
Gross amount 84 16
Accumulated amortisation (5) 0
79 16
Additions 3 62
Amortisation charge (9) (4)
Exchange differences (7) 5
At 31 December 66 79
Comprising:
Gross amount 79 84
Accumulated amortisation (13) (5)
66 79
H2: Intangible assets attributable to with-profits funds
a Goodwill in respect of acquired investment subsidiaries for venture fund and other investment purposes
2009 £m 2008 £m
At 1 January 174 192
Impairment (50) (18)
At 31 December 124 174
All the goodwill relates to the UK insurance operations segment.
The only venture fund investment consolidated by the Group relates to an investment by PAC with-profits fund managed by M&G.
The goodwill shown in the table above relates to this venture fund investment. Goodwill is tested for impairment for this investment by
comparing the investment’s carrying value including goodwill with its recoverable amount. The recoverable amount of the investment
was determined by calculating its fair value less costs to sell. The fair value has been determined by using the discounted cash flow
valuation. The valuation is based on cash flow projections to 2015 prepared by management after considering the historical experience
and future growth rates of the business. The key assumption applied in the calculation is the risk discount rate of 14 per cent which
has been derived by reference to risk-free rates and an equity premium risk. In 2009, following the impairment testing carried out,
£50 million (2008: £18 million) of the goodwill was deemed to be impaired and written off accordingly.
This impairment charge is recorded under ‘acquisition costs and other operating expenditure’ but are also taken account of in
determining the charge/credit in the income statement for the transfer to the liability for unallocated surplus of with-profits funds.
Accordingly, the charge does not affect shareholders’ profits or equity.
b Deferred acquisition costs and other intangible assets
Other intangible assets in the Group consolidated statement of financial position attributable to with-profits funds consist of:
2009 £m 2008 £m
Deferred acquisition costs related to insurance contracts attributable to the PAC with-profits fund 9 13
Distribution rights attributable to with-profits funds of the Asian insurance operations 97 113
106 126
256 Prudential plc > Annual Report 2009
Deferred acquisition costs related to insurance contracts attributable to the PAC with-profit fund
The movement in deferred acquisition costs relating to insurance contracts attributable to the PAC with-profits fund is as follows:
2009 £m 2008 £m
At 1 January 13 19
Additions – –
Amortisation charge (4) (6)
At 31 December 9 13
The above costs relate to non-participating business written by the PAC with-profits sub-fund.
No deferred acquisition costs are established for the participating business.
Distribution rights attributable to with-profit funds of the Asian insurance operations
Distribution rights relate to facilitation fees paid in relation to the bancassurance partnership arrangements in Asia for the bank
distribution of Prudential’s insurance products for a fixed period of time. The distribution rights amounts are amortised over the term
of the distribution contracts.
2009 £m 2008 £m
At 1 January
Gross amount 115 –
Accumulated amortisation (2) –
113 –
Additions – 115
Amortisation charge (4) (2)
Exchange differences (12) –
At 31 December 97 113
Comprising:
Gross amount 103 115
Accumulated amortisation (6) (2)
97 113
H3: Reinsurers’ share of insurance contract liabilities
2009 £m 2008 £m
Insurance contract liabilities 1,114 1,176
Claims outstanding 73 64
1,187 1,240
The movement on reinsurers’ share of insurance contract liabilities is as follows:
2009 £m 2008 £m
At 1 January 1,176 724
Movement in the year 24 243
Foreign exchange translation differences (86) 209
At 31 December 1,114 1,176
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257
Notes on the Group financial statements > H: Other information on statement
of financial position items > continued
H4: Tax assets and liabilities
Assets
Of the £636 million (2008: £657 million) current tax recoverable, the majority is expected to be recovered in one year or less.
Deferred tax asset
2009 £m 2008 £m
Unrealised losses on investments 1,156 1,267
Balances relating to investment and insurance contracts 20 12
Short-term timing differences 1,228 1,282
Capital allowances 18 16
Unused deferred tax losses 286 309
Total 2,708 2,886
The deferred tax asset at 31 December 2009 and 2008 arises in the following parts of the Group:
2009 £m 2008 £m
UK insurance operations:
SAIF 2 7
PAC with-profits fund (including PAL) 141 272
Other 149 234
US insurance operations 1,944 1,969
Asian insurance operations 132 101
Other operations 340 303
2,708 2,886
Deferred tax assets are recognised to the extent that they are regarded as recoverable, that is to the extent that, on the basis of all
available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal
of the underlying temporary differences can be deducted.
The taxation regimes applicable across the Group apply separate rules to trading and capital profits and losses. The distinction
between temporary differences that arise from items of either a trading or capital nature may affect the recognition of deferred tax assets.
Accordingly, for the 2009 results and statement of financial position at 31 December 2009, the possible tax benefit of approximately
£257 million (2008: £211 million), which may arise from capital losses valued at approximately £1.2 billion (2008: £1 billion), is
sufficiently uncertain that it has not been recognised. In addition, a potential deferred tax asset of £607 million (2008: £678 million),
which may arise from tax losses and other potential temporary differences totalling £2.1 billion (2008: £2.2 billion) is sufficiently
uncertain that it has not been recognised. Forecasts as to when the tax losses and other temporary differences are likely to be utilised
indicate that they may not be utilised in the short term.
Liabilities
The current tax liability increased to £1,215 million (2008: £842 million) primarily due to the increase in policyholder tax payable in the
UK. The Group considers that whilst the UK tax provision established within the current tax liability represents an appropriate provision
for matters under discussion with HM Revenue & Customs in the UK, it is not possible to estimate the amount of the tax liability expected
to be settled in one year or less due to the uncertainty over when these issues will be agreed.
Deferred tax liability
2009 £m 2008 £m
Unrealised gains on investments 1,744 765
Balances relating to investment and insurance contracts 961 968
Short-term timing differences 1,159 1,490
Capital allowances 8 6
3,872 3,229
Unprovided deferred income tax liabilities on temporary differences associated with investments in subsidiaries, associates and interests
in joint ventures are considered to be insignificant due to the availability of various UK tax exemptions and reliefs.
Discounting
Deferred tax asset and liability balances have not been discounted.
258 Prudential plc > Annual Report 2009
H5: Accrued investment income and other debtors
2009 £m 2008 £m
Accrued investment income
Interest receivable 1,718 1,775
Other 755 738
Total 2,473 2,513
Other debtors
Premiums receivable:
From policyholders 148 194
From intermediaries 17 17
From reinsurers 82 253
Other 515 768
Total 762 1,232
Total accrued investment income and other debtors 3,235 3,745
Of the £3,235 million (2008: £3,745 million) of accrued investment income and other debtors, £134 million (2008: £114 million) is
expected to be settled after one year or more.
H6: Property, plant and equipment
Property, plant and equipment comprise Group occupied properties, development property and tangible assets. A reconciliation of the
carrying amount of these items from the beginning of the year to the end of the year is as follows:
Group occupied Development Tangible
property property assets Total
£m £m £m £m
At 1 January 2008
Cost 172 655 612 1,439
Accumulated depreciation (21) – (406) (427)
Net book amount 151 655 206 1,012
Year ended 31 December 2008
Opening net book amount 151 655 206 1,012
Exchange differences 45 – 40 85
Depreciation charge (3) – (67) (70)
Additions 3 152 85 240
Disposals (1) – (23) (24)
Reclassification from (to) held for investment 68 (676) – (608)
Closing net book amount 263 131 241 635
At 1 January 2009
Cost 292 131 717 1,140
Accumulated depreciation (29) – (476) (505)
Net book amount 263 131 241 635
Year ended 31 December 2009
Opening net book amount 263 131 241 635
Exchange differences (9) – (31) (40)
Depreciation charge (4) – (70) (74)
Additions 2 – 89 91
Disposals (including amounts disposed of with the Taiwan agency business) (99) – (15) (114)
Reclassify as investment property* – (131) – (131)
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Closing net book amount 153 – 214 367
At 31 December 2009
Cost 173 – 661 834
Accumulated depreciation (20) – (447) (467)
H
Net book amount 153 – 214 367
* In line with changes issued by the IASB as part of its Annual Improvement Project in May 2008 as shown in note A5, all development properties have been
reclassified as investment properties (see note H7).
The total property, plant and equipment relates to continuing operations only.
259
Notes on the Group financial statements > H: Other information on statement
of financial position items > continued
H6: Property, plant and equipment continued
Capital expenditure: property, plant and equipment by segment
2009 £m 2008 £m
Insurance operations:
UK 5 154
US 12 18
Asia 65 40
Asset management operations:
M&G – 3
US 1 2
Asia 2 8
Total segment 85 225
Unallocated corporate 6 15
Total 91 240
H7: Investment properties
Investment properties principally relate to the PAC with-profits fund and are carried at fair value. A reconciliation of the carrying amount
of investment properties at the beginning and end of the year is set out below:
2009 £m 2008 £m
At 1 January 11,992 13,688
Reclassification of development property* 131 –
Additions:
Resulting from acquisitions 184 1,414
Resulting from expenditure capitalised 133 218
Resulting from acquisitions through business combinations 1 463
Disposals (including amounts disposed of with the Taiwan agency business) (1,220) (1,010)
Net loss from fair value adjustments (203) (3,784)
Net foreign exchange differences (113) 395
Transfers to held for sale assets – –
Transfers to owner occupied properties – (68)
Other transfers from property, plant and equipment – 676
At 31 December 10,905 11,992
*In line with changes issued by the IASB as part of its Annual Improvement Project in May 2008 (as shown in note H6 and A5) all development properties
with a total cost of £131 million have been reclassified as investment properties at 1 January 2009. At this date these investments had a fair value of £152
million. The initial gain of £21 million is included as part of ‘net loss from fair value adjustments’.
The income statement includes the following items in respect of investment properties:
2009 £m 2008 £m
Rental income from investment properties 754 726
Direct operating expenses (including repairs and maintenance expenses)
arising from investment properties:
That generated rental income during the year 131 109
That did not generate rental income during the year – 1
Total direct operating expenses 131 110
260 Prudential plc > Annual Report 2009
Investment properties of £3,177 million (2008: £3,559 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:
2009 £m 2008 £m
Future minimum lease payments at 31 December 1,683 963
Future finance charges on finance leases (1,517) (863)
Present value of minimum lease payments 166 100
Future minimum lease payments are due as follows:
Less than 1 year 9 5
1 to 5 years 38 22
Over 5 years 1,636 936
Total 1,683 963
The present values of these minimum lease payments are:
Less than 1 year 8 5
1 to 5 years 38 22
Over 5 years 120 73
Total 166 100
Contingent rent is that portion of the lease payments that is not fixed in amount but is based on the future value of a factor that changes
other than with the passage of time.
The Group’s policy is to rent investment properties to tenants through operating leases. Minimum future rentals to be received on
non-cancellable operating leases are receivable in the following periods:
2009 £m 2008 £m
Less than 1 year 662 742
1 to 5 years 2,282 2,599
Over 5 years 7,792 9,106
Total 10,736 12,447
The total minimum future rentals to be received on non-cancellable sub-leases for land and buildings at 31 December 2009 are
£3,684 million (2008: £3,730 million).
H8: Investments in associates and joint ventures
Investments in associates
The Group had three associates at 31 December 2009 (2008: four) 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 OYO Developments Limited. IFonline Group Limited (IFonline) is no longer
an associate of the Group following a restructuring of that entity in April 2009.
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.
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261
Notes on the Group financial statements > H: Other information on statement
of financial position items > continued
H8: Investments in associates and joint ventures continued
Associates accounted for using the equity method
A summary of the movements in investments in associates accounted for using the equity method in 2009 and 2008 is set out below:
Total
Share of Share of Share of carrying
capital reserves net assets Goodwill value
£m £m £m £m £m
Balance at 1 January 2008 9 (5) 4 8 12
Impairments of goodwill – – – (6) (6)
Exchange translations and other movements 3 1 4 – 4
Share of loss for the year after tax – – – – –
Balance at 31 December 2008 12 (4) 8 2 10
Exchange translation and other movements (7) 4 (3) (1) (3)
Share of loss for the year after tax – – – – (1)
Balance at 31 December 2009 5 – 5 1 6
There have been no changes recognised in the other comprehensive income of associates that would also be recognised in the other
comprehensive income by the Group. Exchange translation and other movements for 2009 mainly relate to the investment in IFonline
mentioned above.
The Group’s share of the assets, liabilities, revenues and profit and loss of associates accounted for using the equity method at
31 December 2009 and 2008 is as follows:
2009 £m 2008 £m
Financial position
Total assets (excluding goodwill) 5 12
Total liabilities – (4)
Net assets 5 8
Results of operations
Revenue 1 3
Profit in the year – –
Associates carried at fair value through profit and loss
The Group’s associates that are carried at fair value through profit and loss comprise investments in OEICs, unit trusts, funds holding
collateralised debt obligations, property unit trusts, and venture capital investments of the PAC with-profits fund where the Group
has significant influence. These investments are incorporated both in the UK and overseas, and some have year ends which are non-
coterminous with that of the Group. In these instances, the investments are recorded at fair value at 31 December 2009 based on
valuations or pricing information at that specific date. The aggregate fair value of associates carried at fair value through profit and loss
where there are published price quotations is approximately £6 billion (2008: £4 billion) at 31 December 2009.
The aggregate assets of these associates are approximately £9 billion (2008: £8 billion). Aggregate liabilities, excluding liabilities
to unit holders and shareholders for unit trusts and OEICs, are approximately £2 billion (2008: £2 billion). Fund revenues, with revenue
arising in unit trusts and OEICs deemed to constitute the investment return for these vehicles, were approximately £0.8 billion (2008:
£0.8 billion) and net loss in the year, excluding unit trusts and OEICs where all investment returns accrue to unit holders or shareholders
respectively, was approximately £0.2 billion (2008: profit of £0.3 billion).
Investments in joint ventures
Joint ventures represent activities over which the Group exercises joint control through contractual agreement with one or more parties.
The Group’s significant joint ventures, which are accounted for using proportionate consolidation, comprise various joint ventures
relating to property investments where the Group has a 50 per cent interest as well as the following interests:
Investment % held Principal activity Country
ICICI Prudential Life Insurance Company Limited 26 Life assurance India
BOCI – Prudential Asset Management Limited 36 Pensions China
PruHealth 50 Private medical insurance UK
CITIC – Prudential Life Insurance Company Limited 50 Life assurance China
CITIC Prudential Fund Management Company Limited 49 Asset management China
Prudential ICICI Asset Management Company Limited 49 Asset management India
Prudential BSN Takaful Berhad 49 General and life insurance Malaysia
262 Prudential plc > Annual Report 2009
The investments noted in the table above have the same accounting year end as the Group, except for ICICI Prudential Life Insurance
Company Limited and Prudential ICICI Asset Management Company Limited. Although these investments have reporting periods
ending 31 March, 12 months of financial information up to 31 December is recorded. Accordingly, the information covers the same
period as that of the Group.
The summarised financial data for the Group’s share of investments in joint ventures is as follows:
2009 £m 2008 £m
Financial position
Current assets 386 250
Non-current assets 2,462 1,212
Total assets 2,848 1,462
Current liabilities (150) (159)
Non-current liabilities (2,392) (1,063)
Total liabilities (2,542) (1,222)
Net equity 306 240
Results of operations
Revenues 974 656
Expenses (945) (649)
Net profit (loss) 29 7
There are several minor service agreements in place between the joint ventures and the Group. During 2009, the aggregate amount
of the transactions was £14.1 million (2008: £15.9 million) and the balance outstanding as at 31 December 2009 was £54.6 million
(2008: £22.5 million).
The joint ventures have no significant contingent liabilities to which the Group is exposed nor does the Group have any significant
contingent liabilities in relation to its interest in the joint ventures.
H9: Properties held for sale
Investment properties are classified as held for sale when contracts have been exchanged but the sale has not been completed at the
period end. At 31 December 2009 the value of assets held for sale was £3 million (2008: nil).
Gains on disposal of held for sale assets are recorded in ‘investment income’ within the income statement.
H10: Cash and cash equivalents
Cash and cash equivalents consist of cash at bank and in hand, deposits held at call with banks, treasury bills and other short-term highly
liquid investments with less than 90 days maturity from the date of acquisition. Cash and cash equivalents included in the cash flow
statement comprise the following statement of financial position amounts:
2009 £m 2008 £m
Cash 5,071 5,362
Cash equivalents 236 593
Total cash and cash equivalents 5,307 5,955
Cash and cash equivalents held centrally are considered to be available for general use by the Group. These funds amount to £895
million and £165 million at 31 December 2009 and 2008, respectively. The remaining funds are considered not to be available for general
use by the Group, and include funds held for the benefit of policyholders.
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263
Notes on the Group financial statements > H: Other information on statement
of financial position items > continued
H11: Shareholders’ equity: Share capital, share premium and reserves
2009 £m 2008 £m
Share capital and share premium
Share capital 127 125
Share premium 1,843 1,840
Reserves
Retained earnings 3,964 3,604
Translation reserve 203 398
Available-for-sale reserve 134 (909)
Total shareholders’ equity 6,271 5,058
*As a result of changes following the implementation of amendments to IAS 1, losses of £240 million relating to US operations previously included within
the unrealised valuation movement of Jackson’s available-for-sale debt securities have been reclassified as exchange movements within the statement
of comprehensive income. This is explained further in note A5. There is no impact on shareholders’ equity or the income statement from this change.
A summary of the ordinary shares in issue is set out below:
Share capital and share premium
2008
Number of Share Share
ordinary capital premium
shares £m £m
Issued shares of 5p each fully paid:
At the beginning of the year 2,470,017,240 123 1,828
Shares issued under share option schemes 2,307,469 – 12
Shares issued in lieu of cash dividends 24,622,979 2 156
Transfer to retained earnings in respect of shares issued in lieu of cash dividends – – (156)
At end of the year 2,496,947,688 125 1,840
2009
Issued shares of 5p each fully paid:
At the beginning of the year 2,496,947,688 125 1,840
Shares issued under share option schemes 605,721 – 3
Shares issued in lieu of cash dividends 34,674,062 2 136
Transfer to retained earnings in respect of shares issued in lieu of cash dividends – – (136)
At end of the year 2,532,227,471 127 1,843
Amounts recorded in share capital represent the nominal value of the shares issued. The difference between the proceeds received
on issue of shares, net of issue costs, and the nominal value of shares issued is credited to the share premium account.
264 Prudential plc > Annual Report 2009
At 31 December 2009, there were options outstanding under Save As You Earn schemes to subscribe for 12,230,833 (2008: 6,825,343)
shares at prices ranging from 266 pence to 572 pence (2008: 266 pence to 617 pence) and exercisable by the year 2016 (2008: 2015). In
addition, there are 17,292 (2008: 967,652) conditional options outstanding under the RSP and 6,644,203 (2008: 4,906,234) under the
GPSP exercisable at nil cost within a 10-year period.
The cost of own shares of £75 million as at 31 December 2009 (2008: £75 million) is deducted from retained earnings. The Company
has established trusts to facilitate the delivery of shares under employee incentive plans and savings-related share option schemes.
At 31 December 2009, 5.3 million (2008: 6.4 million) Prudential plc shares with a market value of £34 million (2008: £27 million) were
held in such trusts. Of this total, 4.8 million (2008: 6.0 million) shares were held in trusts under employee incentive plans. In 2009, the
Company purchased 3.4 million (2008: 5.4 million) shares in respect of employee incentive plans at a cost of £17 million (2008: £27 million).
The maximum number of shares held in the year was 6.4 million which was at the beginning of the year.
Of the total shares held in trust, 0.5 million (2008: 0.4 million) shares were held by a qualifying employee share ownership trust.
These shares are expected to be fully distributed in the future on maturity of savings-related share option schemes.
The Group has consolidated a number of authorised investment funds where it is deemed to control these funds under IFRS.
Some of these funds hold shares in Prudential plc. The total number of shares held by these funds at 31 December 2009 was
10.6 million (2008: 9.2 million) and the cost of acquiring these shares of £51 million (2008: £47 million) is included in the cost of
own shares. The market value of these shares as at 31 December 2009 was £67 million (2008: £37 million).
Reserves
The translation reserve represents cumulative foreign exchange translation differences taken directly to equity in accordance with IFRS,
net of related tax. In accordance with IFRS 1, cumulative translation differences are deemed to be zero at 1 January 2004, the date of
transition to IFRS.
The available-for-sale reserve represents gains or losses arising from changes in the fair value of available-for-sale securities of
Jackson, net of the related change in amortisation of deferred income and acquisition costs and of the related tax.
H12: Insurance contract liabilities and unallocated surplus of with-profits funds
Movement in year
Insurance Unallocated
contract surplus of with-
liabilities profits funds
£m £m
At 1 January 2008 132,776 13,959
Income and expense included in the income statement (12,760) (5,815)
Foreign exchange translation differences 16,014 270
At 31 December 2008 136,030 8,414
At 1 January 2009 136,030 8,414
Income and expense included in the income statement 19,765 1,559
Foreign exchange translation differences (6,574) 46
Disposal of Taiwan agency business (3,508) –
At 31 December 2009 145,713 10,019
Notes B6, D2b, D3b and D4b provide further analysis of the movement in the year of the Group’s policyholder liabilities and unallocated
surplus of the with-profits funds.
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265
Notes on the Group financial statements > H: Other information on statement
of financial position items > continued
H13: Borrowings
Core structural borrowings of shareholder-financed operations
2009 £m 2008 £m
Innovative Lower
Tier 1* Tier 2* Senior† Total Total
Parent company
Subordinated debt:
¤500m 5.75% Subordinated Notes 2021note i 443 443 482
¤20m Medium-Term Subordinated Notes 2023 note ii 18 18 19
£435m 6.125% Subordinated Notes 2031 428 428 427
£400m 11.375% Subordinated Notes 2039 note v 380 380 –
US$1,000m 6.5% Perpetual Subordinated Capital Securities note iii 619 619 696
US$250m 6.75% Perpetual Subordinated Capital Securitiesnote iv 155 155 173
US$300m 6.5% Perpetual Subordinated Capital Securities notes iv 192 192 190
US$750m 11.75% Perpetual Subordinated Capital Securities note ix 456 456 –
1,422 1,269 – 2,691 1,987
Senior debt:
£249m 5.5% Bonds 2009 note v – – 249
£300m 6.875% Bonds 2023 300 300 300
£250m 5.875% Bonds 2029 249 249 249
– – 549 549 798
Total parent company 1,422 1,269 549 3,240 2,785
Jackson
US$250m 8.15% Surplus Notes 2027 note vi 154 154 173
Totalnotes vii, viii 1,422 1,423 549 3,394 2,958
*These debt classifications are consistent with the treatment of capital for regulatory purposes, as defined in the FSA Handbook.
† The senior debt ranks above subordinated debt in the event of liquidation.
Notes
i The ¤500 million 5.75 per cent borrowings have been swapped into borrowings of £333 million with interest payable at six month £Libor plus
0.962 per cent.
ii The ¤20 million borrowings were issued at 20-year Euro Constant Maturity Swap (capped at 6.5 per cent). These have been swapped into
borrowings of £14 million with interest payable at three month £Libor plus 1.2 per cent.
iii Interest on the US$1,000 million 6.5 per cent borrowings was swapped into floating rate payments at three month US$Libor plus 0.80 per cent.
In January 2009, this swap was cancelled.
iv The US$250 million 6.75 per cent borrowings and the US$300 million 6.5 per cent borrowings can be converted, in whole or in part, at the
Company’s option and subject to certain conditions, on any interest payment date falling on or after 23 March 2010 and 23 March 2011 respectively,
into one or more series of Prudential preference shares.
v The £249 million 5.5 per cent borrowings were repaid on maturity in May 2009. In the same month, the Company issued £400 million subordinated
debt in part to replace the maturing debt.
vi The Jackson borrowings are unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims of Jackson.
vii Maturity analysis
The following table sets out the contractual maturity analysis of the Group’s core structural borrowings:
2009 2008
£m £m
Less than 1 year – 249
1 to 2 years – –
2 to 3 years – –
3 to 4 years – –
4 to 5 years – –
Over 5 years 3,394 2,709
Total 3,394 2,958
266 Prudential plc > Annual Report 2009
viii Management analyses the net core structural borrowings position as follows:
2009 2008
£m £m
Total core structural borrowings (as above) 3,394 2,958
Less: Holding company cash and short-term investments
(recorded within the consolidated statement of financial position) (1,486) (1,165)
Net core structural borrowings of shareholder-financed operations 1,908 1,793
ix In July 2009, the Company issued US$750 million perpetual subordinated capital securities.
Operational borrowings attributable to shareholder-financed operations
2009 £m 2008 £m
Borrowings in respect of short-term fixed income securities programmes
Commercial paper 2,031 1,269
Medium-Term Notes 2010 7 9
2,038 1,278
Non-recourse borrowings of US operations note i
Jackson note ii – 104
Investment subsidiaries 20 23
Piedmont and CDO funds note iii 183 384
203 511
Other borrowings
Bank loans and overdrafts note iv 148 185
Obligations under finance leases 3 3
Other borrowings note v 359 –
510 188
Total note vii 2,751 1,977
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 Jackson.
iii Piedmont is an investment trust investing in certain asset-backed and mortgage-backed securities in the US. These borrowings pertain to debt
instruments issued to external parties.
iv Bank loans and overdrafts include a short-term loan of £130 million in respect of Asian operations (2008: £130 million).
v Other borrowings represents amounts whose repayment to the lender is contingent on future surpluses emerging from certain contracts specified
under the arrangement. If insufficient surplus emerges on the contracts, there is no recourse to other assets of the Group and the liability is not
payable to the degree of shortfall.
vi In addition to the operational borrowings shown in the table above, Prudential plc has issued £200 million Floating Rate Notes 2010, which were
wholly subscribed to by a Group subsidiary. These borrowings have been eliminated on consolidation.
vii Maturity analysis
The following table sets out the contractual maturity analysis of the Group’s operational borrowings attributable to shareholder-financed operations:
2009 2008
£m £m
Less than 1 year 2,183 1,584
1 to 2 years 121 9
2 to 3 years 239 38
3 to 4 years 172 52
4 to 5 years 6 240
Over 5 years 30 54
Total 2,751 1,977
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267
Notes on the Group financial statements > H: Other information on statement
of financial position items > continued
H13: Borrowings continued
Borrowings attributable to with-profits operations
2009 £m 2008 £m
Non-recourse borrowings of consolidated investment funds note i 1,016 1,161
£100m 8.5% Undated Subordinated Guaranteed Bonds of Scottish Amicable Finance plc note ii 100 100
Other borrowings (predominantly obligations under finance leases) 168 47
Totalnote iii 1,284 1,308
Notes
i In all instances the holders of the debt instruments issued by these funds do not have recourse beyond the assets of those funds.
ii The interests of the holders of the bonds issued by Scottish Amicable Finance plc, a subsidiary of the Scottish Amicable Insurance Fund,
are subordinate to the entitlements of the policyholders of that fund.
iii Maturity analysis
The following table sets out the contractual maturity analysis of the Group’s borrowings attributable to with-profits operations:
2009 2008
£m £m
Less than 1 year 33 272
1 to 2 years 77 12
2 to 3 years 706 150
3 to 4 years 1 418
4 to 5 years 1 –
Over 5 years 466 456
Total 1,284 1,308
H14: Provisions and contingencies
Provisions
2009 £m 2008 £m
Provision in respect of defined benefit pension schemes:I2
Deficit, gross of deferred tax, based on scheme assets held, including investments in
Prudential insurance policies:
Attributable to PAC with-profits fund (i.e. absorbed by the liability for unallocated surplus) 122 67
Attributable to shareholder-financed operations (i.e. to shareholders’ equity) 128 82
250 149
Add back: Investments in Prudential insurance policies 187 157
Provision after elimination of investments in Prudential insurance policies and matching
policyholder liability from Group statement of financial position 437 306
Other provisions (see below) 206 155
Total provisions 643 461
Analysis of other provisions:
2009 £m 2008 £m
At 1 January 155 220
Charged to income statement:
Additional provisions 148 48
Unused amounts released (13) (24)
Used during the year (75) (101)
Exchange differences (9) 12
At 31 December 206 155
Comprising:
Legal provisions 15 23
Restructuring provisions 17 21
Other provisions 174 111
Total 206 155
Of the other provisions balance of £206 million (2008: £155 million), £148 million (2008: £90 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 I2.
268 Prudential plc > Annual Report 2009
Legal provisions
Of the legal provisions of £15 million (2008: £23 million) £11 million (2008:£23 million) relates to Jackson. Jackson has been named in
civil proceedings, which appear to be substantially similar to other class action litigation brought against many life insurers in the US,
alleging misconduct in the sale of insurance products. During 2009, £9 million was paid.
Restructuring provisions
Restructuring provisions of £17 million (2008: £21 million) relate to restructuring activities of UK insurance operations. In 2004 and
2005, UK insurance operations implemented restructurings relating to document management review, streamlining operations, and the
relocation of activities to an offshore base in India. In December 2005, the Group announced an initiative for UK insurance operations to
work more closely with M&G and in the process facilitate the realisation of substantial annualised pre-tax cost savings and opportunities
for revenue synergies.
At 1 January 2008, a provision of £35 million was brought forward, and during 2008 an additional £4 million was provided, £7 million
of unused provision was released, and £11 million was paid.
During 2009, £1 million of unused provision was released, and £3 million was paid.
Other provisions
Other provisions of £174 million (2008: £111 million) include provisions of £143 million (2008: £95 million) relating to staff benefit
schemes. During 2009, another £112 million was provided (including exchange movements of £6 million), £10 million of unused
provision was released and £54 million was paid. In 2008, a provision of £155 million was brought forward, an additional £37 million
was provided, £15 million of unused provision was released and £82 million was paid. Other provisions also include £27 million
(2008: £16 million) relating to various onerous contracts where, in 2009, an additional £15 million was provided and £4 million was used.
In 2008, £11 million was brought forward, £10 million was provided and £5 million was paid. Other provisions also include £4 million
of regulatory provisions, where £9 million was provided, £2 million of unused provision was released and £3 million was paid.
Contingencies and related obligations
Litigation
In addition to the legal proceedings relating to Jackson mentioned under the legal provisions section above, the Group is involved in
other litigation and regulatory issues. Whilst the outcome of such matters cannot be predicted with certainty, the Company believes
that the ultimate outcome of such litigation and regulatory issues will not have a material adverse effect on the Group’s financial
condition, results of operations, or cash flows.
Pension mis-selling review
In 1988, the UK government introduced new pensions legislation intended to encourage more individuals to make their own
arrangements for their pensions. During the period from April 1988 to June 1994, many individuals were advised by insurance
companies, Independent Financial Advisers and other intermediaries to not join, to transfer from or to opt out of their occupational
pension schemes in favour of private pension products introduced under the UK Income and Corporation Taxes Act 1988. The UK
insurance regulator (previously the Personal Investment Authority, now the FSA), subsequently determined that many individuals were
incorrectly advised and would have been better off not purchasing the private pension products sold to them. Industry participants are
responsible for compensating the persons to whom private pensions were mis-sold. As a result, the FSA required that all UK life
insurance companies review their potential cases of pension mis-selling and pay compensation to policyholders where necessary and,
as a consequence, record a provision for the estimated costs. The Group met the requirement of the FSA to issue offers to all cases by
30 June 2002.
The table below summarises the change in the pension mis-selling provision for the years ended 31 December 2009 and 2008.
The change in the provision is included in benefits and claims in the income statement and the movement in unallocated surplus of
with-profits funds has been determined accordingly.
2009 £m 2008 £m
Balance at beginning of year 345 448
Changes to actuarial assumptions and method of calculation 20 (75)
Discount unwind 3 20
Redress to policyholders (44) (46)
Payment of administrative costs (2) (2)
Balance at end of year 322 345
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The pension mis-selling provision is included within the liabilities in respect of investment contracts with discretionary participation
features under IFRS 4.
The pension mis-selling provision at 31 December 2009 set out above of £322 million is stochastically determined on a discounted
basis. The average discount rate implied in the movement in the year is 4.6 per cent. The undiscounted amounts at 31 December 2009
expected to be paid in each of the years ending 31 December are as follows:
H
269
Notes on the Group financial statements > H: Other information on statement
of financial position items > continued
H14: Provisions and contingencies continued
2009 £m
Year ended 31 December
2010 29
2011 8
2012 11
2013 12
2014 15
Thereafter 513
Total undiscounted amount 588
Aggregate discount (266)
Discounted pension mis-selling provision at 31 December 2009 322
The liability accounting for the contracts which are the subject of the mis-selling provision is reflected in two elements, namely the core
policyholder liability determined on the basis applied for other contract liabilities and the mis-selling provision. The overall liability for
these contracts remains appropriate in the context of the accounting for policyholder liabilities that determines the calculation of both
elements. However, the constituent elements are reallocated and remeasured for the changes arising from the application of the realistic
Peak 2 basis of liabilities for the core policyholder liability, as reflected in the IFRS policy improvement to apply the UK GAAP standard
FRS 27 as described in section A4.
The Financial Ombudsman Service periodically updates the actuarial assumptions to be used in calculating the compensation
payments, including interest rates and mortality assumptions. The pension mis-selling provision represents the discounted value of
future expected payments, including benefit payments and all internal and external legal and administrative costs of adjudicating,
processing and settling those claims. To the extent that amounts have not been paid, the provision increases each year reflecting the
shorter period of discount.
The directors believe that, based on current information, the provision, together with future investment return on the assets backing
the provision, will be adequate to cover the costs of pension mis-selling as well as the costs and expenses of the Group’s pension review
unit established to identify and settle such cases. Such provision represents the best estimate of probable costs and expenses. However,
there can be no assurance that the current provision level will not need to be increased.
The costs associated with the pension mis-selling review have been met from the inherited estate (see below). Accordingly, these
costs have not been charged to the asset shares used in the determination of policyholder bonus rates. Hence policyholders’ pay-out
values have been unaffected by pension mis-selling.
In 1998, Prudential stated that deducting mis-selling costs from the inherited estate would not impact its bonus or investment policy
and it gave an assurance that if this unlikely event were to occur, it would make available support to the fund from shareholder resources
for as long as the situation continued, so as to ensure that policyholders were not disadvantaged. The assurance was designed to protect
both existing policyholders at the date it was announced, and policyholders who subsequently purchased policies while the pension mis-
selling review was continuing.
This review was completed on 30 June 2002. The assurance will continue to apply to any policy in force at 31 December 2003, both
for premiums paid before 1 January 2004, and for subsequent regular premiums (including future fixed, RPI or salary related increases
and Department of Work and Pensions rebate business). The assurance has not applied to new business since 1 January 2004. New
business in this context consists of new policies, new members to existing pension schemes plus regular and single premium top-ups,
transfers and switches to existing arrangements. The maximum amount of capital support available under the terms of the assurance will
reduce over time.
The bonus and investment policy for each type of with-profits policy is the same irrespective of whether or not the assurance applies
and this is expected to continue for the foreseeable future. Hence removal of the assurance for new business has had no impact on
policyholder returns.
270 Prudential plc > Annual Report 2009
Mortgage endowment products review
In common with several other UK insurance companies, the Group used to sell low-cost endowment products related to repayment of
residential mortgages. At sale, the initial sum assured is set at a level such that the projected benefits, including an estimate of the annual
bonus receivable over the life of the policy, will equal or exceed the mortgage debt. Because of a decrease in expected future investment
returns since these products were sold, the FSA is concerned that the maturity value of some of these products will be less than the
mortgage debt. The FSA has worked with insurance companies to devise a programme whereby the companies write to customers
indicating whether they may have a possible shortfall and outline the actions that the customers can take to prevent this possibility.
