PRUDENTIAL PLC
ANNUAL
REPORT 2010
Long-term thinking
HK Stock Code: 2378
Prudential delivered a very strong performance
in 2010, with results significantly ahead of 2009. Our
disciplined approach to capital allocation, proactive
risk management and focus on profitability are
generating both growth and cash for our shareholders.
On the statutory International Financial Reporting
Standards (IFRS) basis, our operating profit before tax
from continuing operations increased by 24 per cent
to £1,941 million. On the European Embedded Value
basis, Group operating profit before tax increased by
20 per cent to £3,696 million.
In view of the progress that the Group has made in
recent years to improve IFRS operating profitability
and free surplus generation, the Board has decided to
rebase the full year dividend upwards by 4 pence per
share, equivalent to an increase of 20 per cent. In line
with this, the directors recommend a final dividend of
17.24 pence per share, which brings the total dividend
for the year to 23.85 pence per share.
We believe our proven strategy, our discipline in putting
value ahead of volume and our focus on execution will
continue to allow us to grow profitably and to generate
significant returns for our shareholders.
The directors’ report of
Prudential plc for the year
ended 31 December 2010 is set
out on pages 1 to 121, pages 353
to 374 and on pages 438 to 442
and includes the sections of
the Annual Report referred
to in these pages.
VIEW OUR REPORT ONLINE
www.prudential.co.uk
OVERVIEW > CONTENTS
1
OVERVIEW
BUSINESS REVIEW
GOVERNANCE
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4
6
8
18
20
26
54
80
87
91
Highlights
Business overview
Chairman’s statement
Group Chief Executive’s report
Financial highlights
Chief Financial Officer’s review
Business unit review
• Insurance operations: Asia, US, UK
• Asset management: M&G, Asia, US
Financial review
Risk and capital management
Other corporate information
Corporate responsibility review
100
104
121
122
Board of directors
Governance report
Additional disclosures
Index to principal Directors’ Report disclosures
DIRECTORS’ REMUNERATION REPORT
124
Directors’ remuneration report
FINANCIAL STATEMENTS AND
EUROPEAN EMBEDDED VALUE (EEV)
BASIS SUPPLEMENTARY INFORMATION
150
152
153
154
155
157
159
160
354
375
376
387
388
389
395
434
435
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
Additional unaudited information
Balance sheet of the parent company
Notes on the parent company financial statements
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
Notes on the EEV basis supplementary 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
ADDITIONAL INFORMATION
438
443
445
Risk factors
Shareholder information
How to contact us
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OVERVIEW > HIGHLIGHTS
HIGHLIGHTS
KEY PERFORMANCE INDICATORS
ANNUAL PREMIUM EQUIVALENT
NEW BUSINESS PREMIUMS1
EUROPEAN EMBEDDED VALUE
OPERATING PROFIT FROM
LONG-TERM BUSINESS2
+23%
£3,485m
+20%
£3,840m
£2,844m
£3,202m
2009
2010
2009
2010
EUROPEAN EMBEDDED VALUE
NEW BUSINESS PROFIT1
+25%
£2,028m
INTERNATIONAL FINANCIAL
REPORTING STANDARDS
OPERATING PROFIT BASED ON
LONGER-TERM INVESTMENT
RETURNS3
+24%
£1,941m
£1,619m
£1,564m
2009
2010
2009
2010
EXTERNAL FUNDS
UNDER MANAGEMENT
+24%
£111.374bn
£89.780bn
2009
2010
1 Excludes Japan, which ceased writing
new business in 2010.
2 Including Solvency II implementation,
restructuring, Asia development and
Asia Regional Head Office costs.
3 The Company has amended the
presentation of IFRS operating profit for
its US insurance operations to remove
the net equity hedge accounting effect
(incorporating related amortisation of
deferred acquisition costs) and include
it in the supplementary analysis of profit
in short-term fluctuations in investment
returns. 2009 amounts have been
amended accordingly.
Prudential plc Annual Report 2010
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BUSINESS UNIT PERFORMANCE HIGHLIGHTS
PRUDENTIAL CORPORATION ASIA
• Regional leader with more market leading positions
in the life insurance and asset management sectors
than anyone else
• Well diversified platform as no one country,
distribution channel or product drives performance
• APE sales up 24 per cent to £1,501 million
• New business profit up 24 per cent to £902 million
• IFRS operating profit up 29 per cent to £536 million
JACKSON
• Record total APE retail sales of £1,164 million – highest level
in Jackson’s history
• Top three provider of variable annuities in US
• 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
PRUDENTIAL UK
• Strength and investment performance of With-Profits
Fund allowed Prudential to deliver strong annualised
returns for policyholders
• Retained ‘Five Star’ rating for excellent service in
the Investment category at the Financial Adviser
Service Awards
• IFRS total operating profits up nine per cent to £719 million
• Retail new business margin increased from 31 per cent to
35 per cent
M&G
• M&G’s retail business was awarded the prestigious 2010
Global Group of the Year award at the 15th annual Investment
Week Fund Manager of the Year Awards. This is the second
time in three years that M&G has received this award
• M&G’s institutional business was also recognised for
its investment performance, winning the 2010 UK Asset
Management Firm of the Year award at Financial News’
Awards for Excellence in Institutional Asset Management
• Record full year profits of £246 million, 8 per cent higher
than previous record achieved in 2008
• External net fund inflows of £9.1 billion
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OVERVIEW > AT A GLANCE
PRUDENTIAL
AT A GLANCE
Prudential plc is an international financial services group with significant
operations in Asia, the US and the UK. We serve over 25 million customers
and have £340 billion of assets under management. The Group is structured
around four main business units: Prudential Corporation Asia, Jackson
National Life Insurance Company, Prudential UK and M&G.
OVERVIEW
PRUDENTIAL CORPORATION ASIA
Prudential is a leading life insurer in Asia operating
in 12 markets. We are in the top three for market
share of new business in Hong Kong, India, Indonesia,
Malaysia, Singapore, the Philippines and Vietnam.
JACKSON
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.
In Asia we provide a comprehensive range of savings,
protection and investment products tailored to meet
customers’ needs in each market.
Prudential’s Asian asset management business manages
investments across a broad range of asset classes for
internal, retail and institutional clients. We are one of the
region’s leaders of Asian sourced assets under management.
We are also the largest onshore mutual fund manager in Asia.
KEY STATISTICS
Jackson is also one of the top three providers of variable
annuities in the US.
Founded 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.
ASIA
www.prudentialcorporation-asia.com
UNITED STATES
www.jackson.com
15m+
customers
320,000+
agents
16,400
employees
2.8m+
customers
3,700
employees
including
affiliates
% OF GROUP OPERATING PROFITS
EEV*
IFRS†
EEV*
IFRS†
38%
25%
38%
35%
Prudential plc Annual Report 2010
LIFE ASSURANCE
% of Group APE new
business premiums1
% of Group new
business profit1
43% Asia
33% US
24% UK
44% Asia
38% US
18% UK
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ASSET MANAGEMENT
% of Group external funds
under management
80% M&G
20% Asia
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www.prudential.co.uk
PRUDENTIAL UK
Prudential UK is a leading life and pensions
provider to approximately 7 million customers
in the United Kingdom.
M&G
M&G is Prudential’s UK and European fund
management business with total assets under
management of £198 billion (at 31 December 2010).
Our expertise in areas such as longevity, risk management
and multi-asset investment, together with our financial
strength and highly respected brand, means that the
business is strongly positioned to continue pursuing a
value-driven strategy built around our core strengths
in with-profits and annuities.
M&G has been investing money for individual and
institutional clients for 80 years. Today it is one of
Europe’s largest active investment managers as well
as being a powerhouse in fixed income.
UNITED KINGDOM
www.pru.co.uk
UNITED KINGDOM & EUROPE
www.mandg.co.uk
7m
customers
2,700
employees
335,000
customers
through M&G
Investments
1,400
employees
EEV*
IFRS†
IFRS†
24%
29%
11%
1 Excludes Japan, which ceased writing new
business in 2010.
* % of Group EEV long-term operating profits.
† % of Group IFRS operating profits, based
on longer-term investment returns before
restructuring costs and other income and
expenditure.
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OVERVIEW > CHAIRMAN’S STATEMENT
CHAIRMAN’S
STATEMENT
HARVEY MCGRATH
CHAIRMAN
FULL YEAR DIVIDEND
+20%
23.85p
19.85p
2009
2010
“ Prudential is uniquely
positioned in the
industry, delivering
both rapid, profitable
growth in emerging
markets and generating
strong cash flows.”