The Group is exposed to mortgage endowment products in respect of policies issued by Scottish Amicable Life plc (SAL) and
policies issued by Scottish Amicable Life Assurance Society (SALAS) which were transferred into SAIF. At 31 December 2009, provisions
of £4 million (2008: £5 million) in SAL and £35 million (2008: £40 million) in SAIF were held within policyholder liabilities to cover
potential compensation in respect of mortgage endowment product mis-selling claims. As SAIF is a separate sub-fund of the Prudential
Assurance long-term business fund, this provision has no impact on shareholders.
In addition, in the year ended 31 December 2009 Prudential Assurance’s main with-profits fund paid compensation of £2 million
(2008: £1 million) in respect of mortgage endowment products mis-selling claims and at 31 December 2009 held a provision of £47
million (2008: £54 million) in respect of further compensation. The movement in this provision has no impact on the Group’s profit
before tax.
In May 2006, the Group introduced a deadline for both Prudential and Scottish Amicable mortgage endowment complaints.
Impacted customers have three years to lodge a mis-selling complaint in line with the time limit prescribed by the FSA and the ABI.
Guaranteed annuities
Prudential Assurance used to sell guaranteed annuity products in the UK and at 31 December 2009 held a provision of £31 million (2008:
£42 million) within the main with-profits fund within policyholder liabilities to honour guarantees on these products. The Group’s main
exposure to guaranteed annuities in the UK is through SAIF and at 31 December 2009 a provision of £284 million (2008: £391 million)
was held in SAIF to honour the guarantees. As SAIF is a separate sub-fund of the Prudential Assurance long-term business fund, the
movement in this provision has no impact on shareholders.
Other matters
Inherited estate of the PAC long-term fund
The assets of the with-profits sub-fund (WPSF) within the long-term fund of The Prudential Assurance Company Limited (PAC) comprise
the amounts that it expects to pay out to meet its obligations to existing policyholders and an additional amount used as working capital.
The amount payable over time to policyholders from the WPSF is equal to the policyholders’ accumulated asset shares plus any
additional payments that may be required by way of smoothing or to meet guarantees. The balance of the assets of the WPSF is called
the ‘inherited estate’ and has accumulated over many years from various sources.
The inherited estate, as working capital, enables PAC to support with-profits business by providing the benefits associated with
smoothing and guarantees, by providing investment flexibility for the fund’s assets, by meeting the regulatory capital requirements that
demonstrate solvency and by absorbing the costs of certain significant events or fundamental changes in its long-term business without
affecting the bonus and investment policies. The size of the inherited estate fluctuates from year to year depending on the investment
return and the extent to which it has been required to meet smoothing costs, guarantees and other events.
Support for long-term business funds by shareholders’ funds
As a proprietary insurance company, PAC is liable to meet its obligations to policyholders even if the assets of the long-term funds are
insufficient to do so. The assets, represented by the unallocated surplus of with-profits funds, in excess of amounts expected to be paid
for future terminal bonuses and related shareholder transfers (‘the excess assets’) in the long-term funds could be materially depleted
over time by, for example, a significant or sustained equity market downturn, costs of significant fundamental strategic change or a
material increase in the pension mis-selling provision. In the unlikely circumstance that the depletion of the excess assets within the
long-term fund was such that the Group’s ability to satisfy policyholders’ reasonable expectations was adversely affected, it might
become necessary to restrict the annual distribution to shareholders or to contribute shareholders’ funds to the long-term funds to
provide financial support.
In 1997, the business of SALAS, a mutual society, was transferred to PAC. In effecting the transfer, a separate sub-fund, SAIF, was
established within PAC’s long-term business fund. This sub-fund contains all the with-profits business and all other pension business
that was transferred. No new business has been or will be written in the sub-fund and the sub-fund is managed to ensure that all the
invested assets are distributed to SAIF policyholders over the lifetime of SAIF policies. With the exception of certain amounts in respect
of the unitised with-profits life business, all future earnings arising in SAIF are retained for SAIF policyholders. Any excess (deficiency)
of revenue over expense within SAIF during a period is offset by a transfer to (from) the SAIF unallocated surplus. Shareholders have
no interest in the profits of SAIF but are entitled to the asset management fees paid on this business. With the exception of certain
guaranteed annuity products mentioned earlier in this note, and certain products which include a minimum guaranteed rate of
accumulation, the majority of SAIF with-profits policies do not guarantee minimum rates of return to policyholders.
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Notes on the Group financial statements > H: Other information on statement
of financial position items > continued
H14: Provisions and contingencies continued
Should the assets of SAIF be inadequate to meet the guaranteed benefit obligations to the policyholders of SAIF, the PAC long-term
fund would be liable to cover any such deficiency. Due to the quality and diversity of the assets in SAIF and the ability of SAIF to revise
guaranteed benefits in the event of an asset shortfall, the directors believe that the probability of either the PAC long-term fund or the
Group’s shareholders’ funds having to contribute to SAIF is remote.
Guarantees and commitments
Guarantee funds in both the UK and the US provide for payments to be made to policyholders on behalf of insolvent life insurance
companies. These guarantee funds are financed by payments assessed on solvent insurance companies based on location, volume and
types of business. The Group estimated its reserve for future guarantee fund assessments for Jackson, included within other liabilities to
be £15 million at 31 December 2009 (2008: £18 million). Similar assessments for the UK businesses were not significant. The directors
believe that the reserve is adequate for all anticipated payments for known insolvencies.
At 31 December 2009, Jackson has unfunded commitments of £339 million (2008: £400 million) related to its investments in limited
partnerships and of £89 million (2008: £24 million) related to commercial mortgage loans. These commitments were entered into in the
normal course of business and the directors do not expect a material adverse impact on the operations to arise from them.
Jackson owns debt instruments issued by securitisation trusts managed by PPM America. At 31 December, 2009, the support
provided by certain forbearance agreements Jackson entered into with the counterparty to certain of these trusts could potentially
expose Jackson to maximum losses of $750 million, if circumstances allowed the forbearance period to cease. Jackson believes that,
so long as the forbearance period continues, the risk of loss under the agreements is remote.
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.
H15: Other liabilities
2009 £m 2008 £m
Creditors arising from direct insurance and reinsurance operations 615 552
Interest payable 83 139
Other items 179 199
Total 877 890
272 Prudential plc > Annual Report 2009
Notes on the Group financial statements > I: Other notes
I1: Sale of legacy agency book and agency force in Taiwan to China Life Insurance Company of Taiwan
On 20 February 2009, the Company announced that it had entered into an agreement to sell the assets and liabilities of its agency
distribution business and its agency force in Taiwan to China Life Insurance Company Ltd of Taiwan for the nominal sum of NT$1
subject to regulatory approval. In addition, the Company would invest £45 million to purchase a 9.99 per cent stake in China Life
through a share placement. The business transferred represented 94 per cent of Prudential’s in-force liabilities in Taiwan and included
Prudential’s legacy interest rate guaranteed products with IFRS basis gross assets at 31 December 2008 of £4.5 billion. After taking
account of IFRS shareholders’ equity of the business at 31 December 2008, provisions for restructuring costs, and other costs the
Group’s IFRS shareholders’ equity at 31 December 2008 was expected to decrease by approximately £595 million.
The Company retains its interest in life insurance business in Taiwan through its retained bank distribution partnerships and its
direct investment of 9.99 per cent in China Life.
The sale was completed, following regulatory approval, on 19 June 2009. The trading results shown below are for the period
1 January to 19 June 2009.
The carrying value of the IFRS equity of the business, as applied in the calculation of the loss on sale, reflects the application of
‘grandfathered’ US GAAP under IFRS 4 of insurance assets and liabilities. US GAAP does not, and is not designed to, include the cost
of holding economic capital to support the legacy interest rate guaranteed products as recognised under the Company’s supplementary
reporting basis under European Embedded Value principles. The IFRS loss on sale reflects this missing element of the economic value.
The effects on the IFRS income statement and equity attributable to shareholders is shown below.
The loss on sale and trading results of the Taiwan agency business for the period of ownership comprise:
2009 £m
2008 £m
Loss on sale:
As estimated and announced on 20 February 2009:
Proceeds
Net asset value attributable to equity holders of the Company and provision for restructuring costs
Goodwill written off
Trading losses to completion, net of tax, as shown below
Minority interests and other adjustments
Loss on sale of the Taiwan agency business, gross and net of tax (as shown in income statement)
Trading results before tax (including short-term fluctuations in investment returns)
Related tax
Total
Loss on sale and trading results of the Taiwan agency business:
Gross of tax
Tax
Net of tax
Attributable to:
Equity holders of the Company
Minority interests
Loss on sale and results of the Taiwan agency business, net of tax
–
(551)
(44)
(595)
44
(8)
(559)
(62)
18
(44)
(621)
18
(603)
(598)
(5)
(603)
The loss on disposal of £559 million includes cumulative foreign exchange gains of £9 million recycled through the profit and loss
account as required by IAS 21. The impact on shareholders’ funds of the disposal (including trading losses up to the date of disposal)
is £607 million. The difference of £12 million from the estimate of £595 million reflects a number of minor adjustments.
–
–
–
–
–
–
–
1
(4)
(3)
1
(4)
(3)
(3)
–
(3)
273
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Notes on the Group financial statements > I: Other notes > continued
I1: Sale of legacy agency book and agency force in Taiwan to China Life Insurance Company of Taiwan continued
Cash and cash equivalents disposed of were £388 million and restructuring and other costs incurred in cash in the year were
£64 million. In addition, the Company invested £45 million in China Life as described above. Accordingly, the cash outflow for the
Group arising from the sale of the Taiwan agency business, as shown in the consolidated statement of cash flows, was £497 million.
In order to facilitate comparisons of the Group’s retained businesses, the presentation of the segmental analysis of IFRS loss
before shareholder tax (as shown in note B1) has been adjusted to show separately the result for the sold Taiwan agency business,
as explained below.
Operating profit based on longer-term investment returns
Short-term fluctuations in investment returns
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes
Results of sold Taiwan agency business
Loss before tax
I2: Staff and pension plans
a Staff and employment costs
The average number of staff employed by the Group during the year was:
Business operations:
UK operations
US operations
Asian operations
Total
The costs of employment were:
Business operations:
Wages and salaries
Social security costs
Other pension costs (see below)
Pension actuarial and other losses (gains) charged to income statement
Total
As
previously
published
1,347
(1,783)
(14)
Included
above
(450)
2008 £m
Adjustment
Adjusted
(64)
62
1
1
–
1,283
(1,721)
(13)
1
(450)
2009
2008
4,516
3,371
19,502
27,389
6,231
3,298
20,154
29,683
2009 £m
2008 £m
878
61
95
138
233
1,172
791
54
78
(10)
68
913
Other pension costs comprises £57 million (2008: £47 million) relating to defined benefit schemes and £38 million (2008: £31 million)
relating to defined contribution schemes of continuing operations. Of the defined contribution scheme costs, £27 million (2008:
£21 million) related to overseas defined contribution schemes. The £57 million (2008: £47 million) relating to defined benefit schemes
comprises a charge of £29 million (2008: £29 million) relating to PSPS and a charge of £28 million (2008: £18 million) for other schemes.
Consistent with the derecognition of the Company’s interest in the underlying IAS 19 surplus of PSPS as described in note (b)(i)1
below, the £29 million (2008: £29 million) for PSPS represents the cash cost of contributions for ongoing service of active members and
the unwind of discount on the opening provision for deficit funding for PSPS. The charge of £28 million (2008: £18 million) for other
schemes comprises a £19 million (2008: £7 million) charge on an economic basis, reflecting the total assets of the schemes, and a further
£9 million (2008: £11 million) charge to adjust for amounts invested in Prudential insurance policies to arrive at the IAS 19 basis charge.
The loss of £138 million (2008: gains of £10 million) for actuarial and other gains comprises a loss of £155 million (2008: £21 million)
for actuarial and other losses on an economic basis and £17 million actuarial gains (2008: £31 million) to adjust for amounts invested in
Prudential insurance policies. The derivation of these amounts is shown in note (b)(i)7 on pages 282 and 283.
274 Prudential plc > Annual Report 2009
b Pension plans
i Defined benefit plans
1 Summary
The Group business operations operate a number of pension schemes. The specific features of these plans vary in accordance with the
regulations of the country in which the employees are located, although they are, in general, funded wholly by the Group and based
either on a cash balance formula or on years of service and salary earned in the last year or years of employment. The largest defined
benefit scheme is the principal UK scheme, namely the Prudential Staff Pension Scheme (PSPS); 86 per cent (2008: 87 per cent) of the
underlying scheme liabilities of the Group defined benefit schemes are accounted for within PSPS.
The Group also operates two smaller defined benefit schemes for UK employees in respect of Scottish Amicable and M&G. For all
three schemes the projected unit method was used for the most recent full actuarial valuations. There is also a small defined benefit
scheme in Taiwan but as part of the sale of the Taiwan agency business completed in June 2009, the Group settled the majority of the
obligations under the scheme as a significant number of employees transferred out.
Defined benefit schemes in the UK are generally required to be subject to full actuarial valuation every three years in order to
assess the appropriate level of funding for schemes in relation to their commitments. These valuations include assessments of the likely
rate of return on the assets held within the separate trustee administered funds. PSPS was last actuarially valued as at 5 April 2008. This
valuation demonstrated the scheme to be 106 per cent funded by reference to the Scheme Solvency Target that forms the basis of the
scheme’s statutory funding objective. Accordingly, the total contributions to be made by the Group into the scheme were reduced from
the previous arrangement of £70-£75 million per annum to £50 million per annum effective from 1 July 2009. As the scheme was in a
surplus position at the valuation date, no formal deficit funding plan was required. However, recognising that there had been significant
deterioration in the value of the scheme assets from 5 April 2008 to the date of the finalisation of the valuation, contributions to the
scheme for additional funding of £25 million per annum, as well as the £25 million per annum employer’s contributions for ongoing
service of current employees, was agreed with the Trustees subject to a reassessment when the next valuation is completed. The
additional funding is akin to deficit funding. Deficit funding for PSPS is apportioned in the ratio of 70/30 between the PAC life fund
and shareholder-backed operations following detailed consideration in 2005 of the sourcing of previous contributions. Employer
contributions for ongoing service of current employees are apportioned in the ratio relevant to current activity. In 2009 total
contributions for the year including expenses and augmentations were £67 million at 31 December (2008: £79 million).
The valuation of the Scottish Amicable Pension Scheme as at 31 March 2008 demonstrated the scheme to be 91 per cent funded,
with a shortfall of actuarially determined liabilities of nine per cent, representing a deficit of £38 million. Based on this valuation, deficit
funding amounts designed to eliminate the actuarial deficit over a seven year period were made from July 2009 of £7.3 million per
annum. The IAS 19 deficit of the Scottish Amicable Pension Scheme at 31 December 2009 of £139 million (2008: £44 million) has been
allocated 50 per cent to the PAC with-profits fund and 50 per cent to the PAC shareholders fund.
Subsequent to the year end, the valuation of the M&G Pension Scheme as at 31 December 2008 was finalised in January 2010.
The valuation demonstrated the scheme to be 76 per cent funded, with a shortfall of actuarially determined assets to liabilities of
£51 million. Based on this valuation, deficit funding amounts designed to eliminate the actuarial deficit over a five year period were made
from January 2010 of £14.1 million per annum for the first two years and £9.3 million per annum for the subsequent three years. The IAS
19 deficit of the M&G Pension Scheme on an economic basis at 31 December 2009 was £36 million (2008: £23 million) and is wholly
attributable to shareholders.
Under the IAS 19 valuation basis, the Group adopted IFRIC 14, ‘IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction’ in 2008. Under IFRIC 14, on an economic basis the Group has not recognised the underlying PSPS
surplus of £513 million gross of deferred tax (2008: £728 million) due to the Group not having an unconditional right of refund to any
surplus in the scheme. Additionally, under IFRIC 14, the Group has also recognised a liability for committed deficit funding obligation to
PSPS. Although the contributions would increase the surplus in the scheme, the corresponding asset will not be recognised in the Group
accounts. At 31 December 2009, based on the new funding arrangement as described above, the Group has recognised a liability for
deficit funding to 30 June 2012 for PSPS of £75 million, gross of deferred tax (2008: £65 million gross of deferred tax based on the
previous deficit funding commitment to 5 April 2010).
The asset and liabilities of PSPS are unaffected by the impact of the application of IFRIC 14. PSPS is managed on an economic basis
for the longer-term benefit of its current and deferred pensioners and active members. The surplus in PSPS is available to absorb future
adverse asset value movements and, if required, strengthening in mortality assumptions.
As at 31 December 2009, after the effect of the application of IFRIC 14, the shareholders’ share of the pension liability for PSPS
deficit funding obligation and the deficits of the defined benefit pension schemes amounted to a £92 million liability net of related tax
relief (2008: £61 million). These amounts are determined after including amounts invested by the M&G scheme in Prudential policies
as explained later in this note.
On the economic basis (including investments of the M&G scheme in Prudential policies as assets), for 2009, a £32 million (2008:
£26 million) pre-tax shareholder charge to operating results based on longer-term returns arises. In addition, outside the operating result
but included in total profits is a pre-tax shareholder loss of £74 million (2008: £14 million) for shareholders’ share of actuarial and other
gains and losses.
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I2: Staff and pension plans continued
In addition, also on the economic basis, the PAC with-profits sub-fund was charged £16 million (2008: charge of £10 million) for its share
of the pension charge of PSPS and Scottish Amicable and charged with £81 million (2008: £7 million) for its share of net actuarial and
other losses on the scheme assets and liabilities. As shareholder profits for the PAC with-profits sub-fund reflects the surplus for
distribution, these amounts are effectively absorbed by an increased credit in the income statement for the transfer to the liability for
unallocated surplus.
At 31 December 2009, after the effect of the application of IFRIC 14, the total share of the liability for deficit funding on PSPS and
the deficit on the smaller Scottish Amicable Scheme attributable to the PAC with-profits fund amounted to a liability of £110 million
(2008: £60 million) net of related tax relief.
2 Corporate governance
The rules of the Group’s largest pension arrangement, the defined benefit section of PSPS, a final salary scheme, specify that, in
exercising its investment powers, the Trustee’s objective is to achieve the best overall investment return consistent with the security of
the assets of the scheme. In doing this, consideration is given to the nature and duration of the scheme’s liabilities. The Trustee sets the
benchmark for the asset mix, following analysis of the liabilities by the Scheme’s Actuary and, having taken advice from the Investment
Managers, then selects benchmark indices for each asset type in order to measure investment performance against a benchmark return.
The Trustee reviews strategy, the asset mix benchmark and the Investment Managers’ objectives every three years, to coincide with
the Actuarial Valuation, or earlier if the Scheme Actuary recommends. Interim reviews are conducted annually based on changing
economic circumstances and financial market levels.
The Trustee sets the general investment policy and specifies any restrictions on types of investment and the degrees of divergence
permitted from the benchmark, but delegates the responsibility for selection and realisation of specific investments to the Investment
Managers. In carrying out this responsibility, the Investment Managers are required by the Pensions Act 1995 to have regard to the need
for diversification and suitability of investments. Subject to a number of restrictions contained within the relevant asset management
agreements, the Investment Managers are authorised to invest in any class of investment asset. However, the Investment Managers will
not invest in any new class of investment asset without prior consultation with the Trustee.
The Trustee consults the Principal Employer, the Prudential Assurance Company, on these investment principles, but the ultimate
responsibility for the investment of the assets of the scheme lies with the Trustee.
The investment policies and strategies for the other two UK defined benefit schemes, the M&G Group Pension Scheme and the
Scottish Amicable Staff Pension Scheme, which are both final salary schemes, follow similar principles, but have different target
allocations reflecting the particular requirements of the schemes.
3 Assumptions
The actuarial assumptions used in determining benefit obligations and the net periodic benefit costs for the years ended 31 December
were as follows:
Discount rate*
Rate of increase in salaries
Rate of inflation
Rate of increase of pensions in payment for inflation:
Guaranteed (maximum 5%)
Guaranteed (maximum 2.5%)†
Discretionary†
Expected returns on plan assets
2009 %
2008
%
5.8
5.7
3.7
3.7
2.5
2.5
4.5
6.1
5.0
3.0
3.0
2.5
2.5
6.2
*The discount rate of 5.8 per cent has been determined by reference to an ‘AA’ corporate bond index adjusted, where applicable, to allow for the
difference in duration between the index and the pension liabilities.
†The rates of 2.5 per cent shown are those for PSPS. Assumed rates of increase of pensions in payment for inflation for all other schemes are 3.7 per cent in
2009 (2008: 3.0 per cent).
The calculations are based on current actuarially calculated mortality estimates with a specific allowance made for future improvements
in mortality, which is broadly based on adjusted versions of the medium cohort projections prepared by the Continuous Mortality
Investigation Bureau of the Institute and Faculty of Actuaries.
276 Prudential plc > Annual Report 2009
The tables used for PSPS immediate annuities in payment at 31 December 2009 were:
Male: 108.6 per cent PNMA 00 with medium cohort improvements subject to a floor of 1.75 per cent up to the age of 90, decreasing
linearly to zero by age of 120; and
Female: 103.4 per cent PNFA 00 with 75 per cent medium cohort improvements subject to a floor of 1.00 per cent up to the age of 90
and decreasing linearly to zero by age of 120.
The tables used for PSPS immediate annuities in payment at 31 December 2008 were:
Male: 100 per cent PMA 92 with CMIR17 improvements to the valuation date and medium cohort improvements subject to a floor
of 1.75 per cent up to the age of 90, decreasing linearly to zero by age of 120; and
Female: 100 per cent PFA92 with CMIR17 improvements to the valuation date and 75 per cent medium cohort improvements subject
to a floor of one per cent up to the age of 90 and decreasing linearly to zero by age of 120.
The assumed life expectancies on retirement at age 60, based on the mortality table used was:
Retiring today
Retiring in 15 years’ time
2009 years
2008 years
Male
27.4
30.1
Female
28.6
30.8
Male
26.4
28.9
Female
28.4
29.8
The mean term of the current PSPS liabilities is around 18 years.
Using external actuarial advice provided by the scheme actuaries being Towers Watson (previously known as Watson Wyatt) for
the valuation of PSPS and by Aon Limited for the M&G scheme, and Xafinity for the Scottish Amicable scheme, the most recent full
valuations have been updated to 31 December 2009, applying the principles prescribed by IAS 19.
4 Summary financial position
The Group liability in respect of defined benefit pension schemes is as follows:
Economic position:
Deficit, gross of deferred tax, based on scheme assets held,
including investments in Prudential insurance policies:
Attributable to the PAC with-profits fund (i.e. absorbed by the liability for unallocated surplus)
Attributable to shareholder-backed operations (i.e. to shareholders’ equity)
Economic deficit – as explained in note 5 below
Exclude: investments in Prudential insurance policies (offset on consolidation in the
Group financial statements against insurance liabilities)
Deficit under IAS 19 included in provisions in the statement of financial position – as explained in note 7 below
2009 £m
2008 £m
(122)
(128)
(250)
(187)
(437)
(67)
(82)
(149)
(157)
(306)
The following disclosures explain the economic position and IAS 19 basis of accounting after eliminating investment in Prudential
insurance policies on consolidation.
5 Group economic financial position
The following tables illustrate the movement on the financial position of the Group’s defined benefit pension schemes on an economic
basis. The underlying position reflects the assets (including investments in Prudential policies that are offset against liabilities to
policyholders on the Group consolidation) and the liabilities of the schemes. At 31 December 2009, the investments in Prudential
policies comprise £101 million (£2008: £103 million) for PSPS and £187 million (2008: £157 million) for the M&G scheme.
Separately, the economic financial position also includes the effect of the application of IFRIC 14, whereby for PSPS, where there are
constraints in the trust deed to prevent the company access, the surplus is not recognised and a liability to additional funding (as described
earlier) is established.
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Notes on the Group financial statements > I: Other notes > continued
I2: Staff and pension plans continued
Estimated pension scheme deficit – economic basis
Movements on the pension scheme deficit (determined on the ‘economic basis’) are as follows, with the effect of the application of
IFRIC 14 being shown separately:
2009 £m
(Charge) credit to income statement
Operating
results
(based on
longer-term
investment
returns)
note b
Actuarial
and
other
gains
and
losses
note c
Surplus
(deficit) in
scheme at
1 January
2009
Contributions
paid
Disposal of
Taiwan
agency
business*
Surplus
(deficit)
in scheme
at 31 Dec
2009
note a
644
(483)
161
(47)
114
(793)
550
(243)
68
(175)
(149)
67
(82)
21
(61)
(71)
33
(38)
11
(27)
23
(17)
6
(2)
4
(48)
16
(32)
9
(23)
(337)
207
(130)
36
(94)
182
(126)
56
(15)
41
(155)
81
(74)
21
(53)
85
(42)
43
(11)
32
–
–
–
–
–
85
(42)
43
(11)
32
17
–
17
(4)
13
–
–
–
–
–
17
–
17
(4)
13
338
(285)
53
(15)
38
(588)
407
(181)
51
(130)
(250)
122
(128)
36
(92)
All schemes
Underlying position
(without the effect of IFRIC 14)
Surplus (deficit)
Less: amount attributable to PAC with-profits fund
Shareholders’ share:
Gross of tax surplus (deficit)
Related tax
Net of shareholders’ tax
Effect of IFRIC 14
Surplus (deficit)
Less: amount attributable to PAC with-profits fund
Shareholders’ share:
Gross of tax surplus (deficit)
Related tax
Net of shareholders' tax
With the effect of IFRIC 14
Surplus (deficit)
Less: amount attributable to PAC with-profits fund
Shareholders’ share:
Gross of tax surplus (deficit)
Related tax
Net of shareholders’ tax
*Including the effect of exchange translation difference.
278 Prudential plc > Annual Report 2009
(Charge) credit to income statement
2008 £m
Surplus
(deficit) in
scheme at
1 January
2008
Operating
results
(based on
longer-term
investment
returns)
note b
Actuarial
and
other
gains
and
losses
note c
Results
of sold
Taiwan
agency
business
Contributions
paid
Exchange
Surplus
(deficit)
in scheme
at 31 Dec
2008
note a
All schemes
Underlying position
(without the effect of IFRIC 14)
Surplus (deficit)
Less: amount attributable to PAC
with-profits fund
Shareholders’ share:
Gross of tax surplus (deficit)
Related tax
Net of shareholders’ tax
Effect of IFRIC 14
Surplus (deficit)
Less: amount attributable to PAC
with-profits fund
Shareholders’ share:
Gross of tax (deficit) surplus
Related tax
Net of shareholders’ tax
With the effect of IFRIC 14
Surplus (deficit)
Less: amount attributable to PAC
with-profits fund
Shareholders’ share:
Gross of tax (deficit) surplus
Related tax
Net of shareholders’ tax
447
(338)
109
(33)
76
(630)
436
(194)
55
(139)
(183)
98
(85)
22
(63)
46
(48)
(2)
1
(1)
(82)
58
(24)
6
(18)
(36)
10
(26)
7
(19)
61
(49)
12
(2)
10
(81)
56
(25)
7
(18)
(20)
7
(13)
5
(8)
(1)
(1)
(1)
–
–
–
–
–
(1)
–
(1)
(1)
95
(48)
47
(13)
34
–
–
–
–
–
95
(48)
47
(13)
34
(4)
(4)
(4)
644
(483)
161
(47)
114
(793)
550
(243)
68
(175)
(4)
(149)
(4)
(4)
a On the ‘economic basis’, after including the underlying assets represented by the investments in Prudential insurance policies as
scheme assets, the underlying statements of financial position of the schemes at 31 December were:
Equities
Bonds
Properties
Cash-like investmentsnote i
Total value of assets
Present value of benefit obligations
Effect of the application of IFRIC 14 for pension schemes:
Derecognition of PSPS surplus
Set up obligation for deficit funding for PSPS
Pre-tax deficitnote ii
2009 £m
2008 £m
Other
schemes
note iii
266
280
15
2
PSPS
830
3,406
272
441
Total
1,096
3,686
287
443
4,949
(4,436)
513
563
(738)
(175)
5,512
(5,174)
338
(513)
(75)
–
–
(75)
(175)
(513)
(75)
(250)
%
20
67
5
8
100
Other
schemes
note iii
213
277
18
6
Total
1,036
2,707
301
1,273
514
(598)
(84)
5,317
(4,673)
644
–
–
(84)
(728)
(65)
(149)
PSPS
823
2,430
283
1,267
4,803
(4,075)
728
(728)
(65)
(65)
67
(82)
21
(61)
%
19
51
6
24
100
279
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Notes on the Group financial statements > I: Other notes > continued
I2: Staff and pension plans continued
Notes
i
The PSPS has entered into a derivatives based strategy to match the duration and inflation profile of its liabilities. This involved a reallocation from
other investments to cash-like investments with an interest and inflation swap overlay. In broad terms, the scheme is committed to making a series
of payments related to LIBOR on a nominal amount and in return the scheme receives a series of fixed and inflation-linked payments which match
a proportion of its liabilities. As at 31 December 2009, the nominal value of the interest and inflation-linked swaps amounted to £1.1 billion (2008:
£1.2 billion) and £1.9 billion (2008: £0.3 billion) respectively.
The resulting scheme deficit arising from the excess of liabilities over assets at 31 December 2009 of £250 million (2008: £149 million) comprised a
deficit of £122 million (2008: deficit of £67 million) attributable to the PAC with-profits fund and deficit of £128 million (2008: deficit of £82 million)
attributable to shareholder operations.
In addition to PSPS, there are two smaller schemes in the UK, the Scottish Amicable Pension Scheme, and the M&G Pension Scheme, with a
combined deficit at 31 December 2009 of £175 million (2008: £67 million), gross of tax. There is also a small scheme in Taiwan, which at 31 December
2009 had a deficit of nil (2008: £17 million), gross of tax. As part of the sale of the Taiwan agency business in June 2009 the Group has settled the
majority of the obligations under the Taiwan scheme relating to the employees who were transferred out.
ii
iii
The movements in the deficit on the ‘economic basis’ between scheme assets and liabilities were:
Current service cost
Curtailment credit
Other finance income
Cash costs and unwind of discount on opening provision for deficit funding for PSPS
Contributions
Actuarial and other gains and losses
Movement due to the sold Taiwan agency business and exchange translation difference
Net decrease in deficit
2009 £m
2008 £m
(11)
–
(8)
(29)
85
(155)
17
(101)
(19)
14
(2)
(29)
95
(20)
(5)
34
b The components of the (charge) credit to operating results (gross of allocation of the share attributable to the PAC with-profits fund)
are as follows:
Service cost
Curtailment credit
Finance (expense) income:
Interest on pension scheme liabilities
Expected return on assets
Total (charge) credit without the effect of IFRIC 14
Effect of IFRIC 14 for pension schemes
Total charge after the effect of IFRIC 14
2009 £m
2008 £m
(34)
–
(277)
240
(71)
23
(48)
(45)
44
(289)
336
46
(82)
(36)
The net charge to operating profit (gross of the share attributable to the PAC with-profits fund) of £48 million (2008: £36 million) is made
up of a charge of £29 million (2008: £29 million) relating to PSPS and a charge of £19 million (2008: £7 million) for other schemes. This
net charge represents:
Underlying IAS 19 charge for other pension schemes
Cash costs for PSPS
Unwind of discount on opening provision for deficit funding for PSPS
2009 £m
2008 £m
(19)
(25)
(4)
(48)
(7)
(25)
(4)
(36)
Consistent with the derecognition of the Company’s interest in the underlying IAS 19 surplus of PSPS, the charge to operating profit on
longer-term investment returns for PSPS reflects the cash cost of contributions for ongoing service of active members. In addition, the
charge to the operating results also includes a charge for the unwind of discount on the opening provision for deficit funding for PSPS.
280 Prudential plc > Annual Report 2009
c
The components of the credit (charge) for actuarial and other gains and losses (gross of allocation of the share attributable to the PAC
with-profits fund but excluding the charge relating to the sold Taiwan agency business) are as follows:
Actual less expected return on assets
(Losses) gains on changes of assumptions for plan liabilities
Experience gains on liabilities
Total charge without the effect of IFRIC 14
Effect of IFRIC 14 for pension schemes
Actuarial and other gains and losses after the effect of IFRIC 14
2009 £m
2008 £m
108
(521)
76
(337)
182
(155)
(356)
272
145
61
(81)
(20)
The net charge for actuarial and other gains and losses is recorded within the income statement but, within the segmental analysis of
profit, the shareholders’ share of actuarial and other gains and losses (i.e. net of allocation of the share to the PAC with-profits funds) is
excluded from operating profit based on longer-term investment returns.
The 2009 actuarial losses of £337 million primarily reflects the effect of increases in inflation rates and decrease in risk discount rates
partially offset by the excess of market returns over long-term assumptions and experience gains on liabilities.
Consistent with the derecognition of the Company’s interest in the underlying IAS 19 surplus of PSPS, the actuarial gains and losses
do not include those of PSPS. In addition, as a result of applying IFRIC 14, the Group has recognised a provision for deficit funding in
respect of PSPS. The change in 2009 in relation to this provision recognised above as other gains and losses on defined benefit pension
schemes was £48 million (2008: £13 million).
6 Movement in IAS 19 basis financial position
The change in the present value of the benefit obligation and the change in fair value of the assets for the total of the PSPS, Scottish
Amicable, M&G and Taiwan schemes over the period were as follows:
PSPS
Provision
for deficit
funding
2009 £m
Other schemes
IAS 19 basis:
change in
fair value
of plan
assets
Investments
in Prudential
insurance
policies
Economic
basis:
total
assets
IAS 19 basis:
change in
present value
of benefit
obligations
357
157
514
Fair value of plan assets, beginning of year
Present value of benefit obligation,
beginning of year
Provision for deficit funding for PSPS
Service cost – current charge only
Interest cost
Expected return on plan assets
Employee contributions
Employer contributions
Actuarial gains (losses)
Benefit payments
Cash costs and unwind of discount on the opening
provision for deficit funding for PSPS
Movement in the provision for deficit
funding for PSPS
Disposal of Taiwan agency business,
including exchange translation difference
(65)
(65)
67
(29)
(48)
Fair value of plan assets, end of year
Present value of benefit obligation,
end of year
Provision for deficit funding of PSPS
(75)
Economic basis deficit
357
157
514
18
9
6
(11)
9
1
9
17
(6)
27
1
18
23
(17)
(598)
(598)
(11)
(35)
(1)
(130)
17
(3)
(3)
20
376
187
563
(738)
Total
Economic
basis:
net
obligations
514
(598)
(65)
(149)
(11)
(35)
27
–
85
(107)
–
(29)
(48)
17
563
(738)
(75)
(250)
281
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Notes on the Group financial statements > I: Other notes > continued
I2: Staff and pension plans continued
Fair value of plan assets, beginning of year
Present value of benefit obligation,
beginning of year
Provision for deficit funding for PSPS
Service cost – current charge only
Curtailment credit
Interest cost
Expected return on plan assets
Employee contributions
Employer contributions
Actuarial gains (losses)
Benefit payments
Cash costs and unwind of discount on the
opening provision for deficit funding
for PSPS
Movement in the provision for deficit
funding for PSPS
Exchange translation difference
Fair value of plan assets, end of year
Present value of benefit obligation,
end of year
PSPS
Provision
for deficit
funding
2008 £m
Other schemes
IAS 19 basis:
change in
fair value
of plan
assets
Investments
in Prudential
insurance
policies
Economic
basis:
total
assets
IAS 19 basis:
change in
present value
of benefit
obligations
401
172
573
(102)
(102)
79
(29)
(13)
401
172
573
26
7
(67)
(10)
11
1
9
(31)
(5)
37
1
16
(98)
(15)
357
157
514
(654)
(654)
(19)
14
(39)
(1)
90
15
(4)
(598)
Total
Economic
basis:
net
obligations
573
(654)
(102)
(183)
(19)
14
(39)
37
–
95
(8)
–
(29)
(13)
(4)
514
(598)
(65)
(149)
Provision for deficit funding of PSPS
(65)
Economic basis deficit
7 IAS 19 basis financial position as consolidated
The IAS 19 basis pensions deficit can be summarised as follows:
Fair value of plan assets, end of year
Present value of funded benefit obligation
Funded status
Present value of unfunded obligations (M&G scheme)*
Effect of the application of IFRIC 14 for pension schemes
Derecognition of PSPS’ surplus
Set up obligation for deficit funding for PSPS
Adjustment in respect of investment of PSPS in Prudential policies
Deficit recognised in the statement of financial position
2009 £m
2008 £m
2007 £m
2006 £m
2005 £m
5,224
(4,951)
5,057
(4,493)
5,150
(4,826)
4,988
(5,023)
273
(223)
50
(513)
(75)
101
(437)
564
(180)
384
(728)
(65)
103
(306)
324
(189)
135
(528)
(102)
140
(355)
(35)
(187)
(222)
(141)
(143)
126
(380)
4,622
(5,228)
(606)
(190)
(796)
–
–
–
(796)
* The M&G pension scheme assets are invested in Prudential insurance policies. For IFRS accounting purposes, the M&G scheme is in effect unfunded.