Prudential plc Annual Report 2010
I am delighted to welcome you to Prudential’s 2010 Annual Report. We have
followed our excellent year in 2009 with another very strong performance.
In 2010, our proven strategy of focusing on the most attractive markets and products,
together with the discipline with which the Group manages risk and capital, has again
delivered outstanding results. The Board has therefore recommended a final dividend
of 17.24 pence per share, which brings the total dividend for the reporting period to
23.85 pence per share, 4 pence (20 per cent) higher than the 2009 total dividend.
The scrip dividend scheme is not being offered in respect of this dividend. In its
place shareholders will be offered a Dividend Reinvestment Plan (DRIP).
As a company, our purpose has remained the same since our foundation in 1848.
We meet our customers’ changing needs for savings, income and protection wherever
we do business. Prudential is uniquely positioned in the industry, delivering both
rapid, profitable growth in emerging markets and generating strong cash flows.
Following Board approval, in December we announced new growth and profitability
objectives for our Asia business and new cash remittance objectives for the Group.
These are challenging but achievable given the Group’s strategy and the potential
of our businesses in our chosen markets. These objectives are clear evidence of the
Group’s commitment to provide both growth and cash to shareholders. The Board’s
recommendation for the final dividend is consistent with that commitment.
One of the key events in the first half of the year was our proposed transaction with
AIA. This led to significant focus on Prudential. The decision to pursue this transaction
was in line with our strategy, which is to concentrate our resources on the highest growth
and highest return markets, many of which are in Asia. The Board spent considerable
time reviewing, challenging, questioning and validating the deal, including months
of due diligence. I would like to thank the non-executive directors for their extensive
contribution to the process. As I said at the 2010 AGM, the whole Board strongly
believed this was an opportunity worth pursuing as part of our wider strategy. We
greatly regret that we were not successful in completing the deal, however while it
would have accelerated our growth, the 2010 results show our ability to deliver a
first-class performance without it.
There have been a number of changes to the Board during the year. In October, we
announced the appointment of Howard Davies and Paul Manduca as non-executive
directors. Paul has replaced James Ross as the Board’s Senior Independent Director.
James will retire from the Board at Prudential’s AGM on 19 May 2011. Howard has
become Chairman of the Group Risk Committee. Both have extensive experience
in the financial sector.
We also announced the appointment of Mike Wells as President and Chief Executive
Officer of Jackson National Life Insurance Company and as an executive director on the
Board of Prudential with effect from 1 January 2011. Mike, who has been with Jackson
for 15 years and was Vice Chairman and Chief Operating Officer, succeeds Clark
Manning, who decided to step down after 15 years with Jackson.
In December, John Foley was appointed Group Chief Risk Officer and he became an
executive director on the Board of Prudential with effect from 1 January 2011. John
was previously Chief Executive, Prudential Capital and Group Treasurer. The decision
to make the position of Group Chief Risk Officer a Board role underlines the importance
of risk management to the Group.
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I am very pleased to welcome Mike, John, Howard and Paul to the Board of Prudential
and I look forward to working with them. I would like to thank Clark and James for their
invaluable service and significant contribution over their time on the Board.
I would also like to pay tribute to Mick Newmarch, who died in April 2010. Mick was
instrumental in shaping the Group during his time as Chief Executive from 1990 to
1995. Mick refocused and re-energised our business in Asia, laying down the
groundwork for our outstanding success in the region today.
Our performance should not only be judged by our financial return. Prudential is
committed to being an active and supportive member of the community. We encourage
our businesses to establish projects and partnerships around education (particularly
financial education) and social welfare. Our approach to community investment is to
support charitable organisations and appropriate NGOs, not only through funding, but
also with the experience and expertise of our employees. In 2010, around one in four
employees volunteered in their community, many of them through our Group-wide
flagship volunteering programme, the Chairman’s Challenge. Over the last five years,
since the Chairman’s Challenge was launched, more than 100 annual projects have
been supported by our employees in partnership with charities including Help Age
International, Plan International and Junior Achievement.
Looking at the performance of the Group around the world, our strategy, the quality of
our people and the strength of our brands, I remain confident we will continue to deliver
profitable growth and sustainable value for our shareholders. We have emerged from
the economic turbulence of the past few years as one of the strongest insurers in the
world and I would like to express my thanks to all our employees for their continued
contribution to the Group’s success.