Please see above for more details.
282 Prudential plc > Annual Report 2009
Components of net periodic pension cost
Current service cost
Curtailment credit
Interest cost
Expected return on assets – economic basis
Less: expected return on investments of scheme assets in Prudential insurance policies
Expected return on assets – IAS 19 basis†
Effect of the application of IFRIC 14
Pension cost (as referred to in noteI2a)
Actuarial gains and losses – economic basis
Less: actuarial gains on investments of scheme assets in Prudential insurance policies
Effect of the application of IFRIC 14
Actuarial gains and losses – IAS 19 basis* (as referred to in noteI2a)
2009 £m
2008 £m
(34)
–
(277)
240
(16)
224
(87)
30
(57)
(337)
8
(329)
191
(138)
(45)
44
(289)
336
(22)
314
24
(71)
(47)
60
79
139
(129)
10
Net periodic pension cost (included within acquisition and other operating expenditure in the
income statement)
(195)
(37)
* Consistent with the derecognition of the Company’s interest in the underlying IAS 19 surplus of PSPS, the effect on the net periodic pension cost for PSPS
was to replace the usual IAS 19 pension charges and credits with the cash cost of contribution for ongoing services of active members and also not to
report the actuarial gains and losses.
†In determining the expected return on scheme assets for 2009, the 4.5 per cent rate shown below has been applied to the opening assets.
The long-term expected rate of return has been taken to be the weighted average (by market value) of the long-term expected rates of
return on each major asset class shown below:
2009
2008
2007
2006
2005
£m
%
£m
%
£m
%
£m
%
£m
%
Scheme assets (IAS 19 basis
before effect of IFRIC 14)
Equity
Bonds
Properties
Cash-like investments
Total
917
3,587
278
442
5,224
18
69
5
8
100
875
2,619
290
1,273
5,057
17
52
6
25
100
1,332
1,299
583
1,936
5,150
26
25
11
38
100
1,432
2,185
621
750
4,988
29
44
12
15
100
2,376
1,593
575
78
4,622
51
35
12
2
100
Long-term expected rate of return
Equity
Bonds
Properties
Cash
Weighted average long-term expected rate of return
Prospectively for 2010 %
2009 %
2008 %
8.5
5.3
6.75
4.75
5.9
6.8
4.8
6.05
2.0
4.5
7.5
5.4
6.75
5.5
6.1
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 £348 million (2008: loss of £20 million) on an IAS 19 basis.
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Notes on the Group financial statements > I: Other notes > continued
I2: Staff and pension plans continued
None of the scheme assets included shares in Prudential plc or property occupied by the Prudential Group.
Fair value of scheme assets, end of year (IAS 19 basis)
Present value of the benefit obligation, end of year
5,224
(5,174)
5,057
(4,673)
5,150
(5,015)
4,988
(5,210)
4,622
(5,418)
2009 £m
2008 £m
2007 £m
2006 £m
2005 £m
Underlying scheme assets in surplus (deficit) of benefit
obligation, before the effect of IFRIC 14
Experience adjustments on scheme liabilities
Percentage of scheme liabilities at 31 December
Experience adjustments on scheme assets (IAS 19 basis)
Percentage of scheme assets at 31 December
50
76
1.47%
100
1.91%
384
145
3.10%
(277)
(5.48)%
135
(222)
(796)
(14)
0.28%
(7)
(0.14)%
18
(0.35)%
140
2.81%
1
(0.02)%
527
11.42%
The experience adjustments on scheme liabilities in 2008 of a gain of £145 million related mainly to the ‘true up’ reflecting improvements
in data consequent upon the 2008 triennial valuation of PSPS.
Total employer contributions expected to be paid into the Group defined benefit schemes for the year ending 31 December 2010
amounts to £88 million (2009: £98 million).
8 Sensitivity of the pension scheme liabilities of the PSPS, Scottish Amicable and M&G pension schemes to key variables
The table below shows the sensitivity of the underlying PSPS, Scottish Amicable and M&G pension scheme liabilities at 31 December
2009 of £4,436 million, £515 million and £223 million respectively (2008: £4,075 million, £398 million and £180 million) to changes in
discount rates and inflation rates.
Assumption
Discount rate
Change in assumption
Impact on scheme liabilities on IAS 19 basis
Decrease by 0.2% from 5.8% to 5.6%
Increase in scheme liabilities by:
2009
Discount rate
Increase by 0.2% from 5.8% to 6.0%
Decrease in scheme liabilities by:
PSPS
Scottish Amicable
M&G
Rate of inflation
Decrease by 0.2% from 3.7% to 3.5%
with consequent reduction in
salary increases
PSPS
Scottish Amicable
M&G
Decrease in scheme liabilities by:
PSPS
Scottish Amicable
M&G
Assumption
Discount rate
Change in assumption
Impact on scheme liabilities on IAS 19 basis
Decrease by 0.2% from 6.1% to 5.9%
Increase in scheme liabilities by:
2008
Discount rate
Increase by 0.2% from 6.1% to 6.3%
Decrease in scheme liabilities by:
PSPS
Scottish Amicable
M&G
Rate of inflation
Decrease by 0.2% from 3.0% to 2.8%
with consequent reduction in
salary increases
PSPS
Scottish Amicable
M&G
Decrease in scheme liabilities by:
PSPS
Scottish Amicable
M&G
3.5%
5.2%
4.9%
3.2%
4.8%
4.9%
0.9%
4.9%
4.5%
3.3%
4.9%
4.5%
3.1%
4.6%
4.2%
0.8%
4.5%
3.8%
284 Prudential plc > Annual Report 2009
The sensitivity of the underlying pension scheme liabilities to changes in discount rates and inflation rates as shown above does not
directly equate to an impact on the profit or loss attributable to shareholders or shareholders’ equity due to the effect of the application
of IFRIC 14 on PSPS and the allocation of a share of the interest in financial position of the PSPS and Scottish Amicable schemes to the
PAC with-profits fund as described in note (b)(i)(1) above.
For PSPS, the underlying surplus of the scheme of £513 million (2008: £728 million) has not been recognised under IFRIC 14.
Any change in the underlying scheme liabilities to the extent that it is not sufficient to alter PSPS into a liability in excess of the deficit
funding provision will not have an impact on the Group’s results and financial position.
In the event that a change in the PSPS scheme liabilities results in a deficit position for the scheme which is recognisable, the deficit
recognised affects the Group’s results and financial position only to the extent of the amounts attributable to shareholder operations.
The amounts attributable to the PAC with-profits fund are absorbed by the liability for unallocated surplus and have no direct effect
on the profit or loss attributable to shareholders or shareholders’ equity. This applies similarly to the Scottish Amicable scheme, whose
deficit has been allocated 50 per cent to the PAC with-profits fund and 50 per cent to the PAC shareholders fund.
9 Transfer value of PSPS scheme
At 31 December 2009, it is estimated that the assets of the scheme are broadly sufficient to cover the liabilities of PSPS on a ‘buyout’
basis including an allowance for expenses. The ‘buyout’ basis refers to a basis that might apply in the circumstance of a transfer to
another appropriate financial institution. In making this assessment it has been assumed that a more conservative investment strategy
applies together with a more prudent allowance for future mortality improvements and no allowance for discretionary pension increases.
ii Other pension plans
The Group operates various defined contribution pension schemes including schemes in Jackson and Asia. As noted earlier, the cost
of the Group’s contributions for continuing operations to these schemes in 2009 was £38 million (2008: £31 million).
I3: Share-based payments
The Group maintains 10 main share award and share option plans relating to Prudential plc shares, which are described below.
The Group Performance Share Plan (GPSP) is the incentive plan in which all executive directors and other senior executives within
the Group can participate. This scheme was established as a replacement for the Restricted Share Plan (RSP) under which no further
awards could be made after March 2006. Awards are granted either in the form of a nil cost option, conditional right over shares, or such
other form that shall confer to the participant an equivalent economic benefit, with a vesting period of three years. The performance
measure for the awards is that Prudential’s Total Shareholder Return (TSR) outperforms an index comprising of peer companies. Vesting
of the awards between each performance point is on a straight line sliding scale basis. Participants are entitled to the value of reinvested
dividends that would have accrued on the shares that vest. Shares are currently purchased in the open market by a trust for the benefit
of qualifying employees. Beginning 2010, newly issued shares will be used in settling the awards that vest and are released.
The RSP was, until March 2006, the Group’s long-term incentive plan for executive directors and other senior executives designed
to provide rewards linked to shareholder return. Each year participants were granted a conditional option to receive a number of shares.
There was a deferment period of three years at the end of which the award vested to an extent that depended on the performance of the
Group’s shares including notional reinvested dividends and on the Group’s underlying financial performance. After vesting, the option
may be exercised at zero cost at any time, subject to closed period rules, in the balance of a 10-year period. Shares are purchased in the
open market by a trust for the benefit of qualifying employees.
The Business Unit Performance Plan (BUPP) is an incentive plan created to provide a common framework under which awards would
be made to senior employees in the UK, Jackson and Asia including the Chief Executive Officers. Awards under this plan are based on
growth in Shareholder Capital Value on the European Embedded Value (EEV) basis with performance measured over three years. Upon
vesting of awards made up to 2008, half of the awards will be released as shares and the other half released in cash. In the year ending
31 December, 2009 all awards made will be settled in shares after vesting. Participants are entitled to receive the value of reinvested
dividends over the performance period for those shares that vest. The growth parameters for the awards are relevant to each region
and vesting of the awards between each performance point is on a straight line sliding scale basis.
UK-based executive directors are eligible to participate in the Prudential HM Revenue & Customs (HMRC) approved UK Savings
Related Share Option Scheme (SAYE scheme) and the Asia-based executive directors can participate in the equivalent International
SAYE scheme. The schemes allow employees to save towards the exercise of options over Prudential plc shares, at an option price set at
the beginning of the savings period at a discount of up to 20 per cent to the market price. In 2009, the rules governing the SAYE scheme
were amended so that savings contracts for seven years was discontinued and employees may save up to £250 per month for three or
five years. On maturity at the end of the set term, participants may exercise their options within six months of the end of the savings
period and purchase Prudential plc shares. If an option is not exercised within six months, participants are entitled to a refund of their
cash contributions plus interest if applicable under the rules. Shares are issued to satisfy options that are exercised. No options may be
granted under the schemes if the grant would cause the number of shares which have been issued, or which remain issuable pursuant to
options granted in the preceding 10 years under the scheme and other share option schemes operated by the Company, or which have
been issued under any other share incentive scheme of the Company, to exceed 10 per cent of the Company’s ordinary share capital at
the proposed date of grant.
285
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I3: Share-based payments continued
UK-based executive directors are also eligible to participate in the Company’s HMRC approved Share Incentive Plan which allows
all UK-based employees to purchase shares of Prudential plc (partnership shares) on a monthly basis out of gross salary. For every four
partnership shares bought, an additional matching share is awarded, purchased on the open market. Dividend shares accumulate while
the employee participates in the plan. Partnership shares may be withdrawn from the scheme at any time. If the employee withdraws
from the plan within five years, the matching shares are forfeit and if within three years, dividend shares are forfeit.
Jackson operates a performance-related share award which, subject to the prior approval of the Jackson Remuneration Committee,
may grant share awards to eligible Jackson employees in the form of a contingent right to receive shares or a conditional allocation of
shares. These share awards have vesting periods of four years and are at nil cost to the employee. Award holders do not have any right
to dividends or voting rights attaching to the shares. The shares are held in the employee share trust in the form of American Depository
Receipts which are tradable on the New York Stock Exchange.
The Prudential Corporation Asia Long-Term Incentive Plan (PCA LTIP) is an incentive plan created in 2008 for senior employees and
Chief Executive Officers to replace the Asia Business Unit Performance Plan (BUPP). Awards under the new PCA LTIP will vest after
three years subject to the employee being in employment at the time of vesting without any performance conditions. Awards will be
discretionary and on a year by year basis determined by Prudential’s full year financial results and the employee’s contribution to the
business. All awards will be in Prudential shares 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.
Certain senior executives have annual incentive plans with awards paid in cash up to the target level of their plan. The portion of any
award for above target performance is made in the form of awards of shares deferred for three years, with the release of shares subject
to close periods. The shares are held in the employee share trust and shares equivalent to dividends otherwise payable will accumulate
for the benefit of award holders during the deferral period up to the release date.
In addition, there are other share awards including the Prudential Corporation Asia Deferred Bonus Plan (PCA DBP), Prudential
Capital Deferred Bonus Plan (PruCap DBP) and other arrangements. There are no performance conditions attaching to these deferred
bonus plans and awards vest in full subject to the individual being employed by Prudential at the end of the vesting period. The other
arrangements relate to various awards that have been made without performance conditions to individual employees, typically in order
to secure their appointment or ensure retention.
Options outstanding (including conditional options)
Beginning of year:
Granted
Exercised
Forfeited
Expired
End of year
Options immediately exercisable, end of year
2009
2008
Number
of options
millions
12.7
14.0
(1.7)
(0.8)
(5.3)
18.9
0.3
Weighted
average
exercise
price
£
2.44
2.28
1.05
2.48
3.77
2.07
4.16
Number
of options
millions
Weighted
average
exercise
price
£
14.5
6.9
(3.5)
(1.5)
(3.7)
12.7
0.6
2.57
3.28
2.73
0.69
4.94
2.44
2.29
The weighted average share price of Prudential plc for the year ended 31 December 2009 was £4.17 compared to £5.46 for the year
ended 31 December 2008.
Movements in share awards outstanding under the Group’s share-based compensation plans relating to Prudential plc shares at
31 December 2009 and 2008 were as follows:
2009
2008
Number of
awards
millions
Number of
awards
millions
8.6
7.9
(2.2)
(0.8)
(1.0)
12.5
8.0
3.5
(1.7)
(0.9)
(0.3)
8.6
Awards outstanding
Beginning of year:
Granted
Exercised
Forfeited
Expired
End of year
286 Prudential plc > Annual Report 2009
The following table provides a summary of the range of exercise prices for Prudential plc options (including conditional options)
outstanding at 31 December 2009.
Range of exercise prices
Between £0 and £1
Between £1 and £2
Between £2 and £3
Between £3 and £4
Between £4 and £5
Between £5 and £6
Between £6 and £7
Between £7 and £8
Outstanding
Weighted
average
remaining
contractual
life
years
Number
outstanding
millions
Exercisable
Weighted
average
exercise
prices
£
Number
exercisable
millions
Weighted
average
exercise
prices
£
6.7
–
10.0
0.1
1.5
0.6
–
–
18.9
8.6
–
3.6
1.0
3.0
1.9
–
–
5.2
–
–
2.88
3.62
4.37
5.60
–
–
2.07
0.0
–
–
0.1
0.2
0.0
–
–
0.3
–
–
–
3.43
4.73
5.65
–
–
4.16
The following table provides a summary of the range of exercise prices for Prudential plc options (including conditional options)
outstanding at 31 December 2008.
Range of exercise prices
Between £0 and £1
Between £1 and £2
Between £2 and £3
Between £3 and £4
Between £4 and £5
Between £5 and £6
Between £6 and £7
Between £7 and £8
Outstanding
Weighted
average
remaining
contractual
life
years
Number
outstanding
millions
Exercisable
Weighted
average
exercise
prices
£
Number
exercisable
millions
Weighted
average
exercise
prices
£
5.9
–
0.3
0.5
4.6
1.4
0.0
–
12.7
8.3
–
1.7
1.4
3.3
2.8
0.4
–
5.5
–
–
2.66
3.56
4.45
5.59
6.17
–
2.44
0.3
–
0.0
0.0
0.3
–
0.0
–
0.6
–
–
2.66
3.65
4.07
–
6.17
–
2.29
The years shown above for weighted average remaining contractual life include the time period from end of vesting period to expiration
of contract.
The weighted average fair values of Prudential plc options and awards granted during the period are as follows:
2009 £
2008 £
Weighted average fair value
Weighted average fair value
GPSP
3.52
Other
options
1.55
Awards
4.67
GPSP
4.16
Other
options
2.14
Awards
5.69
The fair value amounts relating to all options including conditional nil cost options above were determined using the Black-Scholes and
the Monte Carlo option-pricing models using the following assumptions:
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Expected volatility (%)
Risk-free interest rate (%)
Expected option life (years)
Weighted average exercise price (£)
Weighted average share price (£)
2009
2008
GPSP
4.41
56.21
1.92
3.00
–
4.83
Other
options
4.41
60.55
2.15
3.67
2.96
3.82
GPSP
3.60
30.87
4.23
3.00
–
6.63
Other
options
3.60
34.67
4.46
3.74
4.74
6.16
I
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Notes on the Group financial statements > I: Other notes > continued
I3: Share-based payments continued
Under IFRS, compensation costs for all share-based compensation plans are determined using the Black-Scholes model and the Monte
Carlo model. Share options and awards are valued using the share price at the date of grant. The compensation costs for all awards and
options are recognised in net income over the plans’ respective vesting periods. The Group uses the Black-Scholes model to value all
options and awards other than the GPSP, for which the Group uses a Monte Carlo model in order to allow for the impact of the TSR
performance conditions. These models are used to calculate fair values for share options and awards at the grant date based on the
quoted market price of the stock at the measurement date, the amount, if any, that the employees are required to pay, the dividend
yield, expected volatility, risk-free interest rates and exercise prices.
The expected volatility is measured as the standard deviation of expected share price returns based on statistical analysis of daily
share prices over a period up to the grant date equal to the expected life of options. Risk-free interest rates are UK gilt rates with
projections for three, five and seven year terms to match corresponding vesting periods. Dividend yield is determined as the average
yield over the year of grant and expected dividends are not incorporated into the measurement of fair value. For the GPSP, volatility
and correlation between Prudential and an index constructed from a simple average of the TSR growth of 11 companies is required.
For grants in 2009, an average index volatility and correlation of 40 per cent and 83 per cent respectively, were used. Changes to the
subjective input assumptions could materially affect the fair value estimate.
When options are granted or awards made to employees, an estimate is made of what percentage is more than likely to vest, be
forfeited, lapse or cancelled based on historical information. Based on these estimates, compensation expense to be accrued at that
date is calculated and amortised over the vesting period. For early exercises of options or release of awards due to redundancy, death
or resignation, the compensation expense is immediately recognised and for forfeitures due to employees leaving the Group, any
previously recognised expense is reversed. However, if an employee loses their award because of the Group’s failure to meet the
performance criteria, previously recognised expense is not reversed.
During the year, the Group granted share options to certain non-employee independent financial advisors. Those options were
measured using the Black-Scholes option pricing model with assumptions consistent with those of other share options. These
transactions were measured using an option model because the Group does not receive a separate and measurable benefit from those
non-employees in exchange for the options granted. As such, the fair value of the options themselves is more readily determinable than
the services received in return.
c Total share-based payment expense
Total expense recognised in the year in the consolidated financial statements related to share-based compensation is as follows:
Share-based compensation expense
Amount accounted for as equity-settled
Carrying value at 31 December of liabilities arising from share-based payment transactions
Intrinsic value of above liabilities for which rights had vested at 31 December
I4: Key management remuneration
2009 £m
2008 £m
37
29
13
7
23
27
12
4
Key management constitutes the directors of Prudential plc as they have authority and responsibility for planning, directing and
controlling the activities of the Group.
Total key management remuneration amounts to £20,989,000 (2008: £18,122,000). This comprises salaries and short-term benefits
of £11,570,000 (2008: £10,425,000), post-employment benefits of £1,132,000 (2008: £1,003,000), leaving benefits of £915,000
(2008: £507,000) and share-based payments of £7,372,000 (2008: £6,187,000).
Post-employment benefits comprise the change in the transfer value of the accrued benefit relating to directors’ defined benefit
pension schemes in the year and the total contributions made to directors’ other pension arrangements.
The share-based payments charge is the sum of £5,270,000 (2008: £4,624,000), which is determined in accordance with IFRS 2,
‘Share-Based Payments’ (see note I3) and £2,102,000 (2008: £1,563,000) of deferred share awards.
Total key management remuneration includes total directors’ emoluments of £15,090,000 (2008: £12,683,000) as shown in the
directors’ remuneration table and related footnotes in the directors’ remuneration report, and additional amounts in respect of pensions
and share-based payments. Further information on directors’ remuneration is given in the directors’ remuneration report.
288 Prudential plc > Annual Report 2009
I5: Fees payable to auditor
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts
Fees payable to the Company’s auditor and its associates for other services:
Audit of subsidiaries and associates pursuant to legislation
Other services supplied pursuant to legislation
Other services relating to taxation
Valuation and actuarial services
Services relating to corporate finance transactions
All other services
Total
2009 £m
2008 £m
1.8
5.5
2.7
0.6
0.1
0.7
1.0
1.6
5.0
2.4
0.6
0.7
–
0.5
12.4
10.8
In addition, there were fees incurred of £0.2 million (2008: £0.2 million) for the audit of pension schemes.
The Audit Committee regularly monitors the non-audit services provided to the Group by its auditor and has developed a formal
Auditor Independence Policy which sets out the types of services that the auditor may provide, consistent with the guidance in Sir Robert
Smith’s report ‘Audit Committees – Combined Code Guidance’ and with the provisions of the US Sarbanes-Oxley Act.
The Audit Committee annually reviews the auditor’s objectivity and independence. More information on these issues is given in the
corporate governance report within this Annual Report.
I6: Related party transactions
Transactions between the Company and its subsidiaries are eliminated on consolidation.
In addition, the Company has transactions and outstanding balances with certain unit trusts, OEICs, collateralised debt obligations
and similar entities which are not consolidated and where a Group company acts as manager. These entities are regarded as related
parties for the purposes of IAS 24. The balances are included in the Group’s statement of financial position sheet at fair value or
amortised cost in accordance with their IAS 39 classifications. The transactions are included in the income statement and include
amounts paid on issue of shares or units, amounts received on cancellation of shares or units and paid in respect of the periodic charge
and administration fee. Further details of the aggregate assets, liabilities, revenues, profits or losses and reporting dates of entities
considered to be associates under IFRS are disclosed in note H8.
Executive officers and directors of the Company may from time to time purchase insurance, asset management or annuity products
marketed by Group companies in the ordinary course of business on substantially the same terms as those prevailing at the time for
comparable transactions with other persons.
Apart from the transactions with directors referred to below, no director had interests in shares, transactions or arrangements that
require disclosure, other than those given in the directors’ remuneration report. Key management remuneration is disclosed in note I4.
In 2009 and 2008, 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.
I7: Subsidiary undertakings
i Principal subsidiaries
The principal subsidiary undertakings of the Company at 31 December 2009 were:
The Prudential Assurance Company Limited
Prudential Annuities Limited*
Prudential Retirement Income Limited (PRIL)*
M&G Investment Management Limited*
Jackson National Life Insurance Company*
Prudential Assurance Company Singapore (Pte) Limited*
*Owned by a subsidiary undertaking of the Company.
Main activity
Insurance
Insurance
Insurance
Asset management
Insurance
Insurance
Country of
incorporation
England and Wales
England and Wales
Scotland
England and Wales
US
Singapore
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Each subsidiary has one class of ordinary shares and operates mainly in its country of incorporation, except for PRIL which operates
mainly in England and Wales.
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Notes on the Group financial statements > I: Other notes > continued
I7: Subsidiary undertakings continued
ii Dividend restrictions and minimum capital requirements
Certain Group subsidiaries are subject to restrictions on the amount of funds they may transfer in the form of cash dividends or otherwise
to the parent company. UK insurance companies are required to maintain solvency margins which must be supported by capital reserves
and other resources, including unrealised gains on investments. Jackson can pay dividends on its capital stock only out of earned surplus
unless prior regulatory approval is obtained. Furthermore, without the prior regulatory approval, dividends cannot be distributed if all
dividends made within the preceding 12 months exceed the greater of Jackson’s statutory net gain from operations or 10 per cent of
Jackson’s statutory surplus for the prior year. In 2010, the maximum amount of dividends that can be paid by Jackson without prior
regulatory approval is US$454 million (£281 million) (in 2009: US$290 million (£202 million)). The Group’s Asian subsidiaries, mainly
the Singapore and Malaysia businesses, may remit dividends to the Group, in general, provided the statutory insurance fund meets
the capital adequacy standard required under local statutory regulations.
The Group capital position statement for life assurance businesses is set out in note D5, showing the available capital reflecting the
excess of regulatory basis over liabilities for each fund or group of companies determined by reference to the local regulation of the
subsidiaries. In addition, disclosure is also provided in note D5 of the local capital requirement of each of the fund or group of companies.
iii Acquisition and disposal of subsidiaries
There were no material acquisitions or disposals of subsidiaries during the year in 2009 and 2008.
iv PAC with-profits fund acquisitions and disposals
There were no new acquisitions or disposals by the PAC with-profits fund in 2009 and 2008. However, during 2009, the holding in the
voting equity interest of Red Funnel increased from 90 per cent to 100 per cent. In 2008, this holding increased from 78 per cent to
90 per cent. Red Funnel is a venture capital holding owned by the PAC with-profits fund managed by M&G.
I8: Commitments
i Operating leases
The Group leases various offices to conduct its business. Leases in which a significant portion of the risks and rewards of ownership are
retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the
lessor) are charged to the income statement on a straight-line basis over the period of the lease.
Future minimum lease payments for non-cancellable operating leases fall due during
the following periods:
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
2009 £m
2008 £m
63
178
104
86
199
140
The total minimum future sublease rentals to be received on non-cancellable operating leases for land and buildings for the year ended
31 December 2009 were nil (2008: £0.2 million).
Minimum lease rental payments for the year ended 31 December 2009 of £105 million (2008: £84 million) are included in the
consolidated income statement.
ii Capital commitments
The Group has provided, from time to time, certain guarantees and commitments to third-parties including funding the purchase or
development of land and buildings and other related matters. At 31 December 2009, there were no contractual obligations to purchase
or develop investment properties (2008: £1 million).
I9: Discontinued operations
The charge of £14 million, which is net of nil tax, reflects completion adjustments for a previously disposed business.
290 Prudential plc > Annual Report 2009
I10: Cash flows
Within the analysis of the items for 2008 that reconcile from the total loss of £2,074 million to the net cash flow from operating activities
of £1,144 million reclassification adjustments in respect of two items have been made. These adjustments are to:
a
increase the ‘change in operating assets and liabilities’ attributable to ‘investments’, and decrease the amount attributable to ‘other
non-investment and non-cash assets’, by £831 million, for shadow DAC movements accounted for in Other Comprehensive Income,
and
b increase the deduction for the ‘interest income and expense and dividend income included in the result before tax’ and ‘interest
receipts’ by £2,938 million for foreign exchange losses, arising principally with the PAC with-profits fund, that were previously netted
within the amounts for these lines.
Structural borrowings of shareholder-financed operations comprise core debt of the parent company and Jackson surplus notes.
Core debt excludes borrowings to support short-term fixed income securities programmes, non-recourse borrowings of investment
subsidiaries of shareholder-financed operations and other borrowings of shareholder-financed operations. Cash flows in respect of
these borrowings are included within cash flows from operating activities.
Structural borrowings of with-profits operations relate solely to the £100 million 8.5 per cent undated subordinated guaranteed
bonds which contribute to the solvency base of SAIF. Cash flows in respect of other borrowings of with-profits funds, which principally
relate to consolidated investment funds are also included within cash flows from operating activities.
I11: Post balance sheet events
i Acquisition of UOB Life Assurance Limited
On 6 January 2010 the Group announced the acquisition from United Overseas Bank Limited (UOB) of its 100 per cent interest in
UOB Life Assurance Limited in Singapore for total cash consideration of SGD 428 million (£192 million) subject to a post-completion
adjustment to reflect the net asset value as at the completion date. This acquisition accompanied the announcement of a long-term
strategic partnership with UOB. Through this partnership Prudential’s life insurance products will be distributed through UOB’s 414
bank branches across Singapore, Indonesia and Thailand.
The Group continues to complete its compilation of the acquisition balance sheet and further details will be provided in the Group’s
2010 half year results announcement.
ii Japanese insurance subsidiary’s suspension of writing new business
On 15 January 2010 the Group’s Japanese insurance subsidiary announced its intention to suspend writing new policyholder contracts
in Japan after 15 February 2010. The company reinforced its commitment to servicing its existing policyholder base, which comprised
over 170,000 contracts as at 30 September 2009. This decision will be reviewed on an on-going basis in light of changes to the
business environment.
This decision does not effect the Group’s asset management operations in Japan, which ranks among the largest foreign
asset managers.
iii Agreement to acquire AIA Group Limited
On 1 March 2010, Prudential plc announced that it had reached agreement with American International Group Inc. (‘AIG’), on terms for
the combination of Prudential and AIA Group Limited (‘AIA’), a wholly-owned subsidiary of AIG (the ‘Transaction’). AIA is a leading life
insurance organisation in Asia which provides individuals and businesses with products and services for their insurance, protection, savings,
investment and retirement needs in 15 geographical markets in the region. The combined group will be the leading life insurer in Hong
Kong, Singapore, Malaysia, Indonesia, Vietnam, Thailand and the Philippines with the leading foreign life insurance business in China and
India, a significantly enhanced presence in the high growth South East Asian life markets and strong operations in the US and UK.
The Transaction will be effected through the acquisition of both Prudential (by a scheme of arrangement, the ‘Scheme’) and AIA by
a new company (‘New Prudential’). The new company will assume the name Prudential plc, be headquartered and incorporated in the
UK, and traded on the main market of the London Stock Exchange with ADRs traded on the New York Stock Exchange. The existing
Board of Prudential will become the Board of New Prudential.
AIG will receive total consideration of US$35.5 billion, comprising US$25.0 billion in cash and US$10.5 billion in New Prudential
shares and other securities. The cash component of the consideration will be financed through an underwritten rights issue, raising
US$20.0 billion (net of fees and expenses) and through issuance of US$ 5.0 billion senior notes (net of fees and expenses). These issues
have been agreed to be underwritten by certain banks. The terms of the rights issue will be set at the time of publication of Prudential and
New Prudential prospectuses.
The rights issue and the Scheme will be subject to shareholder approval at a General Meeting. The Transaction is also subject to
certain regulatory and anti-trust approvals including various regulatory approvals required on a change of control of Prudential as a result
of the Scheme.
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On 8 March 2010 the Company confirmed that the Prudential Group had entered into foreign exchange hedging arrangements in
I
respect of its requirement to convert the pounds sterling proceeds of the rights issue into US dollars, which is the currency in which
Prudential must pay the cash element of the consideration.
291
Balance sheet of the parent company
31 December 2009
Fixed assets
Investments:
Shares in subsidiary undertakings
Loans to subsidiary undertakings
Current assets
Debtors
Amounts owed by subsidiary undertakings
Deferred tax
Other debtors
Derivative assets
Cash at bank and in hand
Less liabilities: amounts falling due within one year
Debenture loans
Commercial paper
Other borrowings
Derivative liabilities
Amounts owed to subsidiary undertakings
Tax payable
Sundry creditors
Accruals and deferred income
Net current liabilities
Total assets less current liabilities
Less liabilities: amounts falling due after more than one year
Subordinated liabilities
Debenture loans
Other borrowings
Amounts owed to subsidiary undertakings
Total net assets (excluding pension)
Pension asset (net of related deferred tax)
Total net assets (including pension)
Capital and reserves
Share capital
Share premium
Profit and loss account
Shareholders’ funds
Note
2009 £m
2008 £m
4
4
7
6
6
6
7
6
6
6
8
9
9
10
10
10,071
899
10,970
7,193
3,212
10,405
2,760
180
7
151
360
3,458
–
(2,031)
(207)
(136)
(1,279)
(379)
(4)
(41)
(4,077)
(619)
10,351
(2,687)
(549)
–
(3,326)
(6,562)
3,789
37
3,826
127
1,843
1,856
3,826
1,986
111
11
267
102
2,477
(249)
(1,269)
(200)
(235)
(3,341)
(311)
(19)
(44)
(5,668)
(3,191)
7,214
(1,983)
(549)
(9)
(1,464)
(4,005)
3,209
36
3,245
125
1,840
1,280
3,245
The financial statements of the parent company on pages 292 to 301 were approved by the Board of directors on
8 March 2010 and signed on its behalf.
Harvey McGrath
Chairman
Tidjane Thiam
Group Chief Executive
Nic Nicandrou
Chief Financial Officer
292 Prudential plc > Annual Report 2009
Notes on the parent company financial statements
1 Nature of operations
Prudential plc (the Company) is a parent holding company. The Company together with its subsidiaries (collectively, the Group) is an
international financial services group with its principal operations in the UK, the US and Asia. The Group operates in the UK through its
subsidiaries, primarily The Prudential Assurance Company Limited, Prudential Annuities Limited, Prudential Retirement Income Limited
and M&G Investment Management Limited. In the US, the Group’s principal subsidiary is Jackson National Life Insurance Company. In
Asia, the Group’s main operations are in Hong Kong, Indonesia, Malaysia and Singapore. The Company is responsible for the financing
of each of its subsidiaries.
2 Basis of preparation
The financial statements of the Company, which comprise the balance sheet and related notes, are prepared in accordance with Part 15
of the Companies Act 2006, which applies to companies generally. The Company has taken advantage of the exemption under Section
408 of the Companies Act 2006 from presenting its own profit and loss account.
The financial statements are prepared in accordance with applicable accounting standards under UK Generally Accepted
Accounting Practice (UK GAAP), including Financial Reporting Standards (FRS) and Statements of Standard Accounting Practice (SSAP).
The Company has not prepared a cash flow statement on the basis that its cash flow is included within the cash flow statement in the
consolidated financial statements. The Company has also taken advantage of the exemption within FRS 29, ‘Financial Instruments:
Disclosures’, from the requirements of this standard on the basis that the Company’s results are included in the publicly available
consolidated financial statements of the Group that include disclosures that comply with IFRS 7, ‘Financial Instruments: Disclosures’,
which is equivalent to FRS 29. This included exemption from the requirements for enhanced disclosures about fair value measurements
and liquidity risk of the ‘Amendments to FRS 29 – Improving disclosures about financial instruments’ approved by the Accounting
Standards Board (ASB) in May 2009 and effective from 1 January 2009. The enhanced disclosures as required by the equivalent
Amendments to IFRS 7 have been included in note G ‘Financial assets and liabilities’ of the consolidated financial statements.
The amendments to FRS 8 ‘Related Party Transactions’ became effective for the Company in 2009. The amendments made were to
align the definition of related party with that in UK law and IAS 24 ‘Related Party Disclosures’. The main effect of this amendment is that
there is no longer an exemption from disclosure of related party transactions in the Company’s financial statements on the basis that
these financial statements are presented with the consolidated financial statements. The Company is required under the amendment to
disclose any transactions with subsidiaries which are not wholly-owned. The Company did not have any disclosable transactions under
this amendment.
Additionally, in 2009, the Company adopted the following new accounting pronouncements. Their adoption had no material impact
on the financial statements of the Company:
• Amendment on FRS 26 financial instruments – Eligible Hedged Items
• Amendments to UITF Abstract 42 and FRS 26 – Embedded Derivatives
• Amendments to FRS 20 ‘Share-based Payment – Vesting Conditions and Cancellations’
• Improvements to Financial Reporting Standards (2008)
3 Significant accounting policies
Shares in subsidiary undertakings
Shares in subsidiary undertakings are shown at the lower of cost and estimated realisable value.
Loans to subsidiary undertakings
Loans to subsidiary undertakings are shown at cost, less provisions.
Derivatives
Derivative financial instruments are used to reduce or manage interest rate and currency exposures. Derivative financial instruments
are carried at fair value with changes in fair value included in the profit and loss account.
Under FRS 26, hedge accounting is permissible only if certain criteria are met regarding the establishment of documentation and
continued measurement of hedge effectiveness. For derivative financial instruments designated as fair value hedges, the movements
in the fair value are recorded in the profit and loss account with the accompanying change in fair value of the hedged item attributable
to the hedged risk.
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Borrowings
Borrowings are initially recognised at fair value, net of transaction costs, and subsequently accounted for on an amortised cost basis
using the effective interest method. Under the effective interest method, the difference between the redemption value of the borrowing
and the initial proceeds, net of transaction costs, is amortised through the profit and loss account to the date of maturity, or, for hybrid
debt, over the expected life of the instrument.
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Notes on the parent company financial statements > continued
3 Significant accounting policies continued
Dividends
Dividends are recognised in the period in which they are declared. Dividends declared after the balance sheet date in respect of the
prior reporting period are treated as a non-adjusting event.
Where scrip dividends are issued, the value of such shares, measured as the amount of the cash dividend alternative, is credited
to reserves and the amount in excess of the nominal value of the shares issued is transferred from the share premium account to
retained profit.
Share premium
The difference between the proceeds received on issue of shares and the nominal value of the shares issued is credited to the share
premium account.
Foreign currency translation
Foreign currency borrowings that have been used to finance or provide a hedge against Group equity investments in overseas
subsidiaries are translated at year end exchange rates. The impact of these currency translations is recorded within the profit and loss
account for the year.
Other assets and liabilities denominated in foreign currencies are also converted at year end exchange rates with the related foreign
currency exchange gains or losses reflected in the profit and loss account for the year.
Tax
Current tax expense is charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of
taxable operations for the current year. To the extent that losses of an individual UK company are not offset in any one year, they can
be carried back for one year or carried forward indefinitely to be offset against profits arising from the same company.
Deferred tax assets and liabilities are recognised in accordance with the provisions of FRS 19. The Company has chosen not to apply
the option available of recognising such assets and liabilities on a discounted basis to reflect the time value of money. Except as set out
in FRS 19, deferred tax is recognised in respect of all timing differences that have originated but not reversed by the balance sheet date.
Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered.
The Group’s UK subsidiaries each file separate tax returns. In accordance with UK tax legislation, where one domestic UK company
is a 75 per cent owned subsidiary of another UK company or both are 75 per cent owned subsidiaries of a common parent, the
companies are considered to be within the same UK tax group. For companies within the same tax group, trading profits and losses
arising in the same accounting period may be offset for the purposes of determining current and deferred taxes.
Pensions
The Company assumes a portion of the pension surplus or deficit of the Group’s largest pension scheme, the Prudential Staff Pension
Scheme (PSPS) and applied the requirements of FRS 17 (as amended in December 2006) to its interest in the PSPS surplus or deficit.
Further details are disclosed in note 8.
A pension surplus or deficit is recorded as the difference between the present value of the scheme liabilities and the fair value of the
scheme assets. The Company’s share of pension surplus is recognised to the extent that the Company is able to recover a surplus either
through reduced contributions in the future or through refunds from the scheme.
The assets and liabilities of the defined benefit pension schemes of the Prudential Group are subject to a full triennial actuarial
valuation using the projected unit method. Estimated future cash flows are then discounted at a high quality corporate bond rate,
adjusted to allow for the difference in duration between the bond index and the pension liabilities where appropriate, to determine
its present value. These calculations are performed by independent actuaries.
The aggregate of the actuarially determined service costs of the currently employed personnel and the unwind of the discount on
liabilities at the start of the period, gains and losses on settlements and curtailments, less the expected investment return on the scheme
assets at the start of the period, is recognised in the profit and loss account. To the extent that part or all of the Company’s interest in the
pension surplus is not recognised as an asset, the unrecognised surplus is initially applied to extinguish any past service costs, losses on
settlements or curtailments that would otherwise be included in the profit and loss account. Next, the expected investment return on the
scheme’s assets is restricted so that it does not exceed the total of the current service cost, interest cost and any increase in the
recoverable surplus. Any further adjustment for the unrecognised surplus is treated as an actuarial gain or loss.
Actuarial gains and losses as a result of the changes in assumptions, the difference between actual and expected investment return
on scheme assets and experience variances are recorded in the statement of total recognised gains and losses. Actuarial gains and losses
also include adjustment for unrecognised pension surplus as described above.
294 Prudential plc > Annual Report 2009
Share-based payments
The Group offers share award and option plans for certain key employees and a SAYE plan for all UK and certain overseas employees.
The share-based payment plans operated by the Group are mainly equity-settled plans with a few cash-settled plans.
Under the principles of UITF 44, where the Company, as the parent company, grants options or awards of its equity instruments
to employees of its subsidiary undertakings, and such share-based payments are accounted for as equity-settled in the Group financial
statements, the Company records an increase in the investment in the subsidiary undertakings for the value of the share options and
awards granted with a corresponding credit entry recognised directly in equity. The value of the share options and awards granted is
based upon the fair value of the options and awards at the grant date, the vesting period and the vesting conditions.
4 Investments of the Company
At 1 January
Transfer of investment in subsidiary undertaking
Additional investment in subsidiary undertakings
Net advance of loans
At 31 December
2009 £m
Shares in
subsidiary
undertakings
Loans to
subsidiary
undertakings
7,193
(1,021)
3,899
–
10,071
3,212
889
(3,889)
687
899
The transfer of investment in subsidiary undertaking relates to the sale of shares in a central finance subsidiary to another such company.
The consideration was the assignment of loans to a further central finance subsidiary with a value of £889 million and cash of £132 million.
The additional investment in subsidiary undertakings during the year of £3,899 million (2008: £35 million) includes £3,889 million in
a central finance subsidiary following an internal restructuring, for which the consideration was the assignment of loans to other central
finance subsidiaries, and £10 million (2008: £9 million) for share-based payments reflecting the value of payments granted by the
Company to employees of its subsidiary undertakings in 2009.
5 Subsidiary undertakings
The principal subsidiary undertakings of the Company at 31 December 2009, all wholly-owned, were:
The Prudential Assurance Company Limited
Prudential Annuities Limited*
Prudential Retirement Income Limited (PRIL)*
M&G Investment Management Limited*
Jackson National Life Insurance Company*
Prudential Assurance Company Singapore (Pte) Limited*
*Owned by a subsidiary undertaking of the Company.
Main activity
Country of incorporation
Insurance
Insurance
Insurance
Asset management
Insurance
Insurance
England and Wales
England and Wales
Scotland
England and Wales
US
Singapore
Each subsidiary has one class of ordinary shares and operates mainly in its country of incorporation, except for PRIL which operates
mainly in England and Wales. In 2009, the Company transferred the assets and liabilities of its agency distribution business and its agency
force in Taiwan to China Life Insurance Company Ltd of Taiwan.
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Notes on the parent company financial statements > continued
6 Borrowings
Core structural borrowings
Other borrowings
Total
2009 £m
2008 £m
2009 £m
2008 £m
2009 £m
2008 £m
ˆ
Core structural borrowings:
£249m 5.5% Bonds 2009note i
¤500m 5.75% Subordinated Notes 2021note ii
£300m 6.875% Bonds 2023
¤20m Medium-Term Subordinated
Notes 2023note iii
£250m 5.875% Bonds 2029
£435m 6.125% Subordinated Notes 2031
£400m 11.375% Subordinated Notes 2039note iv
US$1,000m 6.5% Perpetual Subordinated
Capital Securitiesnote v
US$250m 6.75% Perpetual Subordinated
Capital Securitiesnote vi
US$300m 6.5% Perpetual Subordinated
Capital Securitiesnotes vi, vii, viii
US$750m 11.75% Perpetual Subordinated
Capital Securities
Total core structural borrowings
Other borrowings:
Commercial papernote ix
Medium-Term Notes 2010note ix
Floating Rate Notes 2010note x
–
443
300
18
249
428
380
619
155
188
456
249
482
300
19
249
427
–
696
173
186
–
3,236
2,781
–
–
–
–
–
–
Total borrowings
3,236
2,781
Borrowings are repayable as follows:
Within 1 year or on demand
Between 1 and 5 years
After 5 years
Recorded in the balance sheet as:
Subordinated liabilitiesnote xi
Debenture loans
–
–
3,236
3,236
2,687
549
3,236
249
–
2,532
2,781
1,983
798
2,781
–
–
–
–
–
–
–
–
–
–
–
–
2,031
7
200
2,238
2,238
–
–
2,238
–
–
–
–
–
–
–
–
–
–
–
–
1,269
9
200
1,478
1,469
9
–
1,478
–
443
300
18
249
428
380
619
155
188
456
3,236
2,031
7
200
5,474
2,238
–
3,236
5,474
249
482
300
19
249
427
–
696
173
186
–
2,781
1,269
9
200
4,259
1,718
9
2,532
4,259
Notes
i
ii
The £249 million 5.5 per cent borrowings were repaid on maturity in May 2009.
The ¤500 million 5.75 per cent borrowings have been swapped into borrowings of £333 million with interest payable at six month £LIBOR plus
0.962 per cent.
iii The ¤20 million borrowings were issued at 20-year Euro Constant Maturity Swap (capped at 6.5 per cent). These have been swapped into
borrowings of £14 million with interest payable at three month £LIBOR plus 1.2 per cent.
iv The interest rate on the £400 million 11.375 per cent borrowings will change to three month £LIBOR plus 11.348 per cent on 29 May 2019.
v
Interest on the US$1,000 million 6.5 per cent borrowings was swapped into floating rate payments at three month US$LIBOR plus 0.80 per cent.
In March 2009, this swap was cancelled.
vi The US$250 million 6.75 per cent borrowings and the US$300 million 6.5 per cent borrowings can be converted, in whole or in part, at the
Company’s option and subject to certain conditions, on any interest payment date falling on or after 23 March 2010 and 23 March 2011 respectively,
into one or more series of Prudential preference shares.
Interest on the US$300 million 6.5 per cent borrowings was swapped into floating rate payments but, in 2008, swapped back into fixed rate payments
of 6.5 per cent.
vii
viii Hedge accounting is applied at both the Group consolidated level and Company level. Due to different dates of commencement of this accounting
treatment, the hedge values differ between these two levels.
ix These borrowings support a short-term fixed income securities programme.
x
The Company originally issued £200 million Floating Rate Notes in October 2008 which matured in April 2009. New £200 million Notes were issued
in April 2009, which matured in October 2009, and again in October 2009 which will mature in April 2010. All Notes have been wholly subscribed to
by a Group subsidiary and accordingly have been eliminated on consolidation in the Group financial statements.
xi The interests of the holders of the Subordinated Notes and the Subordinated Capital Securities are subordinate to the entitlements of other creditors
of the Company.
296 Prudential plc > Annual Report 2009
7 Derivative financial instruments
Derivative financial instruments held to manage interest rate
and currency profile:
Interest rate swaps
Cross-currency swaps
Inflation-linked swap
Forward foreign currency contracts
Total
2009 £m
2008 £m
Fair value
assets
Fair value
liabilities
Fair value
assets
Fair value
liabilities
33
118
–
–
151
8
–
128
–
136
19
182
–
66
267
17
–
162
56
235
The change in fair value of the derivative financial instruments of the Company was a gain before tax of £83 million (2008: loss before tax
of £343 million).
The Company has a US$300 million fair value hedge in place which hedges the interest rate exposure on the US$300 million
6.5 per cent perpetual subordinated capital securities. In addition, the Company had a US$1,000 million fair value hedge which hedged
the interest rate exposure on the US$1,000 million 6.5 per cent perpetual subordinated capital securities until this hedge was cancelled
in March 2009. The derivative financial instruments were valued internally using standard market practices. In accordance with the
Company’s risk management framework, all internally generated valuations are subject to independent assessment against external
counterparties’ valuations.
8 Pension scheme financial position
The majority of UK Prudential staff are members of the Group’s pension schemes. The largest scheme is the Prudential Staff Pension
Scheme (PSPS) which is primarily a closed defined benefit scheme. At 31 December 2009, on the FRS 17, ‘Retirement Benefits’ basis of
valuation, the underlying pension liabilities of PSPS accounted for 86 per cent (2008: 87 per cent) of the liabilities of the Group’s defined
benefit schemes.
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. In 2008, the Group adopted IFRIC 14, interpretation guidance to IAS 19 with the effect of derecognising the Group’s
interest in PSPS surplus and recognising an additional liability for the deficit funding obligation for PSPS in the Group financial
statements. Further details are described in note I2 ‘Staff and pension plans’ of the notes on the financial statements of the Group.
At 31 December 2005, the allocation of surpluses and deficits attaching to PSPS between the Company and the unallocated surplus
of the Prudential Assurance Company’s (PAC) with-profits funds was apportioned in the ratio 30/70 between the Company and the PAC
with-profits fund following detailed consideration of the sourcing of previous contributions. This ratio was applied to the base deficit
position at 1 January 2006 and for the purpose of determining the allocation of the movements in that position up to 31 December 2009.
The FRS 17 service charge and ongoing employer contributions are allocated by reference to the cost allocation for current activity.
Defined benefit schemes are generally required to be subject to full actuarial valuation every three years to assess the appropriate
level of funding for schemes having regard to their commitments. These valuations include assessments of the likely rate of return on
the assets held within the separate trustee administered funds. PSPS was last actuarially valued as at 5 April 2008 using the projected
unit method.
This valuation demonstrated the Scheme to be 106 per cent funded by reference to the Scheme Solvency Target that forms the basis
of the Scheme’s statutory funding objective. Accordingly, the total contributions to be made by the Group to the Scheme were reduced
from the previous arrangement of £70-£75 million per annum to £50 million per annum effective from 1 July 2009. As PSPS was in a
surplus position at the valuation date, no formal recovery plan was required. However, recognising that there had been a significant
deterioration in the value of the Scheme’s assets from 5 April 2008 to the date of the finalisation of the valuation, contributions to the
Scheme for additional funding of £25 million per annum as well as a £25 million per annum employer’s contribution for ongoing service of
current employees, were agreed with the PSPS Trustees subject to a reassessment when the next valuation is completed. The additional
funding is akin to deficit funding. In 2009, total contributions for the year, including expenses and augmentations, were £67 million
(2008: £79 million).
Using external actuarial advice provided by the professionally qualified actuaries, Watson Wyatt Partners, for the valuation of PSPS,
the most recent full valuations have been updated to 31 December 2009 applying the principles prescribed by FRS 17.
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Notes on the parent company financial statements > continued
8 Pension scheme financial position continued
The key assumptions adopted were:
Rate of inflation
Rate of increase in salaries
Rate of increase in pension payments for inflation:
Guaranteed (maximum 5%)
Guaranteed (maximum 2.5%)
Discretionary
Rate used to discount scheme liabilities
Long-term expected rate of return
Equities
Bonds
Properties
Other assets
Weighted average long-term expected rate of return
2009 %
2008 %
3.7
5.7
3.7
2.5
2.5
5.8
3.0
5.0
3.0
2.5
2.5
6.1
Prospectively for 2010 %
2009 %
2008 %
8.5
5.3
6.75
4.75
5.9
6.8
4.8
6.05
2.0
4.5
7.5
5.5
6.75
5.5
6.2
The long-term expected rates of return have been determined after applying due consideration to the requirements of paragraph 54 of
FRS 17, in particular, taking account of the values of the assets.
Further details on the PSPS scheme, including mortality assumptions, are shown in note I2 ‘Staff and pension plans’ of the notes on
the financial statements of the Group.
The assets and liabilities of PSPS were:
Equities
Bonds
Properties
Cash-like investments
Total value of assets
Present value of scheme liabilities
Underlying surplus in the scheme
Surplus in the scheme recognised
by the Company
After deducting deferred tax,
the amounts reflected in the
balance sheet of the Company are
31 Dec 2009
31 Dec 2008
31 Dec 2007
31 Dec 2006
31 Dec 2005
%
17.1
50.6
5.9
26.4
100.0
%
16.8
68.8
5.5
8.9
100.0
Value
£m
830
3,406
272
441
4,949
4,436
513
52
37
Value
£m
823
2,430
283
1,267
4,803
4,075
728
50
36
%
26.1
23.2
11.2
39.5
100.0
Value
£m
1,278
1,134
545
1,932
4,889
4,361
528
163
117
%
28.3
43.8
12.2
15.7
100.0
Value
£m
1,346
2,077
580
745
4,748
4,607
141
48
34
%
52.1
33.9
12.3
1.7
100.0
Value
£m
2,293
1,490
539
75
4,397
4,776
(379)
(114)
(80)
The surplus in the scheme recognised in the balance sheet of the Company represents the element of the amount which is recoverable
through reduced future contributions and is net of the apportionment to the PAC with-profits fund.
298 Prudential plc > Annual Report 2009
Underlying scheme assets and liabilities of PSPS
The change in the present value of the underlying scheme liabilities and the change in the fair value of the underlying assets of PSPS are
as follows:
Present value of scheme liabilities, at 1 January
Service costs
Interest costs
Curtailment credit
Employee contributions
Actuarial losses (gains)
Benefit payments
Present value of scheme liabilities, at 31 December
Fair value of scheme assets, at 1 January
Expected return on scheme assets
Employee contributions
Employer contributions*
Actuarial gains (losses)
Benefit payments
Fair value of scheme assets, at 31 December
* The contributions include deficit funding, ongoing service contributions, expenses and augmentations.
Pension (charge) credit and actuarial (losses) gains of PSPS
The pension charge recognised in the Company’s profit and loss account is as follows:
Pension (charge) credit
Operating charge:
Service costs
Finance income (expense):
Interest on scheme liabilities
Expected return on scheme assets
Curtailment credit
Total pension (charge) credit
2009 £m
2008 £m
4,075
23
242
–
2
315
(221)
4,436
4,361
26
250
(30)
1
(327)
(206)
4,075
2009 £m
2008 £m
4,803
213
2
67
85
(221)
4,949
4,889
299
1
79
(259)
(206)
4,803
2009 £m
2008 £m
(23)
(242)
213
(29)
–
(52)
(26)
(250)
299
49
30
53
Pension charge attributable to the Company
(25)
(4)
The pension charge attributable to the Company is net of the apportionment to the PAC with-profits fund and is related to the surplus
recognised on the balance sheet of the Company. In 2008, an amount of £9 million was applied to extinguish the curtailment credit
attributable to the Company from the unrecognised portion of the pension surplus at 31 December 2008. There was no such amount
applied against the pension charge in 2009.
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Notes on the parent company financial statements > continued
8 Pension scheme financial position continued
Actuarial gains (losses):
Actual less expected return on scheme assets
(2% (2008: 5%) (2007: 0%) (2006: 3%)
(2005: 11%) of assets)
Experience gains (losses) on scheme liabilities
(1% (2008: 3%) (2007: 0%) (2006: 0%)
(2005: 0%) of liabilities)
Changes in assumptions underlying the present
value of scheme liabilities
Total actuarial (losses) gains (5% (2008: 2%)
(2007: 7%) (2006: 8%) (2005: (2)%) of
the present value of the scheme liabilities)
2009 £m
2008 £m
2007 £m
2006 £m
2005 £m
85
59
(374)
127
200
(230)
68
(259)
(12)
141
500
(10)
324
302
91
17
232
390
118
–
(405)
95
(30)
Actuarial (losses) gains attributable to the Company
(3)
(143)
The total actual return on scheme assets for PSPS was a gain of £298 million (2008: £40 million).
The experience gains on scheme liabilities in 2008 of £127 million related mainly to the ‘true-up’ reflecting improvements in data
consequent upon the ongoing triennial valuation of PSPS.
The actuarial gains (losses) attributable to the Company are net of the apportionment to the PAC with-profits fund and are related
to the surplus recognised on the balance sheet of the Company. In 2009, the actuarial losses attributable to the Company included
an amount of £66 million (2008: £164 million) for the unrecognised portion of surplus which has not been deducted from the
pension charge.
The actuarial losses before tax of £3 million (2008: £143 million) attributable to the Company are recorded in the statement of total
recognised gains and losses. Cumulative actuarial gains as at 31 December 2009 amount to £88 million (2008: £91 million).
The 2005 actuarial losses attributable to the Company reflected the changed estimate of allocation in the deficit of PSPS from a ratio
of 20/80 between the Company and the PAC with-profits fund prior to 2005 to a ratio of 30/70 from 2005 onwards.
Total employer contributions expected to be paid into the PSPS defined benefit scheme for the year ending 31 December 2010
amount to £54 million, reflecting the new funding arrangement agreed in 2009, following the completion of the 2008 actuarial valuation,
and expenses.
9
Share capital and share premium
A summary of the ordinary shares in issue is set out below:
Issued shares of 5 pence each fully paid
At 1 January
Shares issued under share option schemes
Shares issued in lieu of cash dividends
Transfer to retained profit in respect of shares issued in lieu of cash dividends
At 31 December
Number of
shares
2,496,947,688
605,721
34,674,062
–
2,532,227,471
2009
Share
capital
£m
Share
premium
£m
125
–
2
–
127
1,840
3
136
(136)
1,843
At 31 December 2009, there were options subsisting under share option schemes to subscribe for 12,230,833 (2008: 6,825,343)
shares at prices ranging from 266 pence to 572 pence (2008: 266 pence to 617 pence) and exercisable by the year 2016 (2008: 2015).
In addition, there were 17,292 (2008: 967,652) conditional options outstanding under the Restricted Share Plan and exercisable at nil
cost by the year 2015. No further options have been issued under this Plan since it was replaced by the Group Performance Share Plan
in March 2006. There were 6,644,203 (2008: 4,906,234) conditional options outstanding under the Group Performance Share Plan
and exercisable at nil cost within a 10 year period. Further information on the Group’s employee share options is given in note I3
‘Share-based payments’ of the notes on the financial statements of the Group.
300 Prudential plc > Annual Report 2009
10 Profit of the Company and reconciliation of the movement in shareholders’ funds
The profit after tax of the Company for the year was £913 million (2008: £486 million). After dividends of £481 million
(2008: £453 million), actuarial losses net of tax in respect of the pension scheme of £2 million (2008: £103 million), share-based
payment reserve movement of £10 million (2008: £9 million) and a transfer from the share premium account of £136 million
(2008: £156 million) in respect of shares issued in lieu of cash dividends, retained profit at 31 December 2009 amounted to
£1,856 million (2008: £1,280 million).
A reconciliation of the movement in shareholders’ funds of the Company for the years ended 31 December 2009 and 2008
is given below:
Profit for the year
Dividends
Actuarial losses recognised in respect of the pension scheme net of related taxnote 8
New share capital subscribednote 9
Reserve movements in respect of share-based paymentsnote 4
Net movement in shareholders’ funds
Shareholders’ funds at beginning of year
Shareholders’ funds at end of year
11 Other information
2009 £m
2008 £m
913
(481)
432
(2)
141
10
581
3,245
3,826
486
(453)
33
(103)
170
9
109
3,136
3,245
a
Information on directors’ remuneration is given in the directors’ remuneration report section of this Annual Report and note I4
‘Key management remuneration’ of the notes on the financial statements of the Group.
b Information on transactions of the directors with the Group is given in note I6 ‘Related party transactions’ of the notes on the financial
statements of the Group.
The Company employs no staff.
c
d Fees payable to the Company’s auditor for the audit of the Company’s annual accounts were £0.1 million (2008: £0.1 million).
In addition, the Company paid fees for other services of £0.2 million (2008: £0.2 million).
In certain instances the Company has guaranteed that its subsidiaries will meet their obligations when they fall due for payment.
e
12 Post balance sheet events
A final dividend of 13.56 pence per share was proposed by the directors on 8 March 2010. Subject to shareholders’ approval, the
dividend will be paid on 27 May 2010 to shareholders on the register at the close of business on 9 April 2010. The dividend will absorb
an estimated £343 million of shareholders’ funds. A scrip dividend alternative will be offered to shareholders.
On 1 March 2010, Prudential plc announced that it had reached agreement with American International Group Inc. (‘AIG’), on terms
for the combination of Prudential and AIA Group Limited (‘AIA’), a wholly-owned subsidiary of AIG (the ‘Transaction’). AIA is a leading
life insurance organisation in Asia which provides individuals and businesses with products and services for their insurance, protection,
savings, investment and retirement needs in 15 geographical markets in the region. The combined group will be the leading life insurer
in Hong Kong, Singapore, Malaysia, Indonesia, Vietnam, Thailand and the Philippines with the leading foreign life insurance business in
China and India, a significantly enhanced presence in the high growth South East Asian life markets and strong operations in the US
and UK.
The Transaction will be effected through the acquisition of both Prudential (by a scheme of arrangement, the ‘Scheme’) and AIA
by a new company (‘New Prudential’). The new company will assume the name Prudential plc, be headquartered and incorporated in
the UK, and traded on the main market of the London Stock Exchange with ADRs traded on the New York Stock Exchange. The existing
Board of Prudential will become the Board of New Prudential.
AIG will receive total consideration of US$35.5 billion, comprising US$25.0 billion in cash and US$10.5 billion in New Prudential
shares and other securities. The cash component of the consideration will be financed through an underwritten rights issue, raising
US$20.0 billion (net of fees and expenses) and through issuance of US$ 5.0 billion senior notes (net of fees and expenses). These issues
have been agreed to be underwritten by certain banks. The terms of the rights issue will be set at the time of publication of Prudential and
New Prudential prospectuses.
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The rights issue and the Scheme will be subject to shareholder approval at a General meeting. The Transaction is also subject to
certain regulatory and anti-trust approvals including various regulatory approvals required on a change of control of Prudential as a result
of the Scheme.
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On 8 March 2010, the Company confirmed that the Prudential Group had entered into foreign exchange hedging arrangements
in respect of its requirement to convert the pounds sterling proceeds of the rights issue into US dollars, which is the currency in which
Prudential must pay the cash element of the consideration.
301
Statement of directors’ responsibilities in respect of the Annual Report and the
financial statements
The directors are responsible for preparing the Annual Report and
the Group and parent company financial statements in accordance
with applicable law and regulations.
Company law requires the directors to prepare Group and parent
company financial statements for each financial year. Under that
law the directors are required to prepare the Group financial
statements in accordance with International Financial Reporting
Standards (IFRS) as adopted by the European Union (EU) and
applicable law and have elected to prepare the parent company
financial statements in accordance with UK Accounting Standards
and applicable law (UK Generally Accepted Accounting Practice).
Under company law the directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and parent company and
of their profit or loss for that period. In preparing each of the
Group and parent company financial statements, the directors
are required to:
• Select suitable accounting policies and then apply them
consistently;
• make judgements and estimates that are reasonable and
prudent;
The directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the parent company’s
transactions and disclose with reasonable accuracy at any time
the financial position of the parent company and enable them to
ensure that its financial statements comply with the Companies
Act 2006. They have general responsibility for taking such steps
as are reasonably open to them to safeguard the assets of the
Group and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the directors are also
responsible for preparing a directors’ report, directors’
remuneration report and corporate governance statement
that comply with that law and those regulations.
The directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company’s website. Legislation in the UK governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
The directors of Prudential plc, whose names and positions
are set out on pages 76 to 78 confirm that to the best of
their knowledge:
• for the Group financial statements, state whether they have
• The financial statements, prepared in accordance with the
been prepared in accordance with IFRS as adopted by the EU;
• for the parent company financial statements, state whether
applicable UK Accounting Standards have been followed,
subject to any material departures disclosed and explained in
the parent company financial statements; and
• prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and the
parent company will continue in business.
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss of the
Company and the undertakings included in the consolidation
taken as a whole; and
• the directors’ report includes a fair review of the development
and performance of the business and the position of the
Company and the undertakings included in the consolidation
taken as a whole, together with a description of the principal
risks and uncertainties that they face.
302 Prudential plc > Annual Report 2009
Independent auditor’s report to the members of Prudential plc
We have audited the financial statements of Prudential plc for
the year ended 31 December 2009 set out on pages 119 to 301.
The financial reporting framework that has been applied in the
preparation of the Group financial statements is applicable law and
International Financial Reporting Standards (IFRSs) as adopted by
the EU. The financial reporting framework that has been applied
in the preparation of the parent company financial statements is
applicable law and UK Accounting Standards (UK Generally
Accepted Accounting Practice).
This report is made solely to the Company’s members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so that we might state
to the Company’s members those matters we are required to state
to them in an auditors’ report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the
Company’s members, as a body, for our audit work, for this
report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
As explained more fully in the Directors’ Responsibilities
Statement set out on page 302, the directors are responsible for
the preparation of the financial statements and for being satisfied
that they give a true and fair view. Our responsibility is to audit
the financial statements in accordance with applicable law and
International Standards on Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices
Board’s (APB’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements
is provided on the APB’s web-site at
www.frc.org.uk/apb/scope/UKP.
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 2009 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
• the information given in the Directors’ Report for the financial
year for which the financial statements are prepared is
consistent with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if,
in our opinion:
• adequate accounting records have not been kept by the
parent company, or returns adequate for our audit have not
been received from branches not visited by us; or
• the parent company financial statements and the part of the
Directors’ Remuneration Report to be audited are not in
agreement with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by
law are not made; or
• we have not received all the information and explanations
we require for our audit.
Under the Listing Rules we are required to review:
• the directors’ statement, set out on page 93, in relation to going
concern; and
• the part of the Corporate Governance Statement set out in the
Governance report relating to the Company’s compliance with
the nine provisions of the June 2008 Combined Code specified
for our review.
G Bainbridge (Senior Statutory Auditor)
for and on behalf of KPMG Audit Plc, Statutory Auditor
Chartered Accountants
London
8 March 2010
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303
European Embedded Value (EEV) basis supplementary information
Operating profit based on longer-term investment returnsi
Results analysis by business area
Year ended 31 December 2009
Asian operations
New business
Business in force
Long-term business
Asset management
Development expenses
Total
US operations
New business
Business in force
Long-term business
Broker-dealer and asset managementii
Total
UK operations
New business
Business in force
Long-term business
General insurance commission
Total UK insurance operations
M&G
Total
Other income and expenditure
Investment return and other income
Interest payable on core structural borrowings
Corporate expenditure:
Group Head Office
Asia Regional Head Office
Charge for share-based payments for Prudential schemes
Charge for expected asset management marginiii
Total
Restructuring costsiv
Operating profit based on longer-term investment returnsv
Analysed as profits (losses) from:
New business
Business in force
Long-term business
Asset management
Other results
Total
Note
2009 £m
2008 £mv,vi
2
3
2
3
2
3
2
3
713
392
1,105
55
(6)
1,154
664
569
1,233
4
1,237
230
640
870
51
921
238
1,159
22
(209)
(146)
(57)
(5)
(38)
(433)
(27)
634
579
1,213
52
(26)
1,239
293
293
586
7
593
273
764
1,037
44
1,081
286
1,367
89
(172)
(130)
(41)
(6)
(42)
(302)
(32)
3,090
2,865
1,607
1,601
3,208
297
(415)
3,090
1,200
1,636
2,836
345
(316)
2,865
Notes
i
EEV basis operating profit based on longer-term investment returns excludes short-term fluctuations in investment returns, the mark to market value
movements on core borrowings, the shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes, and the effect
of changes in economic assumptions and changes in the time value of cost of options and guarantees arising from changes in economic factors. In
addition, during the severe equity market conditions experienced in the first quarter of 2009, coupled with historically high equity volatility, the Group
entered into exceptional short-dated hedging contracts to protect against potential tail events on the Group IGD capital position. These contracts were
in addition to the Group’s regular operational hedging programmes. It also disposed of its Taiwan agency business. The effect of these items has been
shown separately from operating profit based on longer-term investment returns. The treatment of the Taiwan agency business within the
comparatives is discussed below. The amounts for these items are included in total EEV profit attributable to shareholders. The Company believes that
operating profit, as adjusted for these items, better reflects underlying performance. Profit before tax and basic earnings per share include these items
together with actual investment returns. This basis of presentation has been adopted consistently throughout this supplementary information.
The US broker-dealer and asset management result includes losses for Curian of £6 million (2008: £3 million).
ii
iii The value of future profits or losses from asset management and service companies that support the Group’s covered businesses are included in the
profits for new business and the in-force value of the Group’s long-term business. The results of the Group’s asset management operations include
the profits from management of internal and external funds. For EEV basis reporting, Group shareholders’ other income is adjusted to deduct the
expected margin for the year on management of covered business. The deduction is on a basis consistent with that used for projecting the results
for covered business. Group operating profit accordingly includes the variance between actual and expected profit in respect of covered business.
iv Restructuring costs comprise the charge of £23 million recognised on an IFRS basis and an additional £4 million recognised on the EEV basis for the
v
shareholders’ share of restructuring costs incurred by the PAC with-profits fund.
In June 2009, the Group completed the previously announced sale of its Taiwan agency business. In order to facilitate comparisons of the results of
the Group’s retained businesses the effect of disposal and the results of the Taiwan agency business are shown separately. The presentation of the
comparative results for full year 2008 has been adjusted accordingly as explained in note 18.
vi Exchange translation
The comparative results have been prepared using previously reported exchange rates.