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OVERVIEW > GROUP CHIEF EXECUTIVE’S REPORT
GROUP CHIEF
EXECUTIVE’S REPORT
TIDJANE THIAM
GROUP CHIEF EXECUTIVE
“ At the centre of our strategy
is the acceleration of our
profitable growth in Asia,
which offers many of the
highest growth and return
opportunities.”
“ We have focused on
allocating capital with
total discipline to the
highest return and
shortest payback
opportunities across
the Group.”
Prudential plc Annual Report 2010
I am pleased to report a very strong performance in 2010, with results
significantly ahead of 2009. We achieved this by remaining focused on
rigorous capital allocation and effective management of our balance sheet.
These principles have served us well during the financial crisis allowing us to
emerge from the 2008-2009 period with a stronger balance sheet, higher profits,
higher cash flows and an increased dividend. Our 2010 results confirm that our
strategy, underpinned by our operating principles, should increasingly allow us to
differentiate ourselves through our ability to combine growth and cash generation,
as we announced at our Investor Day on 1 December 2010.
Our strategy
At the centre of our strategy is the acceleration of our profitable growth in Asia, which
offers many of the highest growth and return opportunities. The emerging markets of
South-East Asia – such as Indonesia, Malaysia, Vietnam, the Philippines and Thailand,
together with Hong Kong and Singapore – are particularly attractive. They remain the
priority destination for our new capital investment. With our compelling platform of
distribution, brand and product development capabilities in the high growth markets
of Asia, we believe we are particularly well positioned to take advantage of the
considerable opportunity that the region offers.
In the US, we continue to build on the strength of our operations to make them a more
significant component of the Group in terms of IFRS earnings as well as cash generation.
In the UK, we remain focused on generating cash and capital and providing resilience
to the Group’s balance sheet.
In asset management, our strong track record, both at M&G and in our asset management
business in Asia, is enabling us to grow our funds under management. These businesses
make an increasingly important contribution to our profits and cash generation.
Each part of the Group plays a key role in our strategy. Our flexibility and diversification
were instrumental in allowing us to navigate successfully the economic and market
cycle in 2008 and 2009.
In executing this strategy, we are guided by three clearly defined Group-wide operating
principles. The first of these is that from 2008, we decided to take a more balanced
approach to performance management across the three key measures of Embedded
Value (EEV), IFRS and cash, with an increased emphasis on IFRS and cash. When this
operating principle was introduced, it was a clear break with how our industry, and our
company, had operated previously. As a consequence of this new focus, we have been
able in 2010, for the third year in a row, to report results that are in fast progression
across all three key measures – EEV, IFRS and cash.
Second, we have focused on allocating capital with total discipline to the highest return
and shortest payback opportunities across the Group. This means that we restrict new
business to areas of the market where these stringent criteria are met. As a result, we
have not hesitated to take and implement a number of challenging decisions.
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OVERVIEW > GROUP CHIEF EXECUTIVE’S REPORT > CONTINUED
GROUP CHIEF
EXECUTIVE’S REPORT
“ We have significantly more
capital today than before the
financial crisis.”
IFRS OPERATING PROFIT
BEFORE TAX
+24%
£1,941m
£1,564m
2009
2010
TOTAL EEV OPERATING
PROFIT BEFORE TAX
+20%
£3,696m
£3,090m
2009
2010
Even in our preferred region of Asia, we acted decisively when necessary for the Group,
as illustrated by our decision to sell our back book of business in Taiwan, to curtail
writing new life business in Japan, or exchange short-term sales volume in Korea for
long-term shareholder value. In the UK, we have closed down the equity release
business and significantly increased our minimum return criteria for bulk purchase
annuities. In the US, we have managed our sales of annuities, fixed and variable, with a
clear focus on returns and payback periods, not hesitating to lose market share when
necessary and putting value ahead of volume.
Finally, our third operating principle – of equal importance – is to take a proactive
approach to managing risk across the cycle. We have transformed the capital position
of the Group during the last three years, closing 2010 with more than £4 billion of
Insurance Groups Directive (IGD) capital surplus against £1.5 billion at the end of 2008.
We have significantly more capital today than before the financial crisis, and we have put
in place a set of processes to hedge and manage the key risks to which we are exposed.
Our strategy and the disciplined implementation of our operating principles have
produced excellent results.