304 Prudential plc > Annual Report 2009
Summarised consolidated income statement
Year ended 31 December 2009
Note
2009 £m
2008 £m
Operating profit based on longer-term investment returns
Asian operations
US operations
UK operations:
UK insurance operations
M&G
Other income and expenditure
Restructuring costs
Operating profit based on longer-term investment returns
Short-term fluctuations in investment returns
Mark to market value movements on core borrowings
Shareholders’ share of actuarial and other gains and losses on defined benefit
pension schemes
Effect of changes in economic assumptions and time value of cost of options
and guarantees
Profit on sale and results for Taiwan agency business
Profit (loss) from continuing operations before tax (including actual investment returns)
Tax attributable to shareholders’ profit (loss)
Profit (loss) from continuing operations after tax before minority interests
Discontinued operations (net of tax)
5
9
6
18
11
4
1,154
1,237
921
238
1,159
(433)
(27)
3,090
351
(795)
1,239
593
1,081
286
1,367
(302)
(32)
2,865
(4,967)
656
(84)
(14)
(910)
91
1,743
(481)
1,262
(14)
1,248
1,245
3
1,248
(398)
(248)
(2,106)
771
(1,335)
–
(1,335)
(1,338)
3
(1,335)
Profit (loss) for the year
Attributable to:
Equity holders of the Company
Minority interests
Profit (loss) for the year
Earnings per share (in pence)
Year ended 31 December 2009
From operating profit based on longer-term investment returns,
after related tax and minority interests of £2,221m (2008: £2,103m)
Based on profit (loss) after tax and minority interests of £1,245m (2008: £(1,338)m)
Dividends per share (in pence)
Year ended 31 December 2009
Dividends relating to reporting year:
Interim dividend (2009 and 2008)
Final dividend (2009 and 2008)
Total
Dividends declared and paid in reporting year:
Current year interim dividend
Final dividend for prior year
Total
Note
2009
2008
12
12
88.8p
49.8p
85.1p
(54.1)p
2009
2008
6.29p
13.56p
19.85p
6.29p
12.91p
19.20p
5.99p
12.91p
18.90p
5.99p
12.30p
18.29p
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European Embedded Value (EEV) basis supplementary information > continued
Movement in shareholders’ equity (excluding minority interests)
Year ended 31 December 2009
Profit (loss) for the year attributable to equity shareholders
Items taken directly to equity:
Exchange movements on foreign operations and net investment hedges:
Exchange movements arising during the year
Related tax
Dividends
New share capital subscribed
Reserve movements in respect of share-based payments
Treasury shares:
Movement in own shares held in respect of share-based payment plans
Movement in Prudential plc shares purchased by unit trusts consolidated under IFRS
Mark to market value movements on Jackson assets backing
surplus and required capital (gross movement)
Related tax
Net increase in shareholders’ equity
Shareholders’ equity at beginning of year (excluding minority interests)
Shareholders’ equity at end of year (excluding minority interests)
Note
2009 £m
2008 £m
1,245
(1,338)
(761)
11
(481)
141
29
3
(3)
205
(72)
10
10
7,10
317
14,956
15,273
2,010
119
(453)
170
18
3
(25)
(228)
80
356
14,600
14,956
Total
5,431
172
5,603
4,437
16
4,453
5,781
80
5,861
4,122
–
4,122
5,439
–
–
–
5,439
Asset
Long-term management
and other
operations
business
operations
31 Dec 2009 £m
31 Dec 2008 £m
Asset
Long-term management
and other
operations
business
operations
5,264
111
5,375
4,339
–
4,339
167
61
228
98
16
114
Total
5,942
141
6,083
4,217
16
4,233
161
61
222
95
16
111
37
5,476
4,919
–
4,919
173
1,153
1,326
1,363
173
1,153
1,326
6,802
–
–
–
4,919
147
1,153
1,300
1,300
147
1,153
1,300
6,219
–
–
–
(1,780)
(65)
(1,845)
(1,780)
(65)
(1,845)
–
–
–
(818)
(501)
(818)
(501)
(1,319)
(1,319)
15,422
(149)
15,273
14,633
323
14,956
15,342
80
15,422
(1,379)
1,230
(149)
13,963
1,310
15,273
14,522
111
14,633
(907)
1,230
323
13,615
1,341
14,956
Comprising:
Asian operations:
Net assets of operation
Acquired goodwill
US operations:
Net assets of operation
Acquired goodwill
UK insurance operations:
Net assets of operation
M&G
Net assets of operation
Acquired goodwill
Other operations:
Holding company net borrowings
at market value
Other net liabilities
Shareholders’ equity at end of year
(excluding minority interests)
Representing:
Net assets
Acquired goodwill
306 Prudential plc > Annual Report 2009
Net asset value per share (in pence)
Based on EEV basis shareholders’ equity of £15,273m (2008: £14,956m)
Number of issued shares at year end (millions)
Return on embedded value*
2009
2008
603p
2,532
599p
2,497
14.9%
14.4%
*Return on embedded value is based on EEV operating profit after tax and minority interests as a percentage of opening EEV basis shareholders’ equity.
Summary statement of financial position
31 December 2009
Total assets less liabilities, excluding insurance funds
Less insurance funds:*
Policyholder liabilities (net of reinsurers’ share) and unallocated surplus of with-profits funds
Less shareholders’ accrued interest in the long-term business
Total net assets
Share capital
Share premium
IFRS basis shareholders’ reserves
Total IFRS basis shareholders’ equity
Additional EEV basis retained profit
Note
2009 £m
2008 £m
201,501
186,209
(195,230)
9,002
(181,151)
9,898
(186,228)
(171,253)
10
15,273
14,956
127
1,843
4,301
6,271
9,002
125
1,840
3,093
5,058
9,898
7
7
Shareholders’ equity (excluding minority interests)
7,10
15,273
14,956
*Including liabilities in respect of insurance products classified as investment contracts under IFRS 4.
The supplementary information on pages 304 to 340 was approved by the Board of directors on 8 March 2010 and signed on its behalf.
Harvey McGrath
Chairman
Tidjane Thiam
Group Chief Executive
Nic Nicandrou
Chief Financial Officer
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Notes on the EEV basis supplementary information
1 Basis of preparation, methodology and accounting presentation
The EEV basis results have been prepared in accordance with the EEV Principles issued by the CFO Forum of European Insurance
Companies in May 2004 and expanded by the Additional Guidance on EEV Disclosures published in October 2005. Where appropriate,
the EEV basis results include the effects of adoption of International Financial Reporting Standards (IFRS).
The directors are responsible for the preparation of the supplementary information in accordance with the EEV Principles.
a Covered business
The EEV results for the Group are prepared for ‘covered business’, as defined by the EEV Principles. Covered business represents the
Group’s long-term insurance business for which the value of new and in-force contracts is attributable to shareholders. The EEV basis
results for the Group’s covered business are then combined with the IFRS basis results of the Group’s other operations.
The definition of long-term business operations is consistent with previous practice and comprises those contracts falling under the
definition of long-term insurance business for regulatory purposes together with, for US operations, contracts that are in substance the
same as guaranteed investment contracts (GICs) but do not fall within the technical definition. Under the EEV Principles, the results for
covered business incorporate the projected margins of attaching internal asset management.
With two principal exceptions, covered business comprises the Group’s long-term business operations. The principal exceptions
are for the closed Scottish Amicable Insurance Fund (SAIF) and for the presentational treatment of the financial position of the Group’s
principal defined benefit pension scheme, the Prudential Staff Pension Scheme (PSPS). A small amount of UK group pensions business
is also not modelled for EEV reporting purposes.
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.
As regards PSPS, the deficit funding liability attaching to the shareholder-backed business is included in the total for Other
operations, reflecting the fact that the deficit funding is being paid for by the parent company, Prudential plc.
b Methodology
i Embedded value
Overview
The embedded value is the present value of the shareholders’ interest in the earnings distributable from assets allocated to covered
business after sufficient allowance has been made for the aggregate risks in that business. The shareholders’ interest in the Group’s
long-term business comprises:
• present value of future shareholder cash flows from in-force covered business (value of in-force business), less a deduction for the
cost of locked-in (encumbered) capital;
• locked-in (encumbered) capital; and
• shareholders’ net worth in excess of encumbered capital (free surplus).
The value of future new business is excluded from the embedded value.
Notwithstanding the basis of presentation of results (as explained in note 1c(iv)) no smoothing of market or account balance values,
unrealised gains or investment return is applied in determining the embedded value or profit before tax. Separately, the analysis of profit
is delineated between operating profit based on longer-term investment returns and other constituent items, as explained in note 1c(i).
Valuation of new business
The contribution from new business represents profits determined by applying non-economic assumptions as at the end of the year.
In determining the new business contribution for UK immediate annuity and lifetime mortgage business, which is interest rate
sensitive, it is appropriate to use assumptions reflecting point of sale market conditions, consistent with how the business is priced.
For other business within the Group, end of period economic assumptions are used.
Valuation movements on investments
With the exception of debt securities held by Jackson, investment gains and losses during the period (to the extent that changes in
capital values do not directly match changes in liabilities) are included directly in the profit for the period and shareholders’ equity
as they arise.
The results for any covered business conceptually reflects the aggregate of the IFRS results and the movements on the additional
shareholders’ interest recognised on the EEV basis. Thus the start point for the calculation of the EEV results for Jackson, as for other
businesses, reflects the market value movements recognised on the IFRS basis.
However, in determining the movements on the additional shareholders’ interest, the basis for calculating the Jackson EEV result
acknowledges that for debt securities backing liabilities the aggregate EEV results reflect the fact that the value of in-force business
instead incorporates the discounted value of future spread earnings. This value is not affected generally by short-term market
movements on securities that are broadly speaking held for the longer term.
Fixed income securities backing the free surplus and required capital for Jackson are accounted for at fair value. However, consistent
with the treatment applied under IFRS for Jackson securities classified as available-for-sale, movements in unrealised appreciation on
these securities are accounted for in equity rather than in the income statement, as shown in the movement in shareholders’ equity.
308 Prudential plc > Annual Report 2009
Value of in-force business
The embedded value results are prepared incorporating best estimate assumptions about all relevant factors including levels of future
investment returns, expenses, persistency and mortality. These assumptions are used to project future cash flows. The present value of
the future cash flows is then calculated using a discount rate which reflects both the time value of money and the non-diversifiable risks
associated with the cash flows that are not otherwise allowed for.
The total profit that emerges over the lifetime of an individual contract as calculated using the embedded value basis is the same as
that calculated under the IFRS basis. Since the embedded value basis reflects discounted future cash flows, under this methodology the
profit emergence is advanced thus more closely aligning the timing of the recognition of profits with the efforts and risks of current
management actions, particularly with regard to business sold during the year.
Cost of capital
A charge is deducted from the embedded value for the cost of capital supporting the Group’s long-term business. This capital is referred
to as encumbered capital. The cost is the difference between the nominal value of the capital and the discounted value of the projected
releases of this capital allowing for investment earnings (net of tax) on the capital.
The annual result is affected by the movement in this cost from year to year which comprises a charge against new business profit
and generally a release in respect of the reduction in capital requirements for business in force as this runs off.
Where encumbered capital is held within a with-profits long-term fund, the value placed on surplus assets in the fund is already
discounted to reflect its release over time and no further adjustment is necessary in respect of encumbered capital.
Financial options and guarantees
Nature of options and guarantees in Prudential’s long-term business
Asian operations
Subject to local market circumstances and regulatory requirements, the guarantee features described below in respect of UK business
broadly apply to similar types of participating contracts principally written in the PAC 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. Whole of life contracts with floor levels of policyholder benefits that accrue at rates set at inception and do not vary subsequent
with market conditions are written in the Korean life operations. This is to a much lesser extent than the policies written by the Taiwan Life
business which was sold in the first half of 2009, as detailed in note 18.
US operations (Jackson)
The principal options and guarantees in Jackson are associated with the fixed annuity and Variable Annuity (VA) lines of business.
Fixed annuities provide that, at Jackson’s discretion, it may reset the interest rate credited to policyholders’ accounts, subject to
a guaranteed minimum. The guaranteed minimum return varies from 1.5 per cent to 5.5 per cent (2008: 1.5 per cent to 5.5 per cent),
depending on the particular product, jurisdiction where issued, and date of issue. At 31 December 2009, 82 per cent (2008: 83 per cent)
of the account values on fixed annuities relates to policies with guarantees of 3 per cent or less. The average guarantee rate is 3.0 per
cent (2008: 3.0 per cent).
Fixed annuities also present a risk that policyholders will exercise their option to surrender their contracts in periods of rapidly rising
interest rates, possibly requiring Jackson to liquidate assets at an inopportune time.
Jackson issues VA contracts where it contractually guarantees to the contract holder either a) return of no less than total deposits
made to the contract adjusted for any partial withdrawals, b) total deposits made to the contract adjusted for any partial withdrawals plus
a minimum return, or c) the highest contract value on a specified anniversary date adjusted for any withdrawals following the specified
contract anniversary. These guarantees include benefits that are payable at specified dates during the accumulation period (Guaranteed
Minimum Withdrawal Benefit (GMWB)) and minimum accumulation, death and income benefits. Jackson hedges these risks using
equity options and futures contracts.
These guarantees generally protect the policyholder’s value in the event of poor equity market performance.
Jackson also issues fixed index annuities that enable policyholders to obtain a portion of an equity-linked return while providing a
guaranteed minimum return. The guaranteed minimum returns would be of a similar nature to those described above for fixed annuities.
UK insurance operations
The only significant financial options and guarantees in the UK insurance operations arise in the with-profits fund and SAIF.
With-profits products provide returns to policyholders through bonuses that are smoothed. There are two types of bonuses: annual
and final. Annual bonuses are declared once a year and, once credited, are guaranteed in accordance with the terms of the particular
product. Unlike annual bonuses, final bonuses are guaranteed only until the next bonus declaration. The with-profits fund held a
provision on the Pillar I Peak 2 basis of £31 million (2008: £42 million) at 31 December 2009 to honour guarantees on a small amount
of guaranteed annuity option products.
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Beyond the generic features and the provisions held in respect of guaranteed annuities described above, there are very few explicit
options or guarantees of the with-profits fund such as minimum investment returns, surrender values, or annuity values at retirement and
any granted have generally been at very low levels.
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The Group’s main exposure to guaranteed annuity options in the UK is through SAIF and a provision on the Pillar I Peak 2 basis of
£284 million (2008: £391 million) was held in SAIF at 31 December 2009 to honour the guarantees.
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Notes on the EEV basis supplementary information > continued
1 Basis of preparation, methodology and accounting presentation continued
Time value
The value of financial options and guarantees comprises two parts. One is given by a deterministic valuation on best estimate
assumptions (the intrinsic value). The other part arises from the variability of economic outcomes in the future (the time value).
Where appropriate, a full stochastic valuation has been undertaken to determine the value of the in-force business including the
cost of capital. A deterministic valuation of the in-force business is also derived using consistent assumptions and the time value of the
financial options and guarantees is derived as the difference between the two.
The economic assumptions used for the stochastic calculations are consistent with those used for the deterministic calculations.
Assumptions specific to the stochastic calculations reflect local market conditions and are based on a combination of actual market data,
historic market data and an assessment of long-term economic conditions. Common principles have been adopted across the Group for
the stochastic asset models, for example, separate modelling of individual asset classes but with an allowance for correlation between the
various asset classes. Details of the key characteristics of each model are given in note 16.
ii Level of encumbered capital
In adopting the EEV Principles, Prudential has based encumbered 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 encumbered
capital requirements. For shareholder-backed business the following capital requirements apply:
• Asian operations: the level of encumbered capital has been set at the higher of local statutory requirements and the economic capital
requirement;
• US operations: the level of encumbered 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
• UK insurance operations: the capital requirements are set at the higher of Pillar I and Pillar II requirements for shareholder-backed
business of UK insurance operations as a whole, which for 2009 and 2008 was Pillar I.
iii 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 equal 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.
Since financial options and guarantees are explicitly valued under the EEV methodology, discount rates under EEV are set excluding
the effect of these product features.
The risk margin represents the aggregate of the allowance for market risk, additional allowance for credit risk where appropriate,
and allowance for non-diversifiable non-market risk. No allowance is required for non-market risks where these are assumed to be fully
diversifiable. The majority of non-market and non-credit risks are considered to be diversifiable.
Market risk allowance
The allowance for market risk represents the multiple of beta x equity risk premium. Except for UK shareholder-backed annuity business
(as explained below) such an approach has been used for all of the Group’s businesses.
The beta of a portfolio or product measures its relative market risk. The risk discount rates reflect the market risk inherent in each
product group and hence the volatility of product cash flows. These are determined by considering how the profits from each product
are affected by changes in expected returns on various asset classes. By converting this into a relative rate of return it is possible to derive
a product specific beta.
Product level betas are calculated each year. They are combined with the most recent product mix to produce appropriate betas and
risk discount rates for each major product grouping.
Additional credit risk allowance
The Group’s methodology is to allow appropriately for credit risk. The allowance for credit risk is to cover:
• expected long-term defaults;
• credit risk premium (to reflect the volatility in default levels); and
• short-term downgrades and defaults.
These allowances are initially reflected in determining best-estimate returns and through the market risk allowance described above.
However, for those businesses which are largely backed by holdings of debt securities these allowances in the projected returns and
market risk allowances may not be sufficient and an additional allowance may be appropriate.
The practical application of the allowance for credit risk varies depending upon the type of business as described below.
310 Prudential plc > Annual Report 2009
Asian operations
For Asian operations, the allowance for credit risk incorporated in the projected rates of return and the market risk allowance are
sufficient. Accordingly no additional allowance for credit risk is required.
US business
For Jackson business, the allowance for long-term defaults is reflected in the risk margin reserve charge which is deducted in determining
the projected spread margin between the earned rate on the investments and the policyholder crediting rate.
For 2009 the risk discount rate incorporates an additional allowance for credit risk premium and short-term defaults. The allowance
for 2009 is 150 basis points for spread-based business and 30 basis points for variable annuity business to reflect the fact that a
proportion of the variable annuity business is allocated to the general account.
The level of allowance differs from that for UK annuity business for investment portfolio differences and to take account of the
management actions available in adverse economic scenarios to reduce crediting rates to policyholders, subject to guarantee features of
the products. For 2008 and previously, allowance for these elements of credit risk was recognised only in the risk margin reserve charge
and to the extent implicit within the market risk allowance.
UK business
a Shareholder-backed annuity business
For Prudential’s UK shareholder-backed annuity business, Prudential has used a market consistent embedded value (MCEV) approach
to derive an implied risk discount rate which is then applied to the projected best estimate cash flows.
In the annuity MCEV calculations, the future cash flows are discounted using the swap yield curve plus an allowance for liquidity
premium based on Prudential’s assessment of the expected return on the assets backing the annuity liabilities after allowing for expected
long-term defaults, credit risk premium and short-term downgrades and defaults. For the purposes of presentation in the EEV results,
the results on this basis are reconfigured. Under this approach the projected earned rate of return on the debt securities held is
determined after allowing for expected long-term defaults and, where necessary, an additional allowance for an element of short-term
downgrades and defaults to bring the allowance in the earned rate up to best estimate levels. The allowances for credit risk premium
and additional short-term default allowance are incorporated into the risk margin included in the discount rate.
b With-profit fund PAL annuity business
For UK annuity business written by PAL for 2008 the allowance for credit risk was for best estimate defaults. For 2009, the basis for
determining the appropriate aggregate allowance for credit risk has been aligned with that of UK shareholder-backed annuity business
so as also to include provision for short-term defaults. The allowance for credit risk in PAL is taken into account in determining the
projected cash flows to the with-profits fund, which are in turn discounted at the risk discount rate applicable to all of the projected cash
flows of the fund.
c With-profit fund holdings of debt securities
The UK with-profits fund holds debt securities as part of its investment portfolio backing policyholder liabilities and unallocated surplus.
For 2008, given the expectation that the widening of credit spreads observed in 2008 would not be maintained, the Company
considered it appropriate to assume an unchanged level of credit spreads, an unchanged level of default allowance and an unchanged
risk discount rate methodology relative to those used at 31 December 2007. For 2009, the approach for with-profit holdings has been
refined. For equities and properties the projected earned rate is defined as the risk-free rate plus a long-term risk premium. Under the
revised methodology a similar approach is adopted for corporate bonds i.e. the assumed earned rate is defined as the risk-free rate plus
an assessment of the long-term spread over gilts, net of expected long-term defaults.
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.
For UK shareholder-backed annuity business, a margin of 100 basis points is used to cover the non-diversifiable non-market risks
associated with the business. For the Group’s other business a margin of 50 basis points is applied with, where necessary, an additional
allowance for emerging market risk. The additional 50 basis points for UK annuities business reflects the longevity risk which is of
particular relevance.
iv Management actions
In deriving the time value of financial options and guarantees, management actions in response to emerging investment and fund
solvency conditions have been modelled. Management actions encompass, but are not confined to, the following areas:
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• investment allocation decisions;
• levels of reversionary bonuses and credited rates; and
• total claim values.
Bonus rates are projected from current levels and varied in accordance with assumed management actions applying in the emerging
investment and fund solvency conditions.
In all instances, the modelled actions are in accordance with approved local practice and therefore reflect the options actually
available to management. For the PAC with-profits fund, the actions assumed are consistent with those set out in the Principles and
Practices of Financial Management.
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1 Basis of preparation, methodology and accounting presentation continued
v With-profits business and the treatment of the estate
The proportion of surplus allocated to shareholders from the PAC with-profits fund has been based on the present level of 10 per cent.
The value attributed to the shareholders’ interest in the estate is derived by increasing final bonus rates (and related shareholder
transfers) so as to exhaust the estate over the lifetime of the in-force with-profits business. In those few extreme scenarios where
the total assets of the life fund are insufficient to meet policyholder claims in full, the excess cost is fully attributed to shareholders.
Similar principles apply, where appropriate, for other with-profit funds of the Group’s Asian operations.
vi Pension costs
The Group operates three defined benefit schemes in the UK. The principal scheme is the Prudential Staff Pension Scheme (PSPS).
The other two, much smaller, schemes are the Scottish Amicable and M&G schemes. There is also a small scheme in Taiwan, but as part
of the sale of the Taiwan agency business completed in June 2009, the Group settled the majority of the obligations under the scheme as
a significant number of employees were transferred out.
Under IFRS the surpluses or deficits attaching to these schemes are accounted for in accordance with the provisions of IAS 19 that
apply the principles of IFRIC 14, which was adopted in 2008 providing guidance on assessing the limit in IAS 19 on the amount of surplus
in a defined benefit pension scheme that can be recognised as an asset.
Under the EEV basis the IAS 19 basis surpluses (to the extent not restricted under IFRIC 14) or deficits are initially allocated in the
same manner. The shareholders’ 10 per cent interest in the PAC with-profits fund estate is determined after inclusion of the portion of the
IAS 19 basis surpluses or deficits attributable to the fund. Adjustments under EEV in respect of accounting for surpluses or deficits on the
Scottish Amicable Pension Scheme are reflected as part of UK operations and for other defined benefit schemes the adjustments are
reflected as part of ‘Other operations’, as shown in note 7.
Separately, the projected cash flows of in-force covered business include the cost of contributions to the defined benefit schemes for
future service based on the contribution basis applying to the schemes at the time of the preparation of the results.
vii Debt capital
Core structural debt liabilities 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 difference, compared to the IFRS carrying value. Accordingly, no deferred tax credit or
charge is recorded in the results for the reporting period in respect of the mark to market value adjustment.
viii Foreign currency translation
Foreign currency profits and losses have been translated at average exchange rates for the year. Foreign currency assets and liabilities
have been translated at year end rates of exchange. The purpose of translating the profits and losses at average exchange rates,
notwithstanding the fact that EEV profit represents the incremental value added on a discounted cash flow basis, is to maintain
consistency with the methodology applied for IFRS basis reporting.
c Accounting presentation
i Analysis of profit before tax
To the extent applicable, presentation of the EEV profit for the year is consistent with the basis that the Group applies for analysis of IFRS
basis profits before shareholder taxes between operating and non-operating results. Operating results reflect the underlying results
including longer-term investment returns and, except as explained in note (iv) below, the unwind of discount on the value of in-force
business. Operating results include the impact of routine changes of estimates and non-economic assumptions. Non operating results
comprise short-term fluctuations in investment returns, the shareholders’ share of actuarial and other gains and losses on defined benefit
pension schemes, the mark to market value movements on core borrowings and the effect of changes in economic assumptions and
changes in the time value of cost of options and guarantees arising from changes in economic factors. In 2009, during the severe equity
market conditions experienced in the first quarter of 2009, coupled with historically high equity volatility, the Group incurred non-
recurrent costs from an exceptional short dated hedge to protect against tail events on the Group IGD capital position in addition to
regular operational hedging programmes. These costs have been shown separately within short-term fluctuations in investment returns.
Also, in June 2009, the Group completed the disposal of the Taiwan agency business. The effect of this disposal and the results of the
Taiwan agency business have been presented separately outside of the operating result.
ii Operating profit
For the investment element of the assets covering the net worth of long-term insurance business, investment returns are recognised in
operating results at the expected long-term rate of return. These expected returns are calculated by reference to the asset mix of the
portfolio. For the purpose of calculating the longer-term investment return to be included in the operating result of the PAC with-profits
fund of UK operations, where assets backing the liabilities and unallocated surplus are subject to market volatility, values of assets at the
beginning of the reporting period are adjusted to remove the effects of short-term market movements.
For the purpose of determining the long-term returns for debt securities of US operations for fixed annuity and other general account
business, a risk margin charge is included which reflects the expected long-term rate of default based on the credit quality of the
portfolio. For Jackson, interest-related realised gains and losses are amortised to the operating results over the maturity period of the sold
bonds and for equity-related investments, a long-term rate of return is assumed, which reflects the aggregation of year-end risk-free
rates and equity risk premium. For US variable annuity separate account business, operating profit includes the unwind of discount on
the opening value of in force adjusted to reflect year-end projected rates of return with the excess or deficit of the actual return
recognised within non-operating profit, together with the related hedging activity.
312 Prudential plc > Annual Report 2009
For UK annuity business, rebalancing of the asset portfolio backing the liabilities to policyholders may from time to time take place to
align it more closely with the internal benchmark of credit quality that management applies. Such rebalancing will result in a change in the
projected yield on the asset portfolio and the allowance for default risk. The net effect of these changes is reflected in the result for the
year. In general, the effect is booked in operating results. However, in 2008 the element due to the exceptional spread widening in the
market since 31 December 2006 was booked in the effect of change in economic assumptions.
iii Effect of changes in operating assumptions
Operating profits include the effect of changes to operating assumptions on the value of in force at the end of the period. For
presentational purposes, the effect of change is delineated to show the effect on the opening value of in force with the experience
variance being determined by reference to the end of period assumptions.
iv Unwind of discount and other expected returns
The unwind of discount and other expected returns is determined by reference to the value of in-force business, required capital and
surplus assets at the start of the period as adjusted for the effect of changes in economic and operating assumptions reflected in the
current period. For UK insurance operations the amount included within operating results based on longer-term returns represents the
unwind of discount on the value of in-force business at the beginning of the period (adjusted for the effect of current period assumption
changes), the unwind of discount on additional value representing the shareholders’ share of smoothed surplus assets retained within
the PAC with-profits fund (as explained in note 1b(v) above), and the expected return on shareholders’ assets held in other UK long-term
business operations. Surplus assets retained within the PAC with-profits fund are smoothed for this purpose to remove the effects of
short-term investment volatility from operating results. In the summary statement of financial position and for total profit reporting,
asset values and investment returns are not smoothed.
v Pension costs
Profit before tax
Movements on the shareholders’ share of surpluses (to the extent not restricted by IFRIC 14) and deficits of the Group’s defined benefit
pension schemes adjusted for contributions paid in the year are recorded within the income statement. Consistent with the basis of
distribution of bonuses and the treatment of the estate described in note 1b(iv) and (v), the shareholders’ share incorporates 10 per cent
of the proportion of the financial position attributable to the PAC with-profits fund. The financial position is determined by applying the
requirements of IAS 19.
Actuarial and other gains and losses
For pension schemes in which the IAS 19 position reflects the difference between the assets and liabilities of the scheme, actuarial and
other gains and losses comprise:
• the difference between actual and expected return on the scheme assets;
• experience gains and losses on scheme liabilities;
• the impact of altered economic and other assumptions on the discounted value of scheme liabilities; and
• for pension schemes where the IAS 19 position reflects a deficit funding obligation, actuarial and other gains and losses reflect the
movement in estimates of deficit funding requirements.
These items are recorded in the income statement but, consistent with the IFRS basis of presentation, are excluded from operating
results.
vi Effect of changes in economic assumptions and time value of cost of options and guarantees
Movements in the value of in-force business at the beginning of the period caused by changes in economic assumptions and the time
value of cost of options and guarantees resulting from changes in economic factors are recorded in non-operating results.
vii Taxation
The EEV profit for the year for covered business is in most cases calculated initially at the post-tax level. The post-tax profit is then
grossed up for presentation purposes at the effective rate of tax. In general, the effective rate corresponds to the corporation tax rate
on shareholder profits of the business concerned.
viii Inter-company arrangements
The EEV results for covered business incorporate the effect of the reinsurance arrangement of non-profit immediate pension annuity
liabilities of SAIF (which is not covered business) to PRIL. In addition, the analysis of free surplus and value of in-force business takes
account of the impact of contingent loan arrangements between Group companies.
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1 Basis of preparation, methodology and accounting presentation continued
ix Foreign exchange rates
Foreign currency results have been translated as discussed in note 1b(viii), for which the principal exchange rates are as follows:
Local currency: £
Hong Kong
Indonesia
Japan
Malaysia
Singapore
Taiwan
US
2 Analysis of new business contribution
Closing rate at
31 Dec 2009
Average
for 2009
Closing rate at
31 Dec 2008
Average
for 2008
Opening rate
at 1 Jan 2008
12.52
15,171.52
150.33
5.53
2.27
51.65
1.61
12.14
16,173.28
146.46
5.51
2.27
51.65
1.57
11.14
15,799.22
130.33
5.02
2.07
47.28
1.44
14.42
17,749.22
192.09
6.15
2.61
58.24
1.85
15.52
18,696.71
222.38
6.58
2.87
64.56
1.99
New business premiums
note 17
Regular
Single
2009 £m
Annual
premium and
contribution
equivalents
(APE)
note i, 17
Present value
of new
business
premiums
(PVNBP)
note i, 17
Pre-tax new
business
contribution
note ii, iii
713
664
230
6,245
9,048
5,902
21,195
1,607
Asian operationsnote iv
US operationsnote v
UK insurance operations
Total
842
8,885
4,768
14,495
1,177
24
246
1,447
1,261
912
723
2,896
2008 £m
Annual
premium and
contribution
equivalents
(APE)
note i, 17
Present value
of new
business
premiums
(PVNBP)
note i, 17
Pre-tax new
business
contribution
note ii, iii
634
293
273
6,508
7,140
8,081
21,729
1,200
1,216
716
947
2,879
New business premiums
note 17
Regular
Single
1,340
6,917
6,929
15,186
1,082
24
254
1,360
Asian operationsnote iv
US operationsnote v
UK insurance operations
Total
Asian operations:
China
Hong Kong
India
Indonesia
Korea
Taiwannote iv
Other
Weighted average for all Asian operations
2009 %
New business margin
note i
(PVNBP)
(APE)
11.4
7.3
3.9
7.6
57
73
32
56
2008 %
New business margin
note i
(PVNBP)
(APE)
52
41
29
42
9.7
4.1
3.4
5.5
New business margin
(APE)
(APE)
2009 %
2008 %
50
70
19
73
44
18
72
57
52
79
19
58
34
22
72
52
Notes
i
New business margins are shown on two bases, namely the margins by reference to Annual Premium Equivalents (APE) and the Present Value of
New Business Premiums (PVNBP) and are calculated as the ratio of the value of new business profit to APE and PVNBP. APEs are calculated as the
aggregate of regular new business amounts and one-tenth of single new business amounts. PVNBPs are calculated as equalling single premiums plus
the present value of expected premiums of new regular premium business, allowing for lapses and other assumptions made in determining the EEV
new business contribution.
In determining the EEV basis value of new business written in the period the policies incept, premiums are included in projected cash flows on the
same basis of distinguishing annual and single premium business as set out for statutory basis reporting.
ii
314 Prudential plc > Annual Report 2009
iii New business contributions represent profits determined by applying non-economic assumptions as at the end of the year. In general, the use of
point of sale or end of period economic assumptions is not significant in determining the new business contribution for different types of business
and across financial reporting periods. However, to obtain proper measurement of the new business contribution for business which is interest rate
sensitive, it is appropriate to use assumptions reflecting point of sale market conditions, consistent with how the business was priced. In practice, the
only area within the Group where this has a material effect is for UK shareholder-backed annuity and lifetime mortgage business. For other business
within the Group end of period economic assumptions are used.
iv The tables above include new business for the Taiwan bank distribution operation. New business of the Taiwan agency business, which was sold in
v
June 2009 is excluded from the tables but included in the result for the sold Taiwan agency business, shown separately in the analysis of profit, as
shown in note 18. Comparative figures have been adjusted accordingly.
The increase in new business margin for US operations for 2009 reflects the significant changes to target spread for Fixed Annuity and Fixed Index
Annuity business primarily as a result of the exceptional combined benefit of high investment yields on new assets and lower crediting rates, as
described in note 16b, and the increasing proportion of variable annuity business, for which margins have benefited from the increased projected
separate account return, revised benefits and higher take-up rates on the higher margin guaranteed withdrawal benefits.
3 Operating profit from business in force
Group summary
2009
Unwind of discount and other expected returnsnote i
Effect of change in operating assumptionsnote ii
Experience variances and other itemsnote iii
Total
2008
Unwind of discount and other expected returns
Effect of change in operating assumptions
Experience variances and other items
Total
Notes
i Unwind of discount and other expected returns
Asian
operations
note iv
£m
US
operations
note v
£m
UK
operations
note vi
£m
489
(12)
(85)
392
344
101
124
569
588
–
52
640
Asian
operations
note iv
£m
US
operations
note v
£m
UK
operations
note vi
£m
409
165
5
579
233
(17)
77
293
569
–
195
764
Total
£m
1,421
89
91
1,601
Total
£m
1,211
148
277
1,636
ii
The increase in unwind of discount and other expected returns from £1,211 million for 2008 to £1,421 million for 2009 mainly arises in the US,
primarily reflecting an increase in the discount rate applied to the value of in-force business (as adjusted for the effects of changes in operating and
non-operating assumptions) and in Asian operations as a result of higher start of year value of in-force business, reflecting the increasing growth of
this business.
Effect of change in operating assumptions
The charge of £(12) million for Asian operations in 2009 primarily represents a charge of £(78) million for the effect of strengthening persistency
assumptions, offset by a credit of £69 million relating to altered projected net of tax cash flows arising from a regulatory reclassification of health
and protection products in Hong Kong. The change in persistency assumptions are mainly as a direct consequence of the impact on policyholders’
savings behaviour from adverse economic and market conditions, arising primarily for investment related products, principally in Korea
(£(25) million) and Hong Kong (£(12) million), mostly due to premium holidays, and in Indonesia (£(24) million), reflecting recent experience.
The credit of £101 million for US operations in 2009 primarily reflects the positive impact of altered assumptions arising from beneficial
policyholder behaviour for Guaranteed Minimum Withdrawal Benefits on Variable Annuity business, as explained in note v(1) below.
iii Experience variances and other items
The £(85) million charge for Asian operations in 2009 primarily represents the effects of adverse persistency of £(76) million, as customers
have withdrawn from investment related products (for which assumptions have been strengthened, as explained in note ii above). The residual
£(9) million charge reflects a combination of adverse expense experience of £(43) million, offset by the favourable mortality and morbidity
experience of £52 million, (as explained in notes iv(5) and iv(6) below) and a charge of £(18) million for other items.
The £124 million credit in US operations in 2009 primarily represents £59 million for the amortisation of interest-related realised gains and
losses, £40 million for lower than expected levels of expenses and £32 million for favourable mortality experience as detailed in note v(7) below.
The credit of £52 million for UK insurance operations is detailed in note vi below.