Group performance
In 2010, APE sales1 were up 23 per cent in life insurance to £3,485 million (2009:
£2,844 million) and new business profit1 has increased by 25 per cent to £2,028 million
(2009: £1,619 million) as our new business margins increased to 58 per cent
(2009: 57 per cent).
Net inflows in our asset management businesses were £8.9 billion, following an
exceptional year in 2009 (2009: £15.4 billion). These continued strong inflows underpin
the robust performance of our asset management operations during the year and are a
direct driver of the growth in our profits.
On the statutory IFRS basis, our operating profit before tax from continuing operations
increased by 24 per cent in 2010 to £1,941 million (2009: £1,564 million). IFRS profit for
the year after tax increased by 112 per cent to £1,431 million (2009: £676 million). IFRS
shareholder funds increased 28 per cent in 2010 to £8.0 billion (2009: £6.3 billion).
On the EEV basis, Group operating profit before tax increased by 20 per cent in
2010 to £3,696 million (2009: £3,090 million). New business profit1 for the year was
£2,028 million, an increase of 25 per cent (2009: £1,619 million), and we continued to
deliver very strong margins of 58 per cent (2009: 57 per cent). Our total investment
in new business1 in 2010 was £643 million (2009: £660 million), a reduction of 3 per
cent. As a result of our focus on rigorous capital allocation, we are delivering higher
returns on capital invested for our shareholders, while managing to use less capital
in absolute terms.
Since 2008, we have been using free surplus as the primary indicator of our ability to
generate cash and capital. In 2010, free surplus increased 32 per cent to £3.3 billion,
up from £2.5 billion at the end of 2009 and £0.9 billion at the end of 2008.
As these results show, we achieved strong growth on our three key metrics of EEV, IFRS
and cash simultaneously. From 2009 to 2010, both our IFRS and EEV operating profits
have grown by 20 per cent or more, while consuming less capital in absolute terms.
Our ability to generate significant growth while providing increasing cash returns to
our shareholders – ‘growth and cash’ – is the result of our differentiated strategy.
This strategy and the quality of our teams, both in our business units and our head
office, allows us to provide value to our customers and shareholders. Each of our
businesses is a clear leader in its market.
Prudential plc Annual Report 2010
Note
1 Excluding Japan, which ceased writing new business in 2010.
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FREE SURPLUS
+32%
£3.3bn
£2.5bn
2009
2010
“ In the US, we have
maintained our focus on
value over sales volume
growth, ensuring sales
are delivered at highly
profitable margin levels.”
A year ago, we announced an agreement with AIG to acquire its Asia operations, AIA.
The proposed acquisition was a unique opportunity to accelerate our strategy of focusing
on the fast growing markets in Asia. We could not agree a purchase price that was
acceptable to the AIG Board. The costs associated with the transaction were announced
at our half year results and are detailed in the full year results statement.
Our operating performance by business unit
Our aim across all our businesses is to develop and market a suite of products that
deliver good value solutions that meet our customers’ needs, in a way that is profitable
and capital efficient for the Group.
Prudential Corporation Asia
In 2010, in line with our strategy, our core investment was in the fast growing and
highly profitable markets of South-East Asia and Hong Kong and Singapore. Due to the
long-term structural changes taking place in these economies, we continue to believe
they offer the most attractive opportunity in the global life insurance market today.
Distribution remains critical to our business in Asia, and our unique combination of
proprietary agency distribution and bank partnerships continues to deliver excellent
results. Agency will remain the dominant and most profitable channel in Asia for
many years to come. It is clear that Prudential’s agency distribution platform compares
favourably to our peer group, whether in terms of scale, training or productivity.
In addition, we will continue developing our presence in the bancassurance channel.
The performance of our new partnership with UOB reinforces our view that the
bancassurance channel will be increasingly important as Asian middle classes become
wealthier and increasingly use banks and their services. This, together with our strategy
of growing health and protection business, has been central to increasing our
profitability and margins.
Our financial performance in Asia will continue to be based on three principal drivers.
First, as a result of our strong new business growth, and its contribution to the increase
in our in-force policies book, net inflows will be a major contributor to our IFRS
earnings. Second, there will continue to be a contribution from investment returns,
which will increase as the business grows. Third, as the scale of the business increases,
our profitability will continue to benefit from the efficiency of our Asian platform, with
revenues growing faster than our cost base. These three drivers support our
confidence in our ability to double our 2009 IFRS profits by 2013.
Jackson
In the US, we have maintained our focus on value over sales volume growth, ensuring
sales are delivered at highly profitable margin levels. We have maintained our pricing
discipline and have been consistent in our approach of not chasing market share for
its own sake. In 2010 we continued to benefit from the market changes following the
financial turmoil in 2008 and 2009. As part of a trend, mostly driven by distributors who
guide their customers towards the companies that held firm through the crisis and never
closed to business, Jackson has significantly improved its position in the key variable
annuity market. This flight to quality has allowed the Jackson team to increase sales
volumes and market share. Our consistent pricing approach, product flexibility and
Jackson’s strong credit rating, which has remained unchanged for eight years, have
served us well.
We have continued to grow the number of advisers appointed to sell our products,
increasing licensed agents and registered representatives in 2010 to more than 130,000.
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OVERVIEW > GROUP CHIEF EXECUTIVE’S REPORT > CONTINUED
GROUP CHIEF
EXECUTIVE’S REPORT
Prudential UK
Our business in the UK is highly disciplined and generates differentiated returns
relative to the market. We continued to be a market leader in both individual annuities
and with-profits business. We maintained our focus on balancing the writing of new
business with the generation of cash and capital, successfully delivering attractive
returns on capital employed. This strategy led the UK to deliver net cash of £420 million
to the Group in 2010.
Our emphasis on value and generating strong returns saw the UK business continue
to prioritise the retail market, while selectively participating in the wholesale market.
Wholesale market opportunities have only been pursued when they meet our strict
financial criteria and deliver an appropriate return on the capital invested both in terms
of quantum but also, and equally important, of payback period. In 2010 we also
continued to make good progress against our cost reduction plans, meeting our 2010
savings target of £195 million per annum six months early.
Asset management
M&G had a very good 2010, a performance which is all the more impressive as it
comes after an exceptional year in 2009. M&G continues to focus on offering customers
superior investment performance over the longer term, building on its proven track
record of success in the retail investment market through ongoing expansion in Europe.
M&G’s retail business achieved net inflows of £7.4 billion. M&G’s IFRS operating profit
was £284 million, up 19 per cent compared to 2009.
In Asia, our asset management business also had a very successful year, with operating
profits of £72 million, 31 per cent ahead of 2009. It is a key feature of our strategy that
asset management profits are very capital efficient and are ‘cash rich’ profits. For the
first time, funds under management passed the £50 billion mark, up from £42.4 billion
in 2009, a trend that should also lead to continued profit growth.
These achievements underline the potential we see for asset management across Asia.
We continue to believe that this is one of the most exciting opportunities for the Group
today. In 2010, we appointed a new Chief Executive, and we are determined to
continue to invest to capture a significant share of the growth and profits available in
asset management in Asia. The priorities for our asset management business in Asia
are: to build and develop institutional relationships, securing pan-Asia discretionary
mandates; to increase our focus on Japan and China, as the region’s largest and fastest
growing markets respectively; and, finally, to grow our offshore funds business.
Capital and risk management
A strong capital position is key to our development. It gives confidence to our
customers in what is a long-term business, and it allows us to write large amounts
of new business. Strict management and allocation of capital remain a core focus
for our Group. Using the regulatory measure of the IGD, our Group capital surplus
at 31 December 2010 was estimated at £4.3 billion (31 December 2009: £3.4 billion).
The Group’s required capital is covered 3.0 times. This ratio means we continue to
be one of the world’s best-capitalised insurers.
We have strengthened our risk management practices by forming a Group Risk
Committee headed by Howard Davies reporting directly to the Board. We also
appointed a new Chief Risk Officer (CRO), John Foley, and have elevated the CRO
position to board level.
“ In the UK, we maintained
our focus on balancing the
writing of new business
with the generation of cash
and capital.”
Prudential plc Annual Report 2010
“ M&G continues to focus
on offering customers
superior investment
performance over the
longer term, building on
its proven track record.”
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Dividend
In view of the progress that the Group has made in recent years to improve IFRS
operating profitability and free surplus generation, the Board has decided to rebase
the full year dividend upwards by 4 pence per share, equivalent to an increase of
20 per cent. In line with this, the directors recommend a final dividend of 17.24 pence
per share, which brings the total dividend for the year to 23.85 pence per share
(2009: 19.85 pence per share).