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
E
E
V
315
Notes on the EEV basis supplementary information > continued
3 Operating profit from business in force continued
Analysis by business unit
iv Asian operations
Unwind of discount and other expected returns
Effect of change in operating assumptions:
Mortality and morbidity 11
Expense 22
Persistency33
Other44
Experience variances and other items:
Mortality and morbidity 5
Expense 6
Persistency7
Other
2009
£m
489
26
(32)
(78)
72
(12)
52
(43)
(76)
(18)
(85)
392
2008
£m
409
41
30
79
15
165
34
(37)
16
(8)
5
579
Notes
1 The favourable effect of £26 million in 2009 for mortality and morbidity assumption changes primarily arises in Indonesia of £24 million reflecting
recent experience. The benefit of £41 million for 2008 mainly relates to Singapore of £34 million and Hong Kong of £15 million, which reflect actual
experience across most products, offset by a charge in Malaysia of £(19) million which reflects negative morbidity experience on health and
protection products.
2 The charge of £(32) million for strengthened expense assumptions arises principally in Hong Kong of £(23) million with the balance across the
regions.
3 The negative effect of the change in persistency assumptions of £(78) million in 2009 arises mostly with investment related products, principally
in Korea (£(25) million), Indonesia (£(24) million) and Hong Kong (£(12) million).
The favourable effect of the change in persistency assumptions of £79 million in 2008 predominately arose in Singapore (£90 million), Hong
Kong (£28 million) (principally for health and protection products) and in Malaysia (£21 million) which reflected improved lapse rates, based on
recent experience, offset by a charge in Korea (£(44) million) mainly relating to premium holidays.
4 The effect of other assumption changes for 2009 of £72 million comprises the one-off positive impact of £69 million for altered projected net of tax
cash flows arising from a regulatory reclassification of health and protection products in Hong Kong, a credit of £13 million for the effect of altered
application of the Group’s EEV methodology and a net charge of £(10) million for other items. The £13 million effect comprises adjustments for
asset management margins in Indonesia and Korea of £37 million and a charge of £(24) million to better align the assumed capital requirement
with internal management and pricing bases, primarily in China, Indonesia, Philippines and Vietnam, and other minor adjustments with a neutral
net effect.
5 The favourable effects of £52 million in 2009 and £34 million in 2008 relating to mortality and morbidity experience variances reflect better than
expected experience across the territories.
6 The charge of £(43) million for expense experience variance arises across the territories, principally in Korea (£(10) million) reflecting the lower
level of sales in the current year, £(8) million in Taiwan, following the sale of the Agency business during the year and £(16) million for expense
overruns for operations which are at a relatively early stage of development, for which actual expenses are in excess of those factored into the
product pricing.
The 2008 negative expense experience variance of £(37) million includes a charge of £(11) million arising in Korea, also reflecting lower sales.
7 The charge of £(76) million in 2009 relating to negative persistency experience arises across the region with the largest impacts in Korea
(£(29) million), India (£(11) million) and Japan (£(9) million).
v US operations
Unwind of discount and other expected returns
Effect of changes in operating assumptions:
Guaranteed Minimum Withdrawal Benefit (GMWB) policyholder behaviour11
Mortality22
Variable Annuity (VA) fees3
Effect of adjustments for application of EEV methodology for certain reserves and required capital44
Other55
Experience variances and other items:
Spread experience variance6
Amortisation of interest-related realised gains and losses66
Other77
2009
£m
344
156
33
(13)
–
(75)
101
(3)
59
68
124
569
2008
£m
233
–
31
29
(61)
(16)
(17)
54
28
(5)
77
293
316 Prudential plc > Annual Report 2009
Notes
1 The positive impact of the change in GMWB policyholder behaviour assumptions of £156 million reflects the altered assumptions relating to
the utilisation of withdrawal features available to policyholders on VA contracts which have been modified to take account of the more recent
experience of policyholder behaviour when benefits are ‘in the money’. Previously, policyholder behaviour for the utilisation of GMWB was
assumed to be largely driven by the extent to which benefits were in the money. For 2009, the assumption has been altered to take account of
recent experience which shows that the attained age of the policyholder is the key factor in determining utilisation levels.
2 The £33 million credit for mortality for 2009 primarily reflects lower mortality rates for the Life of Georgia business, based upon actual experience
since the acquisition of the business in 2005.
3 The effect of the change of assumption for VA fees represents the capitalised value of the change in the projected level of policyholder advisory
fees, which vary according to the size and mix of VA funds. The charge of £(13) million for 2009 reflects a reduction in the projected level of fees
paid by policyholders, according to the current fund mix. The positive effect of the change in 2008 of £29 million represents an overall
reassessment of the assumed fees, reflecting recent experience at that date.
4 The effect of the adjustments in 2008 for the application of EEV methodology for certain reserves and required capital of £(61) million are as follows:
Effect of adjustments for application of EEV methodology for certain reserves and required capital:
Interest Maintenance Reserve (IMR)a
Variable Annuity Statutory Reservesb
Required Capitalc
2008
£m
(10)
(68)
17
(61)
a The IMR is a statutory liability in respect of realised gains on the sale of bonds which, on a regulatory basis, are amortised to income over time in
line with the duration of the bonds sold.
b The statutory reserves are primarily in respect of guarantees on variable annuity products in excess of the surrender value.
c The adjustment in respect of required capital represents a current year refinement to reduce the required capital to align the amount with the
required level which has been set as an amount at least equal to 235 per cent of the risk-based capital required by National Association of
Insurance Commissioners at the Company Action Level.
5 The effect of other changes in assumptions in 2009 of £(75) million primarily represents the negative impact of changes in persistency assumptions
of £(53) million, reflecting an increase in the assumed utilisation of the partial withdrawal option on Variable and Fixed Annuity business of
£(29) million and £(24) million for the effect of other altered lapse rates, in line with experience.
6 The spread assumption for Jackson is determined on a longer-term basis, net of provision for defaults. The charge of £(3) million for spread
experience variance in 2009 is better assessed in the context of both spread and amortisation of interest-related realised gains and losses.
Amortisation of interest-related gains and losses reflects the same treatment applied to the supplementary analysis of IFRS profit. When bonds that
are neither impaired nor deteriorating are sold and reinvested there will be a consequent change in the investment yield. To reflect better the
longer-term returns on operating profits the realised gain or loss is amortised into the result over the period when the bonds would have otherwise
matured. The net effect on the EEV results of these two items is a credit of £56 million for 2009 and £82 million for 2008.
7 The credit of £68 million for other items for 2009 primarily represents favourable expense experience variance of £40 million relating to marketing
expenses and positive mortality experience of £32 million primarily relating to life products.
vi UK insurance operations
Unwind of discount and other expected returns
Other items:
Effect of asset rebalancingnote
Release of certain annuity business reserves
Other
2009
£m
588
22
–
30
52
640
2008
£m
569
118
56
21
195
764
Note
For UK annuity business, the effects of rebalancing the asset portfolio backing the liabilities to policyholders are normally reflected in full in the
operating result for the year. These effects arise from the altered value arising from the revised projected yield and allowances for default risk.
During 2007 and 2008, exceptional credit spread widening took place. Accordingly in 2008, to better reflect performance reporting, the
effect of asset rebalancing reflected in the operating result was determined by reference to investment conditions at 31 December 2006. The
excess effect of asset rebalancing was included in non-operating results, as described in note 6.
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
E
E
V
317
Notes on the EEV basis supplementary information > continued
4 Discontinued operations
The charge of £(14) million, which is net of nil tax, reflects completion adjustments for a previously disposed business.
5 Short-term fluctuations in investment returns
Insurance operations:
Asianote i
USnote ii
UKnote iii
Other operations:
IGD hedge costsnote iv
Othernote v
Total
Notes
i
Asian operations
Singapore
Hong Kong
Vietnam
Other operations
2009 £m
2008 £m
437
(401)
445
(235)
105
351
2009
£m
159
113
(47)
212
437
(903)
(1,344)
(2,407)
–
(313)
(4,967)
2008
£m
(310)
(284)
(82)
(227)
(903)
The short-term fluctuations in investment returns in Asia for 2009 of £437 million reflect the effect of strong equity market performance in particular
for participating business and unit-linked business where the in-force value benefits from increases in shareholder transfers and from the
capitalisation of increased projected fees due to the higher asset base at the end of the year.
For 2008, the short-term fluctuations in investment returns for Asian operations of £(903) million arose primarily in Singapore and Hong Kong,
reflecting the effect of substantial equity market falls on unit-linked and with-profits business. For unit-linked business, the short-term fluctuation in
investment returns reflects the reduction in the value of the asset base and the consequent effect on the projection of future management fees. For
with-profits business, the short-term fluctuation in investment returns reflects the difference between the shareholders’ 10 per cent interest in the
value movements on the assets and the unwind of discount on the opening shareholders’ interest in the surplus.
ii US operations
The fluctuations for US operations comprise the following items:
Actual realised losses less default assumption and amortisation of interest-related gains and losses
for fixed income securities and related swap transactions1
Actual less long-term return on equity based investments and other items2
Investment return related gain (loss) due primarily to changed expectation of profits on
in-force variable annuity business in future periods based on current period equity returns,
net of related hedging activity for equity related products33
Total Jackson
2009
£m
(367)
(144)
110
(401)
2008
£m
(463)
(148)
(733)
(1,344)
Notes
1 The charge of £(367) million in 2009 relating to fixed income securities primarily represents the excess of the impairment losses in the year on the
US statutory basis over the amortisation of interest-related gains and longer-term default assumption included within operating profit.
2 The charge in 2009 of £(144) million for actual less long-term return on equity based investments and other items primarily relates to the shortfall
of actual return against the expected return on investments in limited partnerships.
3 This gain (loss) arises due to the market returns being higher (lower) than the assumed longer-term rate of return. This gives rise to higher (lower)
than expected year end values of variable annuity assets under management with a resulting effect on the projected value of future account values
and hence future profitability from altered fees. For 2009, the US equity market returns were approximately positive 24 per cent compared to the
assumed longer-term rate of return of 7.4 per cent. For 2008, the US equity market returns were approximately negative 38.5 per cent compared
to the assumed longer-term rate of return of 5.8 per cent.
318 Prudential plc > Annual Report 2009
iii UK insurance operations
The short-term fluctuations in investment returns for UK insurance operations for 2009 represents:
With-profits1
Shareholder-backed annuity2
Unit-linked and other3
2009
£m
430
(40)
55
445
2008
£m
(2,083)
(213)
(111)
(2,407)
Notes
1 For with-profits business the credit for 2009 of £430 million (2008: charge of £(2,083) million) reflects the positive variance of 8.6 per cent
(2008: negative 25.3 per cent) against the assumed long-term return for the investments covering policyholder liabilities and unallocated surplus.
2 Short-term fluctuations in investment returns on shareholder-backed annuity business for 2009 of £(40) million primarily represents mismatching
losses arising from a fall in yields on assets of £(105) million, partially offset by better than expected default experience of £22 million. The
remaining balance of £43 million consists of positive movements in other asset values partially offset by losses on surplus assets relative to the
expected return. The charge for 2008 of £(213) million primarily represented an unrealised loss on surplus assets and default experience.
3 The credit of £55 million relates primarily to unit-linked business representing the increase in capitalised value of future fees arising from the
positive movements in market values experienced during the year.
iv IGD hedge costs
During the severe equity market conditions experienced in the first quarter of 2009, coupled with historically high equity volatility, the Group entered
into exceptional short-dated hedging contracts to protect against potential tail-events on the IGD capital position, in addition to our regular
operational hedging programmes. The hedge contracts have expired and have not been renewed.
v Other operations
Short-term fluctuations in investment returns of Other operations, in addition to the previously discussed IGD hedge costs, arise from:
Sale of investment in India mutual fund in May 2008 giving rise to a transfer to operating profit of £47m
for the crystallised gain, and value reduction in the year, prior to sale, of £24m
Unrealised value movements on swaps held centrally to manage Group assets and liabilities
Unrealised value movements on Prudential Capital bond portfolio
Unrealised value movements on investments held by Other operations
2009
£m
–
28
66
11
105
2008
£m
(71)
(38)
(190)
(14)
(313)
6 Effect of changes in economic assumptions and time value of cost of options and guarantees
The effects of changes in economic assumptions and time value of cost of options and guarantees resulting from changes in economic
factors for in-force business included within the profit (loss) from continuing operations before tax (including actual investment returns)
arise as follows:
Asian operationsnote i
US operationsnote ii
UK insurance operationsnotes iii,iv
Total
2009 £m
Change in
time value
of cost of
options and
guarantees
(9)
10
52
53
Change in
economic
assumptions
(165)
(528)
(270)
(963)
Change in
economic
assumptions
157
267
(783)
(359)
Total
(174)
(518)
(218)
(910)
2008 £m
Change in
time value
of cost of
options and
guarantees
–
11
(50)
(39)
Total
157
278
(833)
(398)
Notes
i
The effect of changes in economic assumptions in Asia for 2009 of a charge of £(165) million primarily reflects increases in risk discount rates and
fund earned rates (as shown in note 16b), with the largest impact arising for Hong Kong US dollar denominated business arising from the increase
in US dollar government bond yields. The £(165) million charge is net of a credit of £96 million for the effect of altered economic assumptions for
Indonesia and Korea arising from a change in the application of the Group’s methodology for these operations (as discussed in note 16b).
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
The effect of changes in economic assumptions in Asia for 2008 of a credit of £157 million reflects the impact of the reduction in risk discount
rates across most territories.
E
E
V
319
Notes on the EEV basis supplementary information > continued
6 Effect of changes in economic assumptions and time value of cost of options and guarantees continued
ii
The charge of £(528) million for the effect of changes in economic assumptions for US operations for 2009 reflects the following:
Effect of changes in 10-year treasury rates, beta and equity risk premium:note
Fixed annuity and other general account business
Variable Annuity (VA) business
Increase in risk margin allowance for credit risknote
2009
£m
(410)
183
(301)
(528)
2008
£m
385
(118)
–
267
Note
For Jackson, the charge for the effect of changes in economic assumptions represents the aggregate of the effects of changes to projected returns
and the risk discount rate. The risk discount rate, as discussed in note 1b(iii), represents the aggregate of the risk-free rate and margin for market risk,
credit risk and non-diversifiable non-market risk.
For fixed annuity and other general account business the effect of changes to the risk-free rate, which is defined as the 10-year treasury rate, is
reflected in the risk discount rate. This discount rate is in turn applied to projected cash flows which principally reflect projected spread, which is
largely insensitive to changes in the risk-free rate. For 2009, the effect of these changes resulted in an overall charge for fixed annuity and other
general account business of £(410) million, reflecting the increase in the risk-free rate of 1.6 per cent (as shown in note 16b). For 2008, the effect of
the change in economic assumptions on this business was a credit of £385 million, which reflects the decrease in the risk-free rate of 1.8 per cent.
For VA business, changes to the risk-free rate are also reflected in determining the risk discount rate. However, the projected cash flows are also
reassessed for altered investment returns on the underlying separate account assets from which fees are charged. For 2009, the effect of both of
these changes resulted in an overall credit on VA business of £183 million, reflecting the increase in the risk-free rate of 1.6 per cent (as shown in note
16b). For 2008, the effect of the change in economic assumptions on VA business of a charge of £(118) million reflects the decrease in the risk-free
rate of 1.8 per cent.
In 2009, the Group has included an additional allowance for credit risk. In determining this allowance a number of factors were considered.
These factors, in particular, include:
a How much of the credit spread on debt securities represents an increased credit risk not reflected in the RMR long-term default assumptions, and
how much is liquidity premium. In assessing this effect consideration has been given to a number of approaches to estimating the liquidity premium
by considering statistical data over the four years from 2006 to 2009, and
b Policyholder benefits for Jackson fixed annuity business are not fixed. It is possible in adverse economic scenarios to pass on a component of credit
loss to policyholders (subject to guarantee features) through lower crediting rates. Consequently, it is only necessary to allow for the balance of the
credit risk in the risk discount rate.
After taking these and other more detailed factors into account and, based on market conditions in late 2009, the risk discount rate for spread
business has been increased by 150 basis points as an additional allowance for credit risk. For VA business, the additional allowance increase has
been set at 20 per cent of the non-VA business increase to reflect the fact that a proportion of the VA business is allocated to general account holdings
of debt securities.
The additional allowance to be applied in future reporting periods will be altered, as necessary, for future credit conditions and as the business
in force alters over time. Accordingly, a simple formulaic approach for the future allowance is not possible and does not apply. However, as a guide
the current allowance can be summarised as broadly reflecting that 50 per cent of the increase in credit spread since 31 December 2006 can be
attributed to credit risk and 50 per cent to liquidity premium, and that management actions can be used to absorb some 50 basis points of credit
losses without adversely impacting value.
iii The effect of changes in economic assumptions of a charge of £(270) million for UK insurance operations comprises the effect of:
(Decrease) increase in expected long-term
rates of return
Decrease (increase) in risk discount rates
Other changes
Shareholder-
backed
annuity
business
note 1
(284)
240
25
(19)
2009 £m
With-
profits
and other
business
note 2
191
(311)
(131)
(251)
Shareholder-
backed
annuity
business
note 1
2008 £m
With-
profits
and other
business
note 2
83
(394)
(6)
(317)
(1,082)
668
(52)
(466)
Total
(93)
(71)
(106)
(270)
Total
(999)
274
(58)
(783)
Notes
1 In 2008, the £(317) million charge comprises £(400) million for the effect of strengthening credit risk assumptions, offset by a credit of £231 million
for the effect of rebalancing the asset portfolio calculated by reference to the exceptional changes in credit spreads from 31 December 2006 to
31 December 2008, and an underlying charge of £(148) million for regular changes in yields and discount rates. In 2009, the charge of £(19) million
reflects the effects of regular economic assumption changes. However, the amounts for the component line items shown above reflect a change in
the composition of the default allowance between best estimate levels (which are reflected in the long-term rates of return) and allowance for
credit risk premium and additional short-term defaults reflected in the risk discount rate.
2 In 2009, the charge of £(251) million for with-profits and other business reflects the fact that the risk discount rate has increased significantly more
than the earned rate as a result of the revised correlation assumptions, lower equity backing ratio and very low cash return. In 2008, the charge of
£(466) million for the effects of the decrease in expected long-term rates of return and risk discount rates primarily reflect the reduction in gilt rates
of (0.85) per cent.
iv The effect of changes in time value of cost of options and guarantees of a credit of £52 million for UK insurance operations primarily relates to with-
profits business reflecting the effect of the improved investment return achieved in 2009, combined with an overall beneficial impact arising from
changes in economic assumptions. In 2008, the charge of £(50) million primarily related to with-profits business reflecting the effect of the reduction
in the expected long-term rates of return as described in note (2) above.
320 Prudential plc > Annual Report 2009
7 Shareholders’ funds – segmental analysis
Asian operations
Long-term business:
Net assets of operations – EEV basis shareholders’ funds
Acquired goodwill
Asset management:note i
Net assets of operations
Acquired goodwill
US operations
Jackson – EEV basis shareholders’ funds (net of surplus note borrowings of £158m (2008: £154m))
Broker-dealer and asset management operations:note i
Net assets of operations
Acquired goodwill
UK operations
Insurance operations:
Long-term business operations:
Smoothed shareholders’ funds
Actual shareholders’ funds less smoothed shareholders’ funds
EEV basis shareholders’ funds
Other
M&G:note i
Net assets of operations
Acquired goodwill
Other operations
Holding company net borrowings at market value9
Other net liabilitiesnote i
Total
Representing:
Asian operations
US operations
UK insurance operations
Total long-term business operations
Other operationsnote ii
Group total
Statutory
IFRS basis
share-
holders’
assumptions
1,462
3,011
1,902
6,375
(104)
6,271
2009 £m
Additional
retained
profit on
an EEV
basis
4,399
1,111
3,537
9,047
(45)
9,002
Statutory
IFRS basis
share
holders’
assumptions
2008 £m
Additional
retained
profit on
an EEV
basis
2,167
1,698
1,655
5,520
(462)
5,058
3,208
2,641
3,264
9,113
785
9,898
EEV basis
share-
holders’
Total
5,861
4,122
5,439
15,422
(149)
15,273
2009 £m
2008 £m
5,781
80
5,861
161
61
222
5,264
111
5,375
167
61
228
6,083
5,603
4,122
4,339
95
16
111
98
16
114
4,233
4,453
5,547
(108)
5,439
37
5,476
173
1,153
1,326
6,802
(1,780)
(65)
(1,845)
15,273
5,437
(518)
4,919
–
4,919
147
1,153
1,300
6,219
(818)
(501)
(1,319)
14,956
EEV basis
share-
holders’
Total
5,375
4,339
4,919
14,633
323
14,956
321
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
E
E
V
Notes on the EEV basis supplementary information > continued
7 Shareholders’ funds – segmental analysis continued
Notes
i With the exception of the share of the Prudential Staff Pension Scheme (PSPS) deficit attributable to the PAC with-profits fund, which is included in
‘Other operations’ net liabilities, these amounts have been determined on the statutory IFRS basis. The overall pension scheme deficit, net of tax,
attributable to shareholders relating to PSPS is determined as shown below:
IFRS basis deficit (relating to shareholder-backed operations)
Additional EEV deficit (relating to shareholders’ 10 per cent share of the IFRS basis deficit
attributable to the PAC with-profits fund)
EEV basis*
2009
£m
(16)
(5)
(21)
2008
£m
(31)
(6)
(37)
*For 2008, the EEV basis deficit of £(37) million for other operations includes the shareholders’ share of the deficit on the Scottish Amicable Pension
Scheme, which for 2009 is included within the shareholders’ funds of UK long-term business operations.
ii
The additional retained profit on an EEV basis for Other operations represents the mark to market value difference on holding company net
borrowings of a charge of £(26) million (2008: credit of £802 million) and the effect of accounting for pension costs for the Prudential Staff
Pension Scheme.
8 Analysis of movement in free surplus
Free surplus is the market value of the net worth in excess of the capital required to support the covered business. Where appropriate,
adjustments are made to the regulatory basis net worth from the local regulatory basis so as to include backing assets movements at fair
value rather than cost so as to comply with 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, as described in note 1b(ii).
2009 £m
management
Asset Free surplus of
long-term
and UK business, asset
general management
insurance and UK general
insurance
commission
commission
note ii
–
257
–
257
41
–
298
(182)
(62)
54
412
466
161
95
210
466
167
98
147
412
(675)
1,914
175
1,414
(198)
987
2,203
(688)
157
1,672
859
2,531
962
844
725
2,531
(73)
599
333
859
Long-term
business
note 13
(675)
1,657
175
1,157
(239)
987
1,905
(506)
219
1,618
447
2,065
801
749
515
2,065
(240)
501
186
447
Long-term business and asset management operationsnote i
Underlying movement:
New business
Business in force:
Expected in-force cash flows (including expected return on net assets)
Effects of changes in operating assumptions, operating experience
variances and other operating items
Changes in non-operating itemsnote iii
Profit on sale and results for Taiwan agency business
Net cash flows to parent companynote iv
Exchange movements, timing differences and other itemsnote v
Net movement in free surplus
Balance at 1 January 2009
Balance at 31 December 2009
Representing:
Asian operations13
US operations13
UK insurance operations13
1 January 2009
Representing:
Asian operations13
US operations13
UK insurance operations13
322 Prudential plc > Annual Report 2009
Notes
i
ii
All figures are shown net of tax.
For the purposes of this analysis, free surplus for asset management operations and the UK general insurance commission is taken to be IFRS basis
shareholders’ funds as shown in note 7.
iii Changes in non-operating items.
This represents short-term fluctuations in investment returns, the shareholders’ share of actuarial and other gains and losses on defined benefit
pension schemes and the effect of changes in economic assumptions for long-term business operations.
Short-term fluctuations in investment returns primarily reflect temporary market movements on the portfolio of investments held by the Group’s
shareholder-backed operations together with the shareholders’ 10 per cent interest in the value movements on the assets in the with-profits funds.
The effect of changes in economic assumptions on free surplus includes the impact of an increase in required capital for Jackson of £168 million
driven by impairments and credit downgrades. Separately, short-term fluctuations in investment returns include the effect of impairments and credit
downgrades in excess of the expected longer-term level reflected within operating profit.
iv Net cash flows to parent company reflect the flows for long-term business operations as included in the holding company cash flow at transaction
rates.
Exchange movements, timing differences and other items represent:
v
Exchange movements
Mark to market value movements on Jackson assets backing surplus and required capital13
Other
9 Holding Company net borrowings
a Balance sheet
Asset
management
and UK
general
insurance
commission
£m
(30)
–
(32)
(62)
Long-term
business
£m
(75)
133
161
219
Total
£m
(105)
133
129
157
Holding company* cash and short-term investments
Core structural borrowings – central fundsnote
Holding company net borrowings
Core structural borrowings – Jackson
*Including central finance subsidiaries.
Note
EEV basis holding company borrowings comprise:
Perpetual subordinated capital securities (Innovative Tier 1)
Subordinated debt (Lower Tier 2)
Senior debt
2009 £m
Mark to
market
value
adjustment
note b
–
26
26
4
30
IFRS basis
(1,486)
3,240
1,754
154
1,908
EEV basis
at market
value
(1,486)
3,266
1,780
158
1,938
IFRS basis
(1,165)
2,785
1,620
173
1,793
2008 £m
Mark to
market
value
adjustment
note b
–
(802)
(802)
(19)
(821)
EEV basis
at market
value
(1,165)
1,983
818
154
972
2009
£m
1,351
1,372
543
3,266
2008
£m
513
737
733
1,983
In May 2009, the Company repaid maturing £249 million senior debt and in the same month the Company issued £400 million
subordinated notes in part to replace the maturing debt.
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.
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
b Results and movements in equity
Loss (profit) included in consolidated income statement
Foreign exchange effects
1 January 2009
31 December 2009
E
E
V
2009 £m
2008 £m
795
56
(821)
30
(656)
(181)
16
(821)
The loss (profit) recorded in the consolidated income statement represents a charge of £774 million (2008: credit of £(619) million) in
respect of central funds and a charge of £21 million (2008: credit of £(37) million) in respect of Jackson.
323
Notes on the EEV basis supplementary information > continued
10 Reconciliation of movement in shareholders’ funds
2009 £m
Long-term business operations
Asian
Other
operations operations operations operations operations
US insurance
Total
UK long-term
business
Operating profit (based on longer-term investment returns)
Long-term business:
New business2
Business in force3
Asia development expenses
UK general insurance commission
M&G
Asian asset management operations
US broker-dealer and asset management
Other income and expenditure
Restructuring costs
Operating profit based on longer-term investment returns
Short-term fluctuations in investment returns5
Mark to market value movements on core borrowings9
Shareholders’ share of actuarial and other gains and losses on
defined benefit pension schemes
Effect of changes in economic assumptions and time value of
cost of options and guarantees6
Profit on sale and results for Taiwan agency business18
Profit (loss) from continuing operations before tax
(including actual investment returns)
Tax (charge) credit attributable to shareholders’ profit (loss):11
Tax on operating profit
Tax on short-term fluctuations in investment returns
Tax on shareholders’ share of actuarial and other gains and
losses on defined benefit pension schemes
Tax on effect of changes in economic assumptions and
time value of cost of options and guarantees
Total tax (charge) credit
Discontinued operations (net of tax)4
Minority interests
Profit (loss) for the year
Exchange movements on foreign operations and
net investment hedgesnote i
Related tax
Intra group dividends (including statutory transfer)
External dividends
Reserve movements in respect of share-based payments
Investment in operationsnote ii
Other transfersnote iv
Movement in own shares held in respect of share-based payment plans
Movement in Prudential plc shares purchased by
unit trusts consolidated under IFRS
New share capital subscribed
Mark to market value movements on Jackson assets backing surplus
and required capital (net of related tax of £72m)13
Net increase (decrease) in shareholders’ equity
Shareholders’ equity at 1 January 2009note iii, 7
713
392
1,105
(6)
–
–
–
–
–
–
1,099
437
–
664
569
1,233
–
–
–
–
–
–
–
1,233
(401)
(21)
230
640
870
–
–
–
–
–
–
(20)
850
445
–
1,607
1,601
3,208
(6)
–
–
–
–
–
(20)
3,182
481
(21)
Group
Total
1,607
1,601
3,208
(6)
51
238
55
4
(433)
(27)
–
–
–
–
51
238
55
4
(433)
(7)
(92) 3,090
351
(795)
(130)
(774)
–
–
(52)
(52)
(32)
(84)
(174)
148
(518)
–
(218)
–
(910)
148
–
(57)
(910)
91
1,510
293
1,025
2,828 (1,085) 1,743
(239)
(76)
(416)
165
(245)
(124)
(900)
(35)
–
94
–
181
14
61
14
336
34
61
9
–
(866)
26
23
336
(221)
(70)
(294)
(585)
104
(481)
–
–
–
–
–
–
–
–
(14)
(3)
(14)
(3)
1,289
223
731
2,243
(998) 1,245
(435)
–
(553)
–
–
219
(3)
–
–
–
–
(483)
–
(39)
–
–
–
(51)
–
–
–
133
–
–
(206)
–
–
27
(32)
–
–
–
–
(918)
–
(798)
–
–
246
(86)
–
–
–
157
11
798
(481)
29
(246)
86
3
(3)
141
(761)
11
–
(481)
29
–
–
3
(3)
141
133
–
133
517
5,264
(217)
4,339
520
820
4,919 14,522
(503)
317
434 14,956
Shareholders’ equity at 31 December 2009note iii, 7
5,781
4,122
5,439 15,342
(69) 15,273
324 Prudential plc > Annual Report 2009
Notes
i
Profits are translated at average exchange rates, consistent with the method applied for statutory IFRS basis results. The amounts recorded above for
exchange rate movements reflect the difference between 2009 and 2008 exchange rates as applied to shareholders’ funds at 1 January 2009 and the
difference between 31 December 2009 and average 2009 rates for profits.
Investment in operations reflects increases in share capital. This includes certain non-cash items.
For the purposes of the table above, goodwill related to Asia long-term operations (as shown in note 7) is included in Other operations.
ii
iii
iv Other transfers (from) to long-term business operations to Other operations in 2009 represent:
Asian
operations
£m
US
operations
£m
UK
insurance
operations
£m
Total
long-term
business
operations
£m
(7)
4
(3)
(3)
(48)
(51)
(17)
(15)
(32)
(27)
(59)
(86)
Adjustment for net of tax asset management projected profits of covered business
Other adjustments
11 Tax attributable to shareholders’ profit (loss)
The tax charge (credit) comprises:
Tax charge on operating profit based on longer-term investment returns:
Long-term business:note i
Asian operationsnote ii
US operations
UK insurance operationsnote ii
Other operations
Total tax charge on operating profit based on longer-term investment returns
Tax credit on items not included in operating profit:
Tax credit on short-term fluctuations in investment returns
Tax credit on shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes
Tax credit on effect of changes in economic assumptions and time value of cost of options and guarantees
Tax credit on profit on sale and results for Taiwan agency business
Total tax credit on items not included in operating profit
Tax charge (credit) on profit (loss) on ordinary activities from continuing operations
(including tax on actual investment returns)
2009 £m
2008 £m
239
416
245
900
(34)
866
(26)
(23)
(336)
–
(385)
322
205
269
796
(38)
758
(1,432)
(2)
(79)
(16)
(1,529)
481
(771)
Notes
i
The profit for the year for covered business is in most cases calculated initially at the post-tax level. The post-tax profit for covered business is then
grossed up for presentation purposes at the effective rates of tax applicable to the countries and periods concerned. In the UK, the effective rate is
the UK corporation tax rate of 28 per cent which took effect from 1 April 2008. For Jackson, the US federal tax rate of 35 per cent is applied to gross up
movements on the value of in-force business. Effects on statutory tax for the period affect the overall tax rate. For Asia, similar principles apply subject
to the availability of taxable profits.
Including tax relief on Asia development expenses and restructuring costs borne by UK insurance operations.
ii
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
E
E
V
325
Notes on the EEV basis supplementary information > continued
12 Earnings per share (EPS)
Operating EPS:
Operating profit before tax
Tax
Minority interests
Operating profit after tax and minority interests
Operating EPS (pence)
Total EPS:
Profit (loss) from continuing operations before tax
Tax
Discontinued operations (net of tax)
Minority interests
Total profit (loss) after tax and minority interests
Total EPS (pence)
Average number of shares (millions)
2009 £m
2008 £m
3,090
(866)
(3)
2,221
88.8p
1,743
(481)
(14)
(3)
1,245
49.8p
2,501
2,865
(758)
(4)
2,103
85.1p
(2,106)
771
–
(3)
(1,338)
(54.1)p
2,472
The average number of shares reflects the average number in issue adjusted for shares held by employee trusts and consolidated unit
trusts and OEICs which are treated as cancelled.
326 Prudential plc > Annual Report 2009
13 Reconciliation of net worth and value of in-force businessnote i
Group
Shareholders’ equity at 1 January 2009
New business contributionnotes ii, iii
Existing business – transfer to net worth
Expected return on existing business
Changes in operating assumptions and experience variances
Profit on sale and results for Taiwan agency business
Increase in capital requirements for US operations arising
from impairments and credit downgrades
Changes in non-operating assumptions and
experience variances and minority interests
Profit after tax and minority interests from long-term business
Exchange movements on foreign operations and
net investment hedges
Intra-group dividends (including statutory transfer) and
investment in operationsnote v
Mark to market value movements on Jackson assets
backing surplus and required capital
Other transfers from net worth
2009 £m
Required
capital
Total net
worth
4,117
451
(434)
100
50
(1,232)
4,564
(224)
1,117
206
225
(245)
Free
surplus
note 8
447
(675)
1,551
106
175
987
Value of
in-force
business
note iv
9,958
1,355
(1,117)
856
(136)
393
Total
long-term
business
14,522
1,131
–
1,062
89
148
(168)
168
–
–
–
(71)
1,905
(75)
(259)
133
(86)
42
(855)
(268)
–
–
–
(29)
1,050
(343)
(259)
133
(86)
(158)
1,193
(575)
(293)
–
–
(187)
2,243
(918)
(552)
133
(86)
Shareholders’ equity at 31 December 2009
2,065
2,994
5,059
10,283
15,342
Representing:
Asian operations
Shareholders’ equity at 1 January 2009
New business contributionnotes ii,iii
Existing business – transfer to net worth
Expected return on existing business
Changes in operating assumptions and experience variancesnote vi
Profit on sale and results for Taiwan agency business
Changes in non-operating assumptions and
experience variances and minority interests
Profit after tax and minority interests from long-term business
Exchange movements on foreign operations and
net investment hedges
Intra-group dividends (including statutory transfer) and
investment in operationsnote v
Other transfers from net worth
Shareholders’ equity at 31 December 2009
(240)
(246)
377
86
(98)
987
101
1,207
1,789
69
5
5
85
(1,232)
(26)
(1,094)
1,549
(177)
382
91
(13)
(245)
75
113
3,715
710
(382)
322
(73)
393
206
1,176
5,264
533
–
413
(86)
148
281
1,289
(12)
(110)
(122)
(313)
(435)
(151)
(3)
801
–
–
585
(151)
(3)
1,386
(183)
–
4,395
(334)
(3)
5,781
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
E
E
V
327
Notes on the EEV basis supplementary information > continued
13 Reconciliation of net worth and value of in-force businessnote i continued
2009 £m
Free
surplus
note 8
Required
capital
Total net
worth
Value of
in-force
business
note iv
Total
long-term
business
501
(326)
706
18
115
(168)
(77)
268
(63)
(39)
133
(51)
749
186
(103)
468
2
158
(95)
430
(69)
(32)
515
1,400
300
(359)
55
(12)
168
11
163
1,901
(26)
347
73
103
–
(66)
431
(158)
(221)
–
–
–
(39)
133
(51)
2,438
458
(347)
151
58
–
(528)
(208)
(262)
–
–
–
4,339
432
–
224
161
–
(594)
223
(483)
(39)
133
(51)
1,405
2,154
1,968
4,122
928
82
(80)
40
(23)
57
76
–
–
1,114
(21)
388
42
135
(38)
506
(69)
(32)
1,004
1,519
3,805
187
(388)
383
(121)
164
225
(110)
–
3,920
4,919
166
–
425
14
126
731
(179)
(32)
5,439
US operations
Shareholders’ equity at 1 January 2009
New business contributionnotes ii,iii
Existing business – transfer to net worth
Expected return on existing business
Changes in operating assumptions and experience variances
Increase in capital requirements for US operations arising from
impairments and credit downgrades
Changes in non-operating assumptions and experience
variances and minority interests
Profit after tax and minority interests from long-term business
Exchange movements on foreign operations and
net investment hedges
Intra-group dividends (including statutory transfer) and
investment in operations
Mark to market value movements on Jackson assets
backing surplus and required capital
Other transfers from net worth
Shareholders’ equity at 31 December 2009
UK insurance operations
Shareholders’ equity at 1 January 2009
New business contributionnotes ii,iii
Existing business – transfer to net worth
Expected return on existing business
Changes in operating assumptions and experience variances
Changes in non-operating assumptions and
experience variances and minority interests
Profit after tax and minority interests from long-term business
Intra-group dividends (including statutory transfer) and
investment in operationsnote v
Other transfers from net worth
Shareholders’ equity at 31 December 2009
Notes
i
ii
All figures are shown net of tax.