The scrip dividend scheme is not being offered in respect of this dividend. In its place
shareholders will be offered a Dividend Reinvestment Plan (DRIP).
The Board will maintain its focus on delivering a growing dividend from this new
higher base, which will continue to be determined after taking into account the 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.
Our financial objectives1
In December 2010, we announced new objectives for the Group that reflect our
determination to accelerate growth in Asia and our belief that we can continue to
deliver both growth and cash sustainably to our shareholders.
Our core objectives are:
(i)
In Asia, to double the 2009 value of IFRS life and asset management pre-tax
operating profit in 2013 (2009: £465 million) and to double the 2009 value of new
business profits in 2013 (2009: £713 million).
(ii) For each business unit to remit net cash to the Group: Asia to deliver £300 million of
net cash remittance to the Group in 2013 (2009: £40 million); Jackson to deliver £200
million of net cash remittance to the Group in 2013 (2009: £39 million); UK to deliver
£350 million of net cash remittance to the Group in 2013 (2009: £2842 million).
(iii) All business units in aggregate to deliver cumulative net cash remittances of at
least £3.8 billion over the period 2010 to end-2013. These net remittances are to be
underpinned by a targeted level of cumulative underlying free surplus generation
of £6.5 billion over the same period.
These objectives are clear evidence of our determination to provide – through our
strategy and disciplined execution – both growth and cash to our shareholders at
a sustained pace.
Notes
1 The following discussion and the discussion under ‘Outlook’ below, contain forward-
looking statements that involve inherent risks and uncertainties. Prudential’s actual
future financial condition or performance or other indicated results may differ
materially from those indicated in any such forward-looking statement due to a
number of important factors (including those discussed under the heading ‘Risk
factors’ in this report). See the discussion under the heading ‘Forward-looking
statements’ at the end of this report. The objectives assume current exchange rates
and a normalised economic environment consistent with the economic assumptions
made by Prudential in calculating the EEV basis supplementary information for
the half year ended 30 June 2010. They have been prepared using current solvency
rules and do not pre-judge the outcome of Solvency II, which remains uncertain.
2 Representing the underlying remittances excluding the £150 million impact of
pro-active financing techniques used to bring forward cash emergence of the in-force
book during the financial crisis.
14
OVERVIEW > GROUP CHIEF EXECUTIVE’S REPORT > CONTINUED
GROUP CHIEF
EXECUTIVE’S REPORT
Outlook
By continuing to implement our strategy with discipline, allocating capital to the most
attractive markets and products, and managing risk and capital prudently, but proactively,
we have generated differentiated performance from our peers.
The outlook for economic growth in Asia, particularly in our preferred markets in
South-East Asia, remains positive. The prospects for sustainably growing our leading
platform in the region continue to be strong. Our confidence is reflected in the ambitious,
yet achievable, objectives we have set for our business in Asia in December 2010.
Regarding Western economies, we continue to be more cautious about the outlook, with
some clear differences between the US and Europe. The US economy is recovering, and
the combination of the transition of 78 million ‘baby boomers’ into retirement, and our
skill base and products, creates a unique and exciting opportunity for us. The economic
outlook in Europe is more challenging. However, having focused our UK business, and
relying largely on our existing seven million customers, we believe that we will continue
to achieve our objectives in terms of margins and capital and cash generation.
Strategy and operating principles
D M ET RIC S
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ACCELERATING
ASIA
STRENGTHENING
UNITED
STATES
STRATEGIC
FRAMEWORK
OPTIMISING
ASSET
MANAGEMENT
FOCUSING
UNITED
KINGDOM
PROACTIVE RISK M A N A G E M E N T
Prudential plc Annual Report 2010
15
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Our disciplined process of capital allocation will, I believe, enable us to continue to
deliver improved cash returns to shareholders. Our diversification, combined with
our flexibility to choose where to allocate our capital, have proved to be significant
sources of competitive advantage. We successfully navigated the extreme economic
and market cycle of the past two years and are confident we will continue to
outperform in the markets where we compete in the future.
I believe that the quality of our strategic options, our discipline in putting value ahead
of volume and our focus on execution will continue to allow us to grow profitably and
to generate significant returns for our shareholders.