The movements arising from new business contribution are as follows:
Asian operations
US operations
UK insurance operations
2009 £m
2008 £m
Pre-tax new
business
contribution
note 2
713
664
230
1,607
Post-tax new
business
contribution
Pre-tax new
business
contribution
note 2
533
432
166
1,131
634
293
273
1,200
Tax
(180)
(232)
(64)
(476)
Post-tax new
business
contribution
468
190
197
855
Tax
(166)
(103)
(76)
(345)
328 Prudential plc > Annual Report 2009
Free surplus
Required capital
Total net worth
Value of in-force business
Total long-term business
iii New business capital usage
Asian operations
US operations
UK insurance operations
2009
£m
(675)
451
(224)
1,355
1,131
2008
£m
(806)
472
(334)
1,189
855
2009 £m
2008 £m
Free surplus
invested
in new
business
Post-tax new
business
contribution
note ii
(246)
(326)
(103)
(675)
533
432
166
1,131
Post-tax new
business
contribution
per £1m free
surplus
invested
2.2
1.3
1.6
1.7
Free surplus
invested
in new
business
Post-tax new
business
contribution
note ii
(224)
(289)
(293)
(806)
468
190
197
855
Post-tax new
business
contribution
per £1m free
surplus
invested
2.1
0.7
0.7
1.1
iv The value of in-force business includes the value of future margins from current in-force business less the cost of holding encumbered capital
and represents:
2009 £m
2008 £m
Value of
in-force
business
before
deduction
of cost
of capital
and of
guarantees
Cost
of capital
Cost of
time
value of
guarantees
Net
value of
in-force
business
Value of
in-force
business
before
deduction
of cost
of capital
and of
guarantees
Cost
of capital
Cost of
time
value of
guarantees
Net
value of
in-force
business
Asian operationsnote vii
US operations
UK insurance
operations
4,605
2,351
4,181
11,137
(198)
(175)
(221)
(594)
(12)
(208)
(40)
(260)
4,395
1,968
3,920
10,283
4,590
2,838
4,263
11,691
(869)
(18)
(372)
(1,259)
(6)
(382)
(86)
(474)
3,715
2,438
3,805
9,958
v
The amounts shown in respect of free surplus and the value of in-force business for UK and Asian operations for intragroup dividends and investment
in operations include the impact of contingent loan funding.
vi For Asian operations, the effect of changes in operating assumptions and experience variances in 2009 includes the impact of changes in the assumed
capital requirement to better align with internal management and pricing bases. This primarily arises in China, Indonesia, Philippines and Vietnam,
with a consequent reduction in free surplus and increase in required capital of £73 million.
vii The change in the cost of capital for Asian operations from £(869) million in 2008 to £(198) million in 2009 primarily reflects the effect of the disposal
of the Taiwan agency business.
14 Expected transfer of value of in-force business to free surplus
The discounted value of in-force business and required capital can be reconciled to the analysis of free surplus crystallisation as follows:
Required capital13
Value of in force (VIF)13
Add back: deduction for cost of time value of guarantees13
Other itemsnote
2009 £m
2008 £m
2,994
10,283
260
(865)
12,672
4,117
9,958
474
(181)
14,368
Note
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. Also included in ‘Other items’ are amounts which are deducted in full
against VIF, as they represent the Group’s best estimate of amounts that will be paid in the future, but for which there is no definitive timeframe for when
the payments will actually be made.
329
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
E
E
V
Notes on the EEV basis supplementary information > continued
14 Expected transfer of value of in-force business to free surplus continued
Cash flows are projected on a deterministic basis and are discounted at the appropriate risk discount rate. The modelled cash flows use
the same methodology underpinning the Group’s embedded value reporting and so is subject to the same assumptions and sensitivities.
The table below shows how the VIF generated by the in-force business and the associated required capital is modelled as emerging
into free surplus over future years.
Asian operations
US operations
UK insurance operations
Total
Asian operations
US operations
UK insurance operations
Total
2009 £m
Expected period of conversion of future post tax distributable earnings
and required capital flows to free surplus
1-5 years
6-10 years
11-15 years
16-20 years
20+ years
1,716
2,129
1,591
5,436
43%
1,121
980
1,035
3,136
25%
687
364
653
1,704
13%
455
153
401
1,009
8%
932
113
342
1,387
11%
2008 £m
Expected period of conversion of future post tax distributable earnings
and required capital flows to free surplus
1-5 years
6-10 years
11-15 years
16-20 years
20+ years
1,746
2,415
2,297
6,458
45%
1,150
1,167
975
3,292
23%
859
460
600
1,919
13%
564
180
389
1,133
8%
1,054
152
360
1,566
11%
2009 Total
as shown
above
4,911
3,739
4,022
12,672
100%
2008 Total
as shown
above
5,373
4,374
4,621
14,368
100%
15 Sensitivity of results to alternative assumptions
a Sensitivity analysis – economic assumptions
The tables below show the sensitivity of the embedded value as at 31 December 2009 (31 December 2008) and the new business
contribution after the effect of encumbered capital for 2009 and 2008 to:
• one per cent increase in the discount rates;
• one per cent increase and decrease in interest rates, including all consequential changes (assumed investment returns for all asset
classes, market values of fixed interest assets, risk discount rates);
• one per cent rise in equity and property yields;
• 10 per cent fall in market value of equity and property assets (not applicable for new business contribution);
• holding company statutory minimum capital (by contrast to economic capital);
• five basis point increase in long-term expected defaults; and
• 10 basis point increase in the liquidity premium for UK shareholder-backed annuities (2009 only).
In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised
economic conditions.
330 Prudential plc > Annual Report 2009
New business profit for 2009
As reported2
Discount rates – 1% increase
Interest rates – 1% increase
Interest rates – 1% decrease
Equity/property yields – 1% rise
Long-term expected defaults – 5 bps increase
Liquidity premium – 10 bps increase
Asian
operations
(excluding
sold Taiwan
agency
business)
713
(91)
(3)
3
31
–
–
2009 £m
US
operations
UK
insurance
operations
Total
long-term
business
operations
664
(48)
8
(12)
39
–
–
230
(43)
(7)
8
11
(9)
18
1,607
(182)
(2)
(1)
81
(9)
18
Embedded value of long-term operations at 31 December 2009
As reported10
5,781
4,122
5,439
15,342
Discount rates – 1% increase
Interest rates – 1% increase
Interest rates – 1% decrease
Equity/property yields – 1% rise
Equity/property market values – 10% fall
Statutory minimum capital
Long-term expected defaults – 5 bps increase
Liquidity premium – 10 bps increase
New business profit for 2008
As reported2
Discount rates – 1% increase
Interest rates – 1% increase
Interest rates – 1% decrease
Equity/property yields – 1% rise
Embedded value of long-term operations
at 31 December 2008
As reported10
Discount rates – 1% increase
Interest rates – 1% increase
Interest rates – 1% decrease
Equity/property yields – 1% rise
Equity/property market values – 10% fall
Statutory minimum capital
(146)
(137)
55
82
(10)
123
–
–
(522)
(183)
231
255
(147)
28
–
–
2008 £m
(401)
(231)
298
213
(298)
6
(76)
152
(1,069)
(551)
584
550
(455)
157
(76)
152
Asian
operations
(excluding
sold Taiwan
agency
business)
US
operations
UK
insurance
operations
Total
long-term
business
operations
Taiwan
agency
business
Total
long-term
business
operations
(as previously
published)
634
(74)
(19)
23
26
293
(25)
21
(47)
28
273
(52)
(5)
6
15
1,200
(151)
(3)
(18)
69
5,487
4,339
4,919
14,745
(454)
(126)
146
240
(94)
1
(170)
(123)
19
114
(117)
11
(361)
(98)
121
276
(381)
5
(985)
(347)
286
630
(592)
17
107
(14)
(1)
–
4
(223)
(110)
126
(182)
54
(35)
512
1,307
(165)
(4)
(18)
73
14,522
(1,095)
(221)
104
684
(627)
529
b Sensitivity analysis – non-economic assumptions
The tables below show the sensitivity of the embedded value as at 31 December 2009 (31 December 2008) and the new business
contribution after the effect of encumbered capital for 2009 and 2008 to:
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
• 10 per cent proportionate decrease in maintenance expenses (a 10 per cent sensitivity on a base assumption of £10 per annum
would represent an expense assumption of £9 per annum);
• 10 per cent proportionate decrease in lapse rates (a 10 per cent sensitivity on a base assumption of five per cent would represent
a lapse rate of 4.5 per cent per annum); and
• five per cent proportionate decrease in base mortality and morbidity rates (i.e. increased longevity).
E
E
V
331
Notes on the EEV basis supplementary information > continued
15 Sensitivity of results to alternative assumptions continued
New business profit for 2009
As reported2
Maintenance expenses – 10% decrease
Lapse rates – 10% decrease
Mortality and morbidity – 5% decrease
Change representing effect on:
Life business
UK annuities
2009 £m
Asian
operations
(excluding
sold Taiwan
agency
business)
US
operations
UK
insurance
operations
Total
long-term
business
operations
713
664
19
56
37
37
–
9
34
7
7
–
230
8
11
(11)
1
(12)
1,607
36
101
33
45
(12)
Embedded value of long-term operations at 31 December 2009
As reported10
5,781
4,122
5,439
15,342
Maintenance expenses – 10% decrease
Lapse rates – 10% decrease
Mortality and morbidity – 5% decrease
Change representing effect on:
Life business
UK annuities
New business profit for 2008
As reported2
Maintenance expenses – 10% decrease
Lapse rates – 10% decrease
Mortality and morbidity – 5% decrease
Change representing effect on:
Life business
UK annuities
Embedded value of long-term operations
at 31 December 2008
As reported10
Maintenance expenses – 10% decrease
Lapse rates – 10% decrease
Mortality and morbidity – 5% decrease
Change representing effect on:
Life business
UK annuities
33
141
78
78
–
77
232
169
169
–
2008 £m
43
70
(157)
11
(168)
153
443
90
258
(168)
Asian
operations
(excluding
sold Taiwan
agency
business)
US
operations
UK
insurance
operations
Total
long-term
business
operations
Taiwan
agency
business
Total
long-term
business
operations
(as previously
published)
634
293
19
53
23
23
–
6
23
6
6
–
273
7
11
(20)
–
(20)
1,200
107
1,307
32
87
9
29
(20)
3
9
4
4
–
35
96
13
33
(20)
5,487
4,339
4,919
14,745
(223)
14,522
74
192
139
139
–
45
177
121
121
–
36
80
(71)
5
(76)
155
449
189
265
(76)
18
2
33
33
–
173
451
222
298
(76)
332 Prudential plc > Annual Report 2009
16 Assumptions
a Best estimate assumptions
Best estimate assumptions are used for the cash flow projections, where best estimate is defined as the mean of the distribution of future
possible outcomes. The assumptions are reviewed actively and changes are made when evidence exists that material changes in future
experience are reasonably certain.
Assumptions required in the calculation of the value of options and guarantees, for example relating to volatilities and correlations,
or dynamic algorithms linking liabilities to assets, have been set equal to the best estimates and, wherever material and practical, reflect
any dynamic relationships between the assumptions and the stochastic variables.
b Principal economic assumptions
Deterministic assumptions
In most countries, the long-term expected rates of return on investments and risk discount rates are set by reference to period end rates
of return on cash or fixed interest securities. For the Group’s Asian operations, the active basis is appropriate for business written in
Japan, Korea and US dollar denominated business written in Hong Kong. Except in respect of the projected returns of holdings of Asian
debt and equity securities for those countries where long-term fixed interest markets are less established, the ‘active’ basis of assumption
setting has been applied in preparing the results of all the Group’s US and UK long-term business operations.
For countries where long-term fixed interest markets are less established, investment return assumptions and risk discount rates
are based on an assessment of longer-term economic conditions. Except for the countries listed above, this basis is appropriate for the
Group’s Asian operations. Similarly, the projected returns on holdings of Asian securities in these territories by other Group businesses
are set on the same basis.
Expected returns on equity and property asset classes in respect of each territory are derived by adding a risk premium, based on the
long-term view of Prudential’s economists, to the risk-free rate. In Asia, equity risk premiums range from 3.0 per cent to 8.35 per cent
(2008: 3.0 per cent to 7.0 per cent). In the US and the UK, the equity risk premium is 4.0 per cent (2008: 4.0 per cent).
Assumed investment returns reflect the expected future returns on the assets held and allocated to the covered business at the
valuation date.
The tables below summarise the principal financial assumptions:
Asian operations
Risk discount rate:
New business
In force
Expected long-term
rate of inflation
Government
bond yield
Asian operations
Risk discount rate:
New business
In force
Expected long-term
rate of inflation
Government
bond yield
31 Dec 2009 %
31 Dec 2008 %
China Hong Kong
note iv notes ii,iii
India
Indonesia
note iv
Japan
Korea
note iv
China Hong Kong
notes ii,iii
India
Indonesia
Japan
Korea
11.75
11.75
5.5
5.7
14.25
14.25
13.8
13.8
5.1
5.1
8.2
8.4
11.75
11.75
3.8
3.9
14.25
14.25
15.25
15.25
4.0
2.25
5.0
6.0
0.0
2.75
4.0
2.25
5.0
6.0
8.25
3.9
9.25
10.25
1.9
5.5
8.25
2.3
9.25
10.25
4.8
4.8
0.7
1.6
8.2
8.2
2.75
4.3
31 Dec 2009 %
31 Dec 2008 %
Malaysia Philippines
note iv
note iii
Singapore
note iii
Taiwan
Thailand
Vietnam Malaysia Philippines
note iii
note iv
Singapore
note iii
Taiwan
Thailand
Vietnam
9.4
9.5
15.75
15.75
5.7
6.8
7.5
7.5
13.0
13.0
16.75
16.75
9.1
9.0
15.75
15.75
6.15
6.85
9.1
9.7
13.0
13.0
16.75
16.75
2.75
5.0
1.75
2.25
3.0
6.0
2.75
5.0
1.75
2.25
3.0
6.0
6.5
9.25
4.25
5.5
6.75
10.25
6.5
9.25
4.25
5.5
6.75
10.25
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
E
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333
Notes on the EEV basis supplementary information > continued
16 Assumptions continued
Weighted risk discount rate:note i
New business (excluding Taiwan agency business)
In force (excluding Taiwan agency business)
In force (including Taiwan agency business)
31 Dec 2009 % 31 Dec 2008 %
Asia total
Asia total
9.1
8.8
N/A
8.7
8.0
7.8
Notes
i
The weighted risk discount rates for Asian operations shown above have been determined by weighting each country’s risk discount rates by
reference to the EEV basis new business result and the closing value of in-force business.
The assumptions shown are for US dollar denominated business which comprises the largest proportion of the in-force Hong Kong business.
ii
iii The mean equity return assumptions for the most significant equity holdings in the Asian operations were:
Hong Kong
Malaysia
Singapore
31 Dec 2009
%
31 Dec 2008
%
7.9
12.4
10.2
6.2
12.5
10.2
To obtain the mean, an average over all simulations of the accumulated return at the end of the projection period is calculated. The annual average
return is then calculated by taking the root of the average accumulated return minus 1.
iv In 2009, the Group reconsidered the application of the Group’s methodology for certain less established operations, with a consequent change
in the risk discount rates used for Indonesia and Korea and a change in the assumed capital requirement to better align with internal management and
pricing bases, primarily in China, Indonesia, Philippines and Vietnam. The change in the risk discount rate for Indonesia from 2008 to 2009 reflects
a more granular assessment of the risks when determining the beta.
US operations (Jackson)
Assumed spread margins:note iii
New businessnote i
Assumed long-term spread between earned rate and rate credited to policyholders
for new tranches of Fixed Annuity businessnote i
In force
Risk discount rate:note ii
New business
In force
US 10-year treasury bond rate at end of period
Pre-tax expected long-term nominal rate of return for US equities
Expected long-term rate of inflation
31 Dec 2009 % 31 Dec 2008 %
see note i
below
1.75
7.8
7.2
3.9
7.9
2.4
1.75
1.75
4.6
3.9
2.3
6.3
1.5
Notes
i
The expected spread for new tranches in 2009 of fixed annuity business (including the proportion of variable annuity new business invested in the
general account) and fixed index annuity business are as follows:
Assumed spread on new business
First six months of 2009
Second six months of 2009
2008
Fixed Annuity business*
First
5 years
%
Long-term
assumption†
%
Fixed Index
Annuity
business
%
2.75
2.25
n/a
2.0
2.0
1.75
3.5
2.5
2.2
*Including the proportion of variable annuity business invested in the general account.
†For new tranches of business in 2009, the expected spread is assumed to grade back to the long-term assumption over the next 10 years.
The increases in the spread assumptions are due primarily to the exceptional combined benefit of high investment yields with a net annualised yield
on new assets of 6.4 per cent during 2009 and lower crediting rates. These revised assumptions include a provision that crediting rates and spreads
will normalise in the future. Thus, the assumption for new business spreads shown above for fixed annuities and the proportion of variable annuity
business invested in the general account is set at the higher new level for the first five years before reducing over the following 10 years. As before,
the valuation of new business takes into account an assumed associated risk of increased lapse under certain interest rate scenarios.
The risk discount rates at 31 December 2009 for new business and business in force for US operations reflect weighted rates based on underlying
rates of 8.2 per cent (2008: 6.2 per cent) for Variable Annuity (VA) business and 6.2 per cent (2008: 3.0 per cent) for other business. The increase
in the weighted discount rates reflects the increase in the US 10 year treasury bond rate of 160 bps, the additional credit risk allowance of 30 bps for
VA business and 150 bps for other business, as explained in notes 1b(iii) and 6, and a change in the product mix reflecting the increased proportion
of VA business.
ii
334 Prudential plc > Annual Report 2009
iii Credit risk treatment
The projected cash flows incorporate the expected long-term spread between the earned rate and the rate credited to policyholders. The projected
earned rates reflect book value yields which are adjusted over time to reflect projected reinvestment rates. Positive net cash flows are assumed to
be reinvested in a mix of corporate bonds, commercial mortgages and limited partnerships. The yield on those assets is assumed to grade from the
current level to a yield that allows for a long-term assumed credit spread of 1.25 per cent over 10 years. The expected spread for 2009 has been
determined after allowing for a Risk Margin Reserve (RMR) allowance of 28 basis points for longer-term defaults as described in note 1b(iii).
The RMR of 28 bps represents the allowance, as at 31 December 2009, applied in the cash flow projections of the value of the in-force business.
In the event that longer-term default levels are higher then, unlike for UK annuity business where policyholder benefits are not changeable,
Jackson has some discretion to adjust crediting rates, subject to contract guarantee levels and general market competition considerations.
The results for Jackson reflect the application of the discount rates shown above, which for 2009 reflect the inclusion of an additional allowance for
a combination of credit risk premium and short-term default allowance as described in note 1b(iii) and note 6. 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.
At 31 December 2008, the book value yields, net of RMR allowance, were in excess of the risk discount rate. To correct for the anomalous effect
that would otherwise occur no credit was taken in the financial statements for full year 2008 for the cost of capital benefit that this feature would have
given rise to for fixed annuity business. As interest rates have subsequently risen such that the risk discount rate exceeds book value yield
at 31 December 2009 no such adjustment is needed for the year.
UK insurance operationsnote iv
Shareholder-backed annuity business:
Risk discount rate:notes i, iv
New business
In force
Pre-tax expected long-term nominal rate of return for shareholder-backed annuity business:note iii
Fixed annuities
Inflation-linked annuities
Other business:
Risk discount rate:notes ii, iv
New business
In force
Pre-tax expected long-term nominal rates of investment return:
UK equities
Overseas equities
Property
Gilts
Corporate bondsnote iv
Expected long-term rate of inflation
31 Dec 2009 % 31 Dec 2008 %
8.7
10.2
5.6
5.8
7.7
7.4
9.6
12.0
6.7
5.8
6.7
6.75
8.4
7.7
7.9 to 10.3 6.3 to 10.25
6.0
3.7
5.2
3.0
6.7
4.4
6.1
3.7
Post-tax expected long-term nominal rate of return for the PAC with-profits fund:
Pension business (where no tax applies)
Life business
6.9
6.0
6.6
5.8
Notes
i
ii
The risk discount rate applied to new shareholder-backed annuity business for 2009 has been determined after allowing for credit risk on the backing
assets.
The risk discount rates for new business and business in force for UK insurance operations other than shareholder-backed annuities reflect weighted
rates based on the type of business.
iii The pre-tax rates of return for shareholder-backed annuity business are based on the gross redemption yield on the backing assets net of a best
estimate allowance for future defaults.
iv Credit spread treatment
For with-profits business, the embedded value reflects the discounted value of future shareholder transfers. These transfers are directly affected by
the level of projected rates of return on investments, including debt securities. For 2008, the Company considered that in light of the current market
conditions, it would be appropriate to assume an unchanged level of default allowance and an unchanged discount rate methodology relative to
those at 31 December 2007.
For 2009, the approach for with-profit holdings has been refined. For equities and properties the projected earned rate is defined as the risk-free
rate plus a long-term risk premium. Under the revised methodology a similar approach is adopted for corporate bonds i.e. the assumed earned rate is
defined as the risk-free rate plus an assessment of the long-term spread over gilts, net of best estimate defaults.
For UK shareholder-backed annuity business, different dynamics apply both in terms of the nature of the business and the EEV methodology
applied. For this type of business the assets are generally held to maturity to match long duration liabilities. It is therefore appropriate under EEV
methodology to include a liquidity premium in the economic basis used. The appropriate EEV risk discount rate is set in order to equate the EEV with
a ‘market consistent embedded value’ including liquidity premium. The liquidity premium in the ‘market consistent embedded value’ is derived from
the yield on the assets held after deducting an appropriate allowance for credit risk. The risk discount rate in EEV reflects the excess of the total
allowance for credit risk over the best estimate default assumptions. For Prudential Retirement Income Limited (PRIL), which has approximately
90 per cent of UK shareholder-backed annuity business, the allowance for credit risk at 31 December 2009 is made up of:
a 20 bps for fixed annuities and 15 bps for inflation-linked annuities in respect of long-term expected defaults. This is derived by applying Moody’s
data from 1970 to 2004 uplifted by between 100 per cent (B) and 200 per cent (AAA) according to credit rating, to the asset portfolios.
335
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
E
E
V
Notes on the EEV basis supplementary information > continued
16 Assumptions continued
b 13 bps for fixed annuities and 10 bps for inflation-linked annuities in respect of long-term credit risk premium for the potential volatility in default
levels. This is derived by applying the 95th worst percentile from Moody’s data from 1970 to 2004, to the asset portfolios.
c 41 bps for fixed annuities and 34 bps for inflation-linked annuities in respect of additional short-term credit risk, reflecting short-term credit rating
downgrades and defaults in excess of the long-term assumptions. At 31 December 2008, this was derived as 25 per cent of the increase in credit
spreads over swaps that has occurred since 31 December 2006 based on a set of externally published indices weighted to reflect the asset mix.
During 2009, this element of the overall credit assumption has not been derived by reference to credit spreads; rather it has been reduced in order
to offset the impact of actual downgrades during the period on the long-term assumptions in (a) and (b) above and increased to eliminate the
positive experience variance that would otherwise have arisen from the small number of actual defaults that were experienced in the period. In
addition, the assumptions have been updated to reflect changes in the asset mix, arising particularly from the sale of subordinated financial debt
and the addition of higher credit quality new business assets to the portfolio.
The credit assumptions used and the residual liquidity premium element of the bond spread over swap rates is as follows:
Bond spread over swap rates
Credit risk allowance
Long-term expected defaults
Long-term credit risk premium
Short-term allowance for credit risk
Total credit risk allowance
Liquidity premium
2009
(bps)
175
19
13
39
71
104
2008
(bps)
323
15
11
54
80
243
The overall allowance for credit risk is prudent by comparison with historic rates of default and would be sufficient to withstand a wide range
of extreme credit events over the expected lifetime of the annuity business.
Stochastic assumptions
The economic assumptions used for the stochastic calculations are consistent with those used for the deterministic calculations
described above. Assumptions specific to the stochastic calculations, such as the volatilities of asset returns, reflect local market
conditions and are based on a combination of actual market data, historic market data and an assessment of longer-term economic
conditions. Common principles have been adopted across the Group for the stochastic asset models, for example, separate modelling
of individual asset classes but with allowance for correlation between the various asset classes.
Details are given below of the key characteristics and calibrations of each model.
Asian operations
• The same asset return models as used in the UK, appropriately calibrated, have been used for the Asian operations as described for
UK insurance operations below. The principal asset classes are government and corporate bonds. Equity holdings are much lower
than in the UK whilst property holdings do not represent a significant investment asset.
• The stochastic cost of guarantees is primarily only of significance for the Hong Kong, Korea, Malaysia and Singapore operations.
• The mean stochastic returns are consistent with the mean deterministic returns for each country. The expected volatility of equity
returns for 2009 ranges from 18 per cent to 35 per cent (2008: 18 per cent to 30 per cent), and the volatility of government bond
yields ranges from 1.3 per cent to 2.4 per cent (2008: 1.4 per cent to 2.4 per cent).
US operations (Jackson)
• Interest rates are projected using a log-normal generator calibrated to the market yield curve at the valuation date;
• Corporate bond returns are based on Treasury securities plus a spread that has been calibrated to current market conditions and varies
by credit quality; and
• Variable annuity equity and bond returns have been stochastically generated using a log-normal model with parameters determined
by reference to historical data. The volatility of equity fund returns for both 2009 and 2008 ranges from 18.6 per cent to 28.1 per cent,
depending on risk class, and the standard deviation of bond returns ranges from 1.4 per cent to 1.6 per cent (2008: 1.5 per cent to
1.6 per cent).
336 Prudential plc > Annual Report 2009
UK insurance operations
• Interest rates are projected using a two-factor model calibrated to the initial market yield curve;
• The risk premium on equity assets is assumed to follow a log-normal distribution;
• The corporate bond return is calculated as the return on a zero-coupon bond plus a spread. The spread process is a mean reverting
stochastic process; and
• Property returns are modelled in a similar fashion to corporate bonds, namely as the return on a riskless bond, plus a risk premium,
plus a process representative of the change in residual values and the change in value of the call option on rents.
Mean returns have been derived as the annualised arithmetic average return across all simulations and durations.
For each projection year, standard deviations have been calculated by taking the square root of the annualised variance of the returns
over all the simulations. These have been averaged over all durations in the projection. For equity and property, the standard deviations
relate to the total return on these assets. The standard deviations applied to 2009 and 2008 are as follows:
Equities:
UK
Overseas
Property
2009 %
2008 %
18.0
18.0
15.0
18.0
16.0
15.0
c Demographic assumptions
Persistency, mortality and morbidity assumptions are based on an analysis of recent experience but also reflect expected future
experience. Where relevant, when calculating the time value of financial options and guarantees, policyholder withdrawal rates vary
in line with the emerging investment conditions according to management’s expectations.
d Expense assumptions
Expense levels, including those of service companies that support the Group’s long-term business operations, are based on internal
expense analysis investigations and are appropriately allocated to acquisition of new business and renewal of in-force business.
Exceptional expenses are identified and reported separately. It is Prudential’s policy not to take credit for future cost reduction
programmes until the savings have been delivered.
For Asian life operations, the expenses comprise costs borne directly and recharged costs from the Asia Regional Head Office,
that are attributable to covered business. The assumed future expenses for these operations also include projections of these future
recharges.
Expenditure of the Regional Head Office that is not allocated to the covered business or asset management operations is charged
as incurred. These costs are primarily for corporate related activities. Development expenses are also charged as incurred.
Corporate expenditure for Group Head Office, to the extent not allocated to the PAC with-profits fund, is charged to EEV basis
results as incurred.
e Taxation and other legislation
Current taxation and other legislation have been assumed to continue unaltered except where changes have been announced
and the relevant legislation passed.
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
E
E
V
337
Notes on the EEV basis supplementary information > continued
17 New business premiums and contributionsnotes i,iii
Single
Regular
(APE)
(PVNBP)
2009 £m 2008 £m 2009 £m 2008 £m 2009 £m 2008 £m 2009 £m 2008 £m
Annual premium and Present value of new
contribution equivalents business premiums
72
94
47
41
57
38
63
297
104
29
842
1,053
1,433
6,389
10
8,885
–
–
8,885
1,357
590
242
2,189
91
127
198
81
122
1,264
–
317
–
4,389
111
79
127
317
4,706
39
23
4,768
1,814
2,765
62
4,641
127
4,768
63
507
60
94
115
78
28
341
36
18
38
232
163
186
46
118
140
98
97
59
32
154
202
167
30
211
99
78
55
54
45
241
168
190
52
122
146
128
107
62
38
205
208
176
42
219
102
112
58
56
253
1,414
581
671
263
568
814
1,033
427
221
1,340
1,177
1,082
1,261
1,216
6,245
1,724
501
3,491
7
5,723
857
337
6,917
1,600
703
497
2,800
75
242
115
221
109
869
–
551
–
4,982
227
132
153
512
5,494
1,417
18
6,929
2,352
2,990
1,434
6,776
153
6,929
–
–
–
24
24
–
–
24
–
–
–
–
–
–
7
86
–
–
17
3
11
124
105
17
–
122
246
–
–
–
–
–
24
24
–
–
24
–
–
–
–
–
–
3
88
–
–
6
4
16
117
116
21
–
137
254
–
–
105
143
639
25
912
–
–
912
136
59
24
219
9
13
27
94
12
126
17
35
11
563
116
25
13
154
717
4
2
246
254
723
201
45
–
246
–
246
215
39
–
254
–
254
382
322
6
710
13
723
172
50
349
25
596
86
34
716
160
70
50
280
8
24
14
110
11
87
6
59
16
615
139
34
15
188
803
142
2
947
450
338
144
932
15
947
1,053
1,433
6,389
173
9,048
–
–
9,048
1,357
590
242
2,189
91
127
218
547
122
1,264
110
336
111
5,115
460
138
127
725
5,840
39
23
5,902
2,667
3,046
62
5,775
127
5,902
230
1,612
747
649
217
1,097
570
961
237
188
6,508
1,724
501
3,491
230
5,946
857
337
7,140
1,600
703
497
2,800
75
242
124
645
109
869
38
573
146
5,621
653
219
153
1,025
6,646
1,417
18
8,081
3,268
3,226
1,434
7,928
153
8,081
14,495 15,186
1,447
1,360
2,896
2,879 21,195 21,729
Asian operationsnote ii
China (Group’s 50% interest)
Hong Kong
India (Group’s 26% interest)
Indonesia
Japan
Korea
Malaysia
Singapore
Taiwannote ii
Other
Total Asian operations (all retail)
US operations
Fixed annuities
Fixed index annuities
Variable annuities
Life
Total US operations – retail
Guaranteed Investment Contracts
GIC – Medium Term Notes
Total US operations
UK insurance operations
Product summary
Internal vesting annuities
Direct and partnership annuities
Intermediated annuities
Total individual annuities
Income drawdown
Equity release
Individual pensions
Corporate pensions
Unit-linked bonds
With-profit bonds
Protection
Offshore products
PruHealth
Total retail retirement
Corporate pensions
Other products
DWP rebates
Total mature life and pensions
Total UK retail
Wholesale annuities
Credit life
Total UK insurance operations
Channel summary
Direct and partnership
Intermediated
Wholesale
Sub-total
DWP rebates
Total UK operations
Group total
338 Prudential plc > Annual Report 2009
Notes
i
The tables shown above are provided as an indicative volume measure of transactions undertaken in the reporting period that have the potential to
generate profits for shareholders. The amounts shown are not, and not intended to be, reflective of premium income recorded in the IFRS income
statement.
Annual premiums and contribution equivalents are calculated as the aggregate of regular new business amounts and one-tenth of single new
business amounts. PVNBPs are calculated as equalling single premiums plus the present value of expected premiums of new regular premium
business, allowing for lapses and other assumptions made in determining the EEV new business contribution. New business premiums reflect those
premiums attaching to covered business, including premiums for contracts classified as investment products for IFRS basis reporting. 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.
The table above includes new business for the Taiwan bank distribution operation. New business of the Taiwan agency business, which was sold in
June 2009 (as explained in note 18) is excluded from the table. Comparative figures have been adjusted accordingly.
ii
iii The 2008 comparatives shown in the table are translated at average exchange rates for the year.
18 Sale of legacy agency book and agency force in Taiwan to China Life Insurance of Taiwan
Profit on sale and results for Taiwan agency business
2009 £m
2008 £m
91
(248)
a 2009
On 20 February 2009, the Group announced that it had entered into an agreement to sell the assets and liabilities of its agency business
and its agency force in Taiwan to China Life Insurance Company Ltd of Taiwan for the nominal sum of NT$1. The economic transfer date
for the purpose of determining the net assets transferred was 28 February 2009. The sale was completed, following regulatory approval,
on 19 June 2009.
The profit on sale and results for the period of ownership comprise:
Proceeds
Net asset value attributable to equity holders of Company at 1 January 2009 and provision for restructuring costs
Goodwill written off
Estimate as announced on 20 February 2009
Plus: effect of completion and other adjustments
Representing:
Profit arising on sale and result for long-term business operations10
Goodwill written off
Adjustments in respect of restructuring costs borne by non-covered business
£m
–
134
(44)
90
1
91
148
(44)
(13)
91
b 2008 comparative results
The results for 2008 of £(248) million comprise the total result for the sold business i.e. including operating profit, short-term fluctuations
in investment returns and the effect of changes in economic assumptions and the time value of cost of options and guarantees.
In order to facilitate comparisons of the Group’s retained businesses, the presentation of the EEV basis results has been adjusted to
show separately the results for the sold Taiwan agency business, as explained below:
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Notes on the EEV basis supplementary information > continued
18 Sale of legacy agency book and agency force in Taiwan to China Life Insurance of Taiwan continued
APE new business
New business profit
In-force profit
Asset management
Other results
Operating profit based on longer-term investment returns
Short-term fluctuations in investment returns
Mark to market value movements on core borrowings
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes
Effect of changes in economic assumptions and the time value of cost of options and guarantees
Results for sold Taiwan agency business
Loss before tax
19 Post balance sheet events
As
previously
published
3,025
1,307
1,625
345
(316)
2,961
(5,127)
656
(15)
(581)
Included
above
(2,106)
2008 £m
Adjustment
Adjusted
(146)
(107)
11
–
–
(96)
160
–
1
183
(248)
–
2,879
1,200
1,636
345
(316)
2,865
(4,967)
656
(14)
(398)
(248)
(2,106)
a Acquisition of UOB Life Assurance Limited
On 6 January 2010 the Group announced the acquisition from United Overseas Bank Limited (UOB) of its 100 per cent interest in
UOB Life Assurance Limited in Singapore for total cash consideration of SGD428 million (£192 million) subject to a post-completion
adjustment to reflect the net asset value as at the completion date. This acquisition accompanied the announcement of a long-term
strategic partnership with UOB. Through this partnership Prudential’s life insurance products will be distributed through UOB Group’s
414 bank branches across Singapore, Indonesia and Thailand.
The Group continues to complete its compilation of the acquisition balance sheet and further details will be provided in the Group’s
2010 half year results announcement.
b Japanese insurance subsidiary’s suspension of writing new business
On 15 January 2010 the Group’s Japanese insurance subsidiary announced its intention to suspend writing new policyholder contracts in
Japan after 15 February 2010. The Company reinforced its commitment to servicing its existing policyholder base, which comprised over
170,000 contracts as at 30 September 2009. This decision will be reviewed on an on-going basis in light of changes to the business
environment.
This decision does not affect the Group’s asset management operations in Japan, which ranks among the largest foreign asset managers.
c Agreement to acquire AIA Group Limited
On 1 March 2010, Prudential plc announced that it had reached agreement with American International Group Inc. (‘AIG’), on terms for
the combination of Prudential and AIA Group Limited (‘AIA’), a wholly-owned subsidiary of AIG (the ‘Transaction’). AIA is a leading life
insurance organisation in Asia which provides individuals and businesses with products and services for their insurance, protection,
savings, investment and retirement needs in 15 geographical markets in the region. The combined group will be the leading life insurer
in Hong Kong, Singapore, Malaysia, Indonesia, Vietnam, Thailand and the Philippines with the leading foreign life insurance business
in China and India, a significantly enhanced presence in the high growth South East Asian life markets and strong operations in the
US and UK.
The Transaction will be effected through the acquisition of both Prudential (by a scheme of arrangement, the ‘Scheme’) and AIA by
a new company (‘New Prudential’). The new company will assume the name Prudential plc, be headquartered and incorporated in the
UK, and traded on the main market of the London Stock Exchange with ADRs traded on the New York Stock Exchange. The existing
Board of Prudential will become the Board of New Prudential.
AIG will receive total consideration of US$35.5 billion, comprising US$25.0 billion in cash and US$10.5 billion in New Prudential
shares and other securities. The cash component of the consideration will be financed through an underwritten rights issue, raising
US$20.0 billion (net of fees and expenses) and through issuance of US$5.0 billion senior notes (net of fees and expenses). These issues
have been agreed to be underwritten by certain banks. The terms of the rights issue will be set at the time of publication of Prudential and
New Prudential prospectuses.
The rights issue and the Scheme will be subject to shareholder approval at a General meeting. The Transaction is also subject to
certain regulatory and anti-trust approvals including various regulatory approvals required on a change of control of Prudential as a result
of the Scheme.
On 8 March 2010 the Company confirmed that the Prudential Group had entered into foreign exchange hedging arrangements in
respect of its requirement to convert the pounds sterling proceeds of the rights issue into US dollars, which is the currency in which
Prudential must pay the cash element of the consideration.
340 Prudential plc > Annual Report 2009
Statement of directors’ responsibilities in respect of the
European Embedded Value (EEV) basis supplementary information
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.
When compliance with the EEV Principles is stated, those
principles require the directors to prepare supplementary
information in accordance with the Embedded Value
Methodology (EVM) contained in the EEV Principles and
to disclose and explain any non-compliance with the EEV
guidance included in the EEV Principles.
In preparing the EEV supplementary information,
the directors have:
• prepared the supplementary information in accordance
with the EEV Principles;
• identified and described the business covered by the EVM;
• applied the EVM consistently to the covered business;
• determined assumptions on a realistic basis, having regard
to past, current and expected future experience and to any
relevant external data, and then applied them consistently;
• made estimates that are reasonable and consistent; and
• described the basis on which business that is not covered
business has been included in the supplementary information,
including any material departures from the accounting
framework applicable to the Group’s financial statements.
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Independent auditor’s report to Prudential plc on the
European Embedded Value (EEV) basis supplementary information
We have audited the EEV basis supplementary information (‘the
supplementary information’) of Prudential Plc for the year ended
31 December 2009 set out on pages 304 to 340. The financial
reporting framework that has been applied in the supplementary
information is the European Embedded Value Principles issued in
May 2004 by the European CFO Forum as supplemented by the
Additional Guidance on European Embedded Value Disclosures
issued in October 2005 (together ‘the EEV Principles’) using the
methodology and assumptions set out on pages 308 to 312 and
333 to 337 respectively. The supplementary information should be
read in conjunction with the group financial statements which are
on pages 119 to 301.
This report is made solely to the Company in accordance with the
terms of our engagement. Our audit work has been undertaken so
that we might state to the Company those matters we have been
engaged to state in this report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company for our audit
work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the statement of directors’
responsibilities set out on page 341, the directors have accepted
responsibility for the preparation of the supplementary
information on the EEV basis in accordance with the EEV
Principles.
Our responsibility is to audit the supplementary information in
accordance with the terms of our engagement and having regard
to International Standards on Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices Board’s
(APB’s) Ethical Standards for Auditors.
Scope of the audit of the supplementary information
An audit involves obtaining evidence about the amounts and
disclosures in the supplementary information to give reasonable
assurance that the supplementary information is free from material
misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate
to the Group’s circumstances and have been consistently applied
and adequately disclosed; the reasonableness of significant
accounting estimates made by the directors; and the overall
presentation of the supplementary information.
Opinion on supplementary information
In our opinion, the EEV basis supplementary information for the
year ended 31 December 2009 has been properly prepared in
accordance with the EEV Principles using the methodology and
assumptions set out on pages 308 to 312 and 333 to 337
respectively.
G Bainbridge
for and on behalf of KPMG Audit Plc
Chartered Accountants
London
8 March 2010
342 Prudential plc > Annual Report 2009
ADDITIONAL
INFORMATION
344
348
350 How to contact us
Risk factors
Shareholder information
343
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Additional information > Risk factors
A number of factors (risk factors) affect Prudential’s operating
results and financial condition and, accordingly, the trading price
of its shares. The risk factors mentioned below should not be
regarded as a complete and comprehensive statement of all
potential risks and uncertainties. The information given is as of
the date of this report, is not updated, and any forward-looking
statements are made subject to the reservations specified under
‘Forward-Looking Statements’ (page 351).
Risks relating to Prudential’s business
Prudential’s businesses are inherently subject to market
fluctuations and general economic conditions.
Prudential’s businesses are inherently subject to market
fluctuations and general economic conditions. Uncertain or
negative trends in international economic and investment climates
which have adversely affected Prudential’s business and
profitability could be repeated, or prolonged, or could worsen.
The adverse effects of such trends, including the unprecedented
market dislocation across asset classes and geographical markets
witnessed in 2008 and in the first half of 2009, have been and
would be felt principally through the following:
• investment impairments or reduced investment returns, as a
result of market volatility, could impair Prudential’s ability to
write significant volumes of new business as a result of market
volatility, which would have a negative impact on its assets
under management and profit;
• higher credit defaults and wider credit and liquidity spreads
resulting in realised and unrealised credit losses, as experienced
during 2008 and 2009, when illiquidity and credit spreads
reached all-time highs;
• Prudential in the normal course of business enters into a variety
of transactions with counterparties, including derivative
transactions. Failure of any of these counterparties to discharge
their obligations, or where adequate collateral is not in place,
could have an adverse impact on Prudential’s results; and
• in certain illiquid or closed markets, determining the value at
which financial instruments can be realised is highly subjective.
Processes to ascertain value and estimates of value require
substantial elements of judgement, assumptions and estimates
(which may change over time). Increased illiquidity also adds to
uncertainty over the accessibility of financial resources and may
reduce capital resources as valuations decline.
Estimates of financial instruments’ value are difficult because a
significant part of Prudential’s shareholders’ profit is related to
bonuses for policyholders declared on its with-profits products,
which are broadly based on historic and current rates of return
on equity, real estate and fixed income securities, as well as
Prudential’s expectations of future investment returns. During
2008 and for the first half of 2009, Prudential has had to operate
in the UK against a challenging background of unprecedented
volatility in capital and equity markets, interest rates and
widespread economic uncertainty. This has led, among other
things, to reduced consumer spending, an increase in
unemployment, and consequently reduced liquidity, requiring
the intervention of the Bank of England via a quantitative easing
programme to restore credit liquidity in the market.
In the US fluctuations in prevailing interest rates can affect results
from Jackson National Life Insurance Company (‘Jackson’), which
has a significant spread-based business, with the majority of its
assets invested in fixed income securities. In particular, fixed
annuities and stable value products written by Jackson expose the
Prudential Group to the risk that changes in interest rates, which
are not fully reflected in the interest rates credited to customers,
will reduce spread. The spread is the difference between the rate
of return Jackson is able to earn on the assets backing the
policyholders’ liabilities and the amounts that are credited to
policyholders in the form of benefit increases, subject to minimum
crediting rates. During 2008, the US financial services industry
faced an unprecedented array of challenges: the S&P 500 index
fell by 38.5 per cent, government interest rates fell to historic lows,
and global markets experienced a significant increase in volatility.
In addition, credit markets seized up and global credit spreads
widened to historic levels. These factors contributed to substantial
increases in Jackson’s unrealised losses. Although global markets
have begun to stabilise beginning in 2009, interest rates remain
low, many of the challenges of 2008 persist in the credit markets
and new challenges such as potential sovereign credit
deterioration and defaults continue to emerge. Declines in spread
from these products or other spread businesses that Jackson
conducts could have a material impact on its businesses or results
of operations. Jackson also writes a significant amount of variable
annuities that offer capital or income protection guarantees. There
could be unforeseen market circumstances where the derivatives
that it enters into to hedge its market risks may not fully offset its
losses, and any cost of the guarantees that remain unhedged will
also affect the Company’s results.
For some non unit-linked investment products, in particular those
written in some of the Group’s Asian operations, it may not be
possible to hold assets which will provide cash flows to exactly
match those relating to policyholder liabilities. This is particularly
true in those countries where bond markets are not developed and
in certain markets where regulated surrender values are set with
reference to the interest rate environment prevailing at the time
of policy issue. This results in a mismatch due to the duration and
uncertainty of the liability cash flows and the lack of sufficient
assets of a suitable duration. This residual asset/liability mismatch
risk can be managed but not eliminated. Where interest rates in
these markets remain lower than interest rates used to calculate
surrender values over a sustained period, this could have an
adverse impact on the Group’s reported profit.
Prudential is subject to the risk of exchange rate
fluctuations owing to the geographical diversity
of its businesses.
Due to the geographical diversity of its businesses, Prudential
is subject to the risk of exchange rate fluctuations. Prudential’s
international operations in the US and Asia, which represent a
significant proportion of operating profit and shareholders’ funds,
generally write policies and invest in assets denominated in local
currency. Although this practice limits the effect of exchange rate
fluctuations on local operating results, it can lead to significant
fluctuations in Prudential’s consolidated financial statements upon
translation of results into sterling. The currency exposure relating
to the translation of reported earnings is not separately managed.
Consequently, this could impact on the Group’s gearing ratios
(defined as debt over debt plus shareholders’ funds). The
impact of gains or losses on currency translations is recorded
as a component of shareholders’ funds within the statement
of changes in equity.
344 Prudential plc > Annual Report 2009
Prudential conducts its businesses subject to regulation
and associated regulatory risks, including the effects
of changes in the laws, regulations, policies and
interpretations and any accounting standards
in the markets in which it operates.
Changes in government policy, legislation (including tax) or
regulatory interpretation applying to companies in the financial
services and insurance industries in any of the markets in which
Prudential operates, which in some circumstances may be applied
retrospectively, may adversely affect Prudential’s product range,
distribution channels, capital requirements and, consequently,
reported results and financing requirements. For instance,
regulators in jurisdictions in which Prudential operates may
change the level of capital required to be held by individual
businesses. Also these changes could include possible changes in
the regulatory framework for pension arrangements and policies,
the regulation of selling practices and solvency requirements.
Furthermore, as a result of the recent interventions by
governments in response to global economic conditions, it
is widely expected that there will be a substantial increase in
government regulation and supervision of the financial services
industry, including the possibility of higher capital requirements,
restrictions on certain types of transaction structure, and
enhanced supervisory powers.
Current EU directives, including the EU Insurance Groups
Directive (‘IGD’) require European financial services groups to
demonstrate net aggregate surplus capital in excess of solvency
requirements at the Group level in respect of shareholder-owned
entities. The test is a continuous requirement, so that Prudential
needs to maintain a somewhat higher amount of regulatory capital
at the Group level than otherwise necessary in respect of some of
its individual businesses to accommodate, for example, short-term
movements in global foreign exchange rates, interest rates,
deterioration in credit quality and equity markets. The EU is also
developing a new solvency framework for insurance companies,
referred to as ‘Solvency II’. The new approach will be based on
the concept of three pillars – minimum capital requirements,
supervisory review of firms’ assessment of risk, and enhanced
disclosure requirements – and will cover valuations, the treatment
of insurance groups, the definition of capital and the overall level
of capital requirements. A key aspect of Solvency II is that the
assessment of risks and capital requirements will be aligned more
closely with economic capital methodologies, and may allow the
Group to make use of its internal economic capital models, if
approved by the FSA. The Solvency II Directive was formally
approved by a meeting of the EU’s Economic and Financial Affairs
Council on 10 November 2009. The European Commission has
already initiated the process of developing the detailed rules that
will complement the high-level Principles of the Directive, referred
to as ‘implementing measures’, which are subject to a consultation
process and are not expected to be finalised until late 2011. There
is a significant uncertainty regarding the final outcome of this
process. As a result there is a risk that the effect of the measures
finally adopted could be adverse for the Group, including a
potentially significant increase in the capital required to support
the UK annuity business. In addition, the application of Solvency II
to international groups is still unclear and there is a risk of
inconsistent application, which may place Prudential at a
competitive disadvantage to other European and non-European
financial services groups.
Various jurisdictions in which Prudential operates have created
investor compensation schemes that require mandatory
contributions from market participants in some instances in the
event of a failure of a market participant. As a major participant
in the majority of its chosen markets, circumstances could arise
where Prudential, along with other companies, may be required
to make such contributions.
The Group’s accounts are prepared in accordance with current
International Financial Reporting Standards (‘IFRS’) applicable to
the insurance industry. The International Accounting Standards
Board (‘IASB’) introduced a framework that it described as Phase I,
which permitted insurers to continue to use the statutory basis of
accounting for insurance assets and liabilities that existed in their
jurisdictions prior to January 2005. The IASB has published
proposals in its Phase II discussion paper, which would introduce
significant changes to the statutory reporting of insurance entities
that prepare accounts according to IFRS and has stated its
intention to publish an Exposure Draft in 2010. It is uncertain
whether and how the proposals in the discussion paper will
become definitive IFRS and when such changes might take effect.
Any changes or modification of IFRS accounting policies may
require a change in the future results or a restatement of
reported results.
European Embedded Value (‘EEV’) basis results are published as
supplementary information by Prudential using principles issued
by the European CFO (Chief Financial Officers) Forum. The EEV
basis is a value based reporting method for Prudential’s long-term
business which is used by market analysts and which underpins
a significant part of the key performance indicators used by
Prudential’s management for both internal and external reporting
purposes. In June 2008, in an effort to improve the consistency
and transparency of embedded value reporting, the CFO Forum
published the Market Consistent Embedded Value (‘MCEV’)
Principles. Following a review of the impact of turbulent market
conditions on the MCEV Principles, the CFO Forum announced
in May 2009 the postponement of the mandatory reporting on
MCEV basis until 2011 and subsequently, in October 2009,
changes in the principles to allow for the inclusion of a liquidity
premium, which is the additional return investors require for
investing in less liquid assets and is a key component in the
calculation of the profitability of UK annuity business. It also
announced that it was performing further work to develop more
detailed application guidance to increase consistency going
forward. When the work has been completed, Prudential will
consider its approach to the new Principles. The adoption of
the new Principles would give rise to different embedded value
results from those prepared under the application of European
Embedded Value Principles.
The resolution of several issues affecting the financial
services industry could have a negative impact on
Prudential’s reported results or on its relations with
current and potential customers.
Prudential is, and in the future may be, subject to legal and
regulatory actions in the ordinary course of its business, both in
the UK and internationally. This could be a review of business
sold in the past under previously acceptable market practices
at the time, such as the requirement in the UK to provide redress
to certain past purchasers of pension and mortgage endowment
policies, changes to the tax regime affecting products, and
regulatory reviews on products sold and industry practices,
including, in the latter case, businesses it has closed.
345
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Additional information > Risk factors > continued
Regulators particularly, but not exclusively, in the US and the UK
are moving towards a regime based on principles-based regulation
which brings an element of uncertainty. These regulators are
increasingly interested in the approach that product providers
use to select third-party distributors and to monitor the
appropriateness of sales made by them. In some cases product
providers can be held responsible for the deficiencies of third-
party distributors.
In the US, federal and state regulators have focused on, and
continue to devote substantial attention to, the mutual fund,
fixed index variable annuity and insurance product industries.
This includes new regulations in respect of the suitability of
broker-dealers’ sales of certain products. As a result of publicity
relating to widespread perceptions of industry abuses, there
have been numerous regulatory inquiries and proposals for
legislative and regulatory reforms.
In Asia, regulatory regimes are developing at different speeds,
driven by a combination of global factors and local considerations.
There is a risk that new requirements are introduced that are
retrospectively applied to sales made prior to their introduction.
Litigation and disputes may adversely affect Prudential’s
profitability and financial condition.
Prudential is, and may be in the future, subject to legal actions
and disputes in the ordinary course of its insurance, investment
management and other business operations. These legal actions
and disputes may relate to aspects of Prudential’s businesses and
operations that are specific to Prudential, or that are common to
companies that operate in Prudential’s markets. Legal actions and
disputes may arise under contracts, regulations (including tax) or
from a course of conduct taken by Prudential, and may be class
actions. Although Prudential believes that it has adequately
provided in all material aspects for the costs of litigation and
regulatory matters, no assurance can be provided that such
provisions are sufficient. Given the large or indeterminate amounts
of damages sometimes sought, and the inherent unpredictability
of litigation and disputes, it is possible that an adverse outcome
could, from time to time, have an adverse effect on Prudential’s
results of operation or cash flows.
Prudential’s businesses are conducted in highly
competitive environments with developing demographic
trends and Prudential’s continued profitability depends
on its management’s ability to respond to these pressures
and trends.
The markets for financial services in the UK, US and Asia are highly
competitive, with several factors affecting Prudential’s ability to
sell its products and continued profitability, including price and
yields offered, financial strength and ratings, range of product
lines and product quality, brand strength and name recognition,
investment management performance, historical bonus levels,
developing demographic trends and customer appetite for
certain savings products. In some of its markets, Prudential faces
competitors that are larger, have greater financial resources or a
greater market share, offer a broader range of products or have
higher bonus rates or claims-paying ratios. Further, heightened
competition for talented and skilled employees with local
experience, particularly in Asia, may limit Prudential Group’s
potential to grow its business as quickly as planned.
Within the UK, Prudential’s principal competitors in the life market
include many of the major retail financial services companies
including, in particular, Aviva, Legal & General, Lloyds Banking
Group and Standard Life.
Jackson’s competitors in the US include major stock and mutual
insurance companies, mutual fund organisations, banks and other
financial services companies such as AIG, AXA Financial Inc.,
Hartford Life Inc., Lincoln National, MetLife and TIAA-CREF.
In Asia, the Prudential Group’s principal regional competitors are
international financial companies, including Allianz, AXA, ING,
AIA and Manulife. In a number of markets, local companies have
a very significant market presence.
Prudential believes competition will intensify across all regions
in response to consumer demand, technological advances, the
impact of consolidation, regulatory actions and other factors.
Prudential’s ability to generate an appropriate return depends
significantly upon its capacity to anticipate and respond
appropriately to these competitive pressures.
Downgrades in Prudential’s financial strength and credit
ratings could significantly impact its competitive position
and hurt its relationships with creditors or trading
counterparties.
Prudential’s financial strength and credit ratings, which are
used by the market to measure its ability to meet policyholder
obligations, are an important factor affecting public confidence in
most of Prudential’s products, and as a result its competitiveness.
Changes in methodologies and criteria used by rating agencies
could result in downgrades that do not reflect changes in the
general economic conditions or Prudential’s financial condition.
Downgrades in Prudential’s ratings could have an adverse effect
on its ability to market products and retain current policyholders.
In addition, the interest rates Prudential pays on its borrowings are
affected by its debt credit ratings, which are in place to measure
Prudential’s ability to meet its contractual obligations.
Prudential’s long-term senior debt is rated as A2 (negative
outlook) by Moody’s, A+ (negative outlook) by Standard & Poor’s
and A+ (negative outlook) by Fitch.
Prudential’s short-term debt is rated as P-1 by Moody’s, A-1 by
Standard & Poor’s and F1+ by Fitch.
Prudential Assurance Company Limited (‘Prudential Assurance’)
long-term fund is rated Aa2 (negative outlook) by Moody’s, AA
(negative outlook) by Standard & Poor’s and AA+ (negative
outlook) by Fitch.
Jackson’s financial strength is rated AA (negative outlook) by
Standard & Poor’s and Fitch, A1 (negative outlook) by Moody’s,
and A+ (negative outlook) by AM Best.
Adverse experience in the operational risks inherent in
Prudential’s business could have a negative impact on its
results of operations.
Operational risks are present in all of Prudential’s businesses,
including the risk of direct or indirect loss resulting from
inadequate or failed internal and external processes, systems
and human error or from external events. Prudential’s business is
dependent on processing a large number of complex transactions
across numerous and diverse products, and is subject to a number
of different legal and regulatory regimes. In addition, Prudential
outsources several operations, including in the UK a significant
part of its back office and customer-facing functions as well as
a number of IT functions. In turn, Prudential is reliant upon the
operational processing performance of its outsourcing partners.
346 Prudential plc > Annual Report 2009
Further, because of the long-term nature of much of Prudential’s
business, accurate records have to be maintained for significant
periods. Prudential’s systems and processes incorporate controls
which are designed to manage and mitigate the operational risks
associated with its activities. For example, any weakness in the
administration systems or actuarial reserving processes could have
an impact on its results of operations during the effective period.
Prudential has not experienced or identified any operational risks
in its systems or processes during 2009, which have subsequently
caused, or are expected to cause, a significant negative impact on
its results of operations.
Notwithstanding anything in this risk factor, this risk factor
should not be taken as implying that Prudential or any member
of the Group will be unable to comply with its obligations as a
company with securities admitted to the Official List or as a
supervised firm regulated by the FSA.
Adverse experience against the assumptions used in
pricing products and reporting business results could
significantly affect Prudential’s results of operations.
Prudential needs to make assumptions about a number of factors
in determining the pricing of its products, and for reporting the
capital levels and the results of its long-term business operations.
For example, the assumption that Prudential makes about future
expected levels of mortality is particularly relevant for its UK
annuity business. In exchange for a premium equal to the capital
value of their accumulated pension fund, pension annuity
policyholders receive a guaranteed payment, usually monthly, for
as long as they are alive. Prudential conducts rigorous research
into longevity risk, using data from its substantial annuitant
portfolio. As part of its pension annuity pricing and reserving
policy, Prudential assumes that current rates of mortality
continuously improve over time at levels based on adjusted data
from the Continuous Mortality Investigations (CMI) as published
by the Institute and Faculty of Actuaries. If mortality improvement
rates significantly exceed the improvement assumed, Prudential’s
results of operations could be adversely affected.
A further example is the assumption that Prudential makes about
future expected levels of the rates of early termination of products
by its customers (persistency). This is particularly relevant to its
lines of business other than its UK annuity business. Prudential’s
persistency assumptions reflect recent past experience for each
relevant line of business. Any expected deterioration in future
persistency is also reflected in the assumption. If actual levels of
future persistency are significantly lower than assumed (that is,
policy termination rates are significantly higher than assumed),
Prudential’s results of operations could be adversely affected.
In common with other industry participants, the profitability of
the Group’s businesses depends on a mix of factors including
mortality and morbidity trends, policy surrender rates, investment
performance and impairments, unit cost of administration and new
business acquisition expense.
As a holding company, Prudential is dependent upon its
subsidiaries to cover operating expenses and dividend
payments.
Prudential’s insurance and investment management operations
are generally conducted through direct and indirect subsidiaries.
As a holding company, Prudential’s principal sources of funds are
remittances from subsidiaries, shareholder-backed funds, the
shareholder transfer from Prudential’s long-term funds and any
amounts that may be raised through the issuance of equity, debt
and commercial paper. Certain of the subsidiaries have regulatory
restrictions that can limit the payment of dividends, which in some
circumstances could limit the Group’s ability to pay dividends to
shareholders.
Prudential operates in a number of markets through
joint ventures and other arrangements with third parties
(including in China and India). These arrangements involve
certain risks that Prudential does not face with respect to its
consolidated subsidiaries.
Prudential operates, and in certain markets is required by local
regulation to operate, through joint ventures (including in China
and India). Prudential’s ability to exercise management control
over its joint venture operations and its investment in them
depends on the terms of the joint venture agreements, in
particular, the allocation of control among, and continued co-
operation between, the joint venture participants. Prudential may
also face financial or other exposure in the event that any of its
joint venture partners fails to meet its obligations under the joint
venture or encounters financial difficulty. In addition, a significant
proportion of the Group’s product distribution is carried out
through arrangements with third-parties not controlled by
Prudential and is dependent upon continuation of these
relationships. A temporary or permanent disruption to these
distribution arrangements could adversely affect Prudential’s
results of operations.
Prudential’s Articles of Association contain an exclusive
jurisdiction provision.
Under Prudential’s Articles of Association, certain legal
proceedings may only be brought in the courts of England and
Wales. This applies to legal proceedings between a shareholder
(in its capacity as such) against Prudential and/or its directors
and/or its professional service providers. It also applies to legal
proceedings between Prudential and its directors and/or
Prudential and Prudential’s professional service providers
that arise in connection with legal proceedings between the
shareholder and such professional service provider. This provision
could make it difficult for US and other non-UK shareholders to
enforce their shareholder rights.
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Additional information > Shareholder information
Analysis of registered shareholder accounts
31 December 2009
Number of
shareholder
accounts
% of total
number of
shareholder
accounts
278
157
507
2,200
3,094
20,077
45,387
71,700
0.39
0.22
0.71
3.07
4.31
28.00
63.30
100
Number of shares
2,164,318,575
110,715,705
119,504,546
57,843,159
21,545,844
44,722,257
13,577,385
2,532,227,471
% of total
number of
shares
85.47
4.37
4.72
2.28
0.85
1.77
0.54
100
Dividend mandates
Shareholders may find it convenient to have their dividends paid
directly to their bank or building society account. If you wish to
take advantage of this facility, please call Equiniti and request a
'Cash Dividend Mandate' form. Alternatively, you may download
a form from www.prudential.co.uk/prudential-plc/investors/
shareholder_services/forms
Scrip dividend alternative
The Company will be offering a scrip dividend alternative in respect
of the final dividend for the year ending 31 December 2009.
Once signed up to the evergreen scrip shareholders will
automatically receive shares for all future scrip dividends;
this election can be cancelled at any time by the shareholder.
Further details of the scrip dividend scheme and the timetable
for each payment are available on the Company website at
www.prudential.co.uk/prudential-plc/investors
Electronic communications
Shareholders are encouraged to elect to receive shareholder
documents electronically by registering with Shareview at
www.shareview.co.uk This will save on printing and distribution
costs, and create environmental benefits. Once you have
registered, you will be sent an email notification whenever
shareholder documents are available on our website and you will
be provided with a link to that information. When registering, you
will need your shareholder reference number which can be found
on your share certificate or proxy form. Please contact Equiniti if
you require any assistance or further information.
Size of shareholding
1,000,001 upwards
500,001 – 1,000,000
500,000
100,001 –
100,000
–
10,001
10,000
–
5,001
5,000
–
1,001
1,000
–
1
Total
Financial calendar
Ex-dividend date
Record date
Annual General Meeting
7 April 2010
9 April 2010
19 May 2010
Payment of 2009 final dividend
27 May 2010
Announcement of 2010 Half Yearly Results
12 August 2010
Ex-dividend date
Record date
18 August 2010
20 August 2010
Payment of 2010 interim dividend
23 September 2010
Shareholder enquiries
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
Tel: 0871 384 2035
Fax: 0871 384 2100
Textel: 0871 384 2255 (for hard of hearing)
Calls to 0871 numbers are charged at 8 pence per minute from
a BT landline. Other telephone providers costs may vary.
International shareholders tel: +44 (0) 121 415 7047
348 Prudential plc > Annual Report 2009
Share dealing services
The Company's Registrars, Equiniti, offer a postal dealing facility
for buying and selling Prudential plc ordinary shares; please see
the Equiniti address above or telephone 0871 384 2248. They also
offer a telephone and internet dealing service, Shareview, which
provides a simple and convenient way of selling Prudential plc
shares. For telephone sales call 0871 384 2020 between 8.30am
and 4.30pm, Monday to Friday, and for internet sales log on to
www.shareview.co.uk/dealing
American Depositary Receipts (ADRs)
The Company's ordinary shares are listed on the New York Stock
Exchange in the form of American Depositary Shares, evidenced
by ADRs and traded under the symbol PUK. Each American
Depositary Share represents two ordinary shares. All enquiries
regarding ADR holder accounts should be directed to JP Morgan,
the authorised depositary bank, at JPMorgan Chase & Co, P O Box
64504, St.Paul, MN 55164-0504, USA, telephone +1 651 453 2128
or log on to www.adr.com
Form 20-F
The Company is subject to the reporting requirements of the
Securities and Exchange Commission (SEC) in the USA as such
requirements apply to foreign companies and files its Form 20-F
with the SEC. Copies of Form 20-F can be found on the Company's
website at www.prudential.co.uk or on the SEC's website at
www.sec.gov
ShareGift
Shareholders who only have a small number of shares whose
value makes it uneconomic to sell them may wish to consider
donating them to ShareGift (Registered Charity 1052686).
The relevant share transfer form may be obtained from
our website www.prudential.co.uk/prudential-plc/investors/
shareholder_services/forms or from Equiniti. Further information
about ShareGift may be obtained on +44 (0)20 7930 3737 or from
www.ShareGift.org. There are no implications for capital gains tax
purposes (no gain or loss) on gifts of shares to charity and it is also
possible to obtain income tax relief.
Irish branch register
The Company operates a branch register for Irish shareholders.
All enquiries regarding Irish branch register accounts should be
directed to Capita Registrars (Ireland), Unit 5, Manor Street
Business Park, Manor Street, Dublin 7.
Telephone: + 353 1 810 2400
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Additional information > How to contact us
Prudential plc
Laurence Pountney Hill
London EC4R 0HH
Tel +44 (0)20 7220 7588
www.prudential.co.uk
Harvey McGrath
Chairman
Tidjane Thiam
Group Chief Executive
Nic Nicandrou
Chief Financial Officer
Margaret Coltman
Group General Counsel & Company Secretary
Thibaut Le Maire
Group Chief Risk Officer
Priscilla Vacassin
Group Human Resources Director
Stephen Whitehead
Group Communications Director
Prudential UK & Europe
3 Sheldon Square
London W2 6PR
Tel +44 (0)20 7334 9000
www.pru.co.uk
Rob Devey
Chief Executive
M&G
Laurence Pountney Hill
London EC4R 0HH
Tel +44 (0)20 7626 4588
www.mandg.co.uk
Michael McLintock
Chief Executive
Prudential Corporation Asia
13th Floor
One International Finance Centre
1 Harbour View Street
Central
Hong Kong
Tel +852 2918 6300
www.prudentialcorporation-asia.com
Barry Stowe
Chief Executive
Jackson National Life Insurance Company
1 Corporate Way
Lansing
Michigan 48951
USA
Tel +1 517 381 5500
www.jackson.com
Clark Manning
President & Chief Executive Officer
Institutional Analyst and Investor Enquiries
Tel +44 (0)20 7548 2007
E-mail: investor.relations@prudential.co.uk
UK Register Private Shareholder Enquiries
Tel 0871 384 2035
International shareholders
Tel +44 (0) 121 415 7047
Irish Branch Register Private Shareholder Enquiries
Tel + 353 1 810 2400
American Depository Receipts Holder Enquiries
Tel + 1 651 453 2128
Media Enquiries
Tel +44 (0)20 7548 3559
E-mail: media.relations@prudential.co.uk
350 Prudential plc > Annual Report 2009
Prudential public limited company
Incorporated and registered in England and Wales
Registered office:
Laurence Pountney Hill
London EC4R 0HH
Registered number 1397169
www.prudential.co.uk
Prudential plc is a holding company, some of whose subsidiaries are
authorised and regulated by the Financial Services Authority (FSA).
Forward-looking statement
This report may contain certain ‘forward-looking statements’ with respect
to certain of Prudential's plans and its current goals and expectations
relating to its future financial condition, performance, results, strategy
and objectives. Statements containing the words ‘believes’, ‘intends’,
‘expects’, ‘plans’, ‘seeks’ and ‘anticipates’, and words of similar meaning,
are forward-looking. By their nature, all forward-looking statements
involve risk and uncertainty because they relate to future events and
circumstances which are beyond Prudential's control including among
other things, UK domestic and global economic and business conditions,
market related risks such as fluctuations in interest rates and exchange
rates, and the performance of financial markets generally; the policies and
actions of regulatory authorities, the impact of competition, inflation, and
deflation; experience in particular with regard to mortality and morbidity
trends, lapse rates and policy renewal rates; the timing, impact and other
uncertainties of future acquisitions or combinations within relevant
industries; and the impact of changes in capital, solvency or accounting
standards, and tax and other legislation and regulations in the jurisdictions
in which Prudential and its affiliates operate. This may for example result in
changes to assumptions used for determining results of operations
or re-estimations of reserves for future policy benefits. As a result,
Prudential's actual future financial condition, performance and results
may differ materially from the plans, goals, and expectations set forth
in Prudential's forward-looking statements. Prudential undertakes no
obligation to update the forward-looking statements contained in this
report or any other forward-looking statements it may make.
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This Annual Report is printed on paper made from50 per cent
recycled post-consumer waste. The paper is Forest Stewardship
Council (FSC) accredited. This Annual Report can be recycled.
Design Further
Print Royle Print
352 Prudential plc > Annual Report 2009
Prudential public limited company
Incorporated and registered in England and Wales
Registered office
Laurence Pountney Hill
London EC4R 0HH
Registered number 1397169
www.prudential.co.uk
Prudential plc is a holding company, some of
whose subsidiaries are authorised and regulated
by the Financial Services Authority (FSA).