GROUP
2011 PRIORITIES
2013 FINANCIAL OBJECTIVES
• Continue to implement strategy with discipline,
allocating capital to the most attractive markets
and products
• Manage risk and capital prudently, but proactively
• Focus on delivering a progressive dividend,
determined after taking into account the Group’s
financial flexibility and opportunities to invest
in areas of business offering attractive returns
• All business units in aggregate to deliver
cumulative net cash remittances of at least
£3.8 billion over the period 2010 to end-2013
• Net remittances underpinned by targeted
level of cumulative underlying free surplus
generation of £6.5 billion over the period 2010
to end-2013
ASIA
• Continue expanding multi-channel distribution
platform and improving its productivity
• Focus on regular premium products with
comprehensive suite of protection riders
• Drive value through operational efficiency
• Double 2009 value of IFRS life and asset
management pre-tax operating profit
• Double 2009 value of new business profits
• Deliver £300 million of net cash remittance
to the Group
UNITED
STATES
• Continue to drive positive net retail flows
• Innovate around our key variable annuity
• Deliver £200 million of net cash remittance
to the Group
product
• Further enhance operational efficiency
UNITED
KINGDOM
• Balance writing profitable new business at
• Deliver £350 million of net cash remittance
to the Group
attractive returns on capital with sustainable
cash generation and capital preservation
• Continue to pursue a value-driven strategy
built around our core strengths in with-profits
and annuities
• Deliver further improvements to operational
performance and customer service while
maintaining a strict focus on costs
• Continue building complementary
distribution channels
M&G
• Maintain superior long-term investment performance for both internal and external funds
• Continue growth in third-party retail and institutional businesses
16
Prudential plc Annual Report 2010
BUSINESS
REVIEW
18
20
26
54
80
87
91
Financial highlights
Chief Financial Officer’s review
Business unit review
• Insurance operations: Asia, US, UK
• Asset management: M&G, Asia, US
Financial review
Risk and capital management
Other corporate information
Corporate responsibility review
17
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BUSINESS REVIEW > FINANCIAL HIGHLIGHTS
FINANCIAL
HIGHLIGHTS
LIFE NEW BUSINESS: DELIVERING GROWTH IN VALUE AND VOLUME –
BALANCING CAPITAL CONSUMPTION AND VALUE OPTIMISATION £m
Life APE new business sales
New business profit
+23%
2,844
723
912
1,209
3,485
820
1,164
1,501
+25%
2,028
365
761
902
1,619
230
664
725
2009
2010
2009
2010
Asia1
US
UK
Group
2010
2009
2010
2009
2010
2009
2010
2009
New business profit
margin
Payback period2
Internal rate of return
60%
60%
57%
3 years 3 years 1 year 2 years 4 years 5 years 2 years 3 years
>20% >20% >20% >20% >20% >15% >20% >20%
73%
32%
45%
58%
65%
Free surplus investment
in new business
Asia1
US
UK
2009
(103)
(326)
(231)
(660)
+3%
2010
(65)
(300)
(278)
(643)
SHAREHOLDER-BACKED POLICYHOLDER LIABILITIES £m
Asia
US
UK
Other movements
92,189
33,853
45,361
12,975
At 1 Jan
2009
2,055
5,189
(73)
701
100,061
38,700
1,298
7,368
1,029
12,427
Net liability flows3
48,311
Net liability flows3
13,050
At 1 Jan
2010
122,183
43,944
60,523
17,716
At 31 Dec
2010
ASSET MANAGEMENT NET INFLOWS AND PROFITABILITY £m
IFRS operating profit
External funds under
management
Total asset management
Net inflows
M&G net inflows
M&G
Other asset management business
Total asset management
+27%
378
284
297
238
+24%
111,374
89,780
70,306
89,326
15,417
–42%
8,890
13,478
–32%
9,105
2009
2010
2009
2010
2009
2010
2009
2010
Prudential plc Annual Report 2010
19
IFRS OPERATING
PROFIT 4
EEV OPERATING
PROFIT
BASIC EARNINGS PER SHARE – BASED ON OPERATING PROFIT
AFTER TAX AND NON-CONTROLLING INTERESTS 5
IFRS
EEV
+24%
+20%
£1,941m
£3,696m
£1,564m
£3,090m
+20%
+31%
88.8p
47.5p
2009
2010
2009
2010
2009
106.9p
62.0p
2010
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BALANCE SHEET, CASH AND CAPITAL
Underlying free surplus
generated 6
IGD Capital before final
dividend 7
Dividend per share relating to the
reporting year
+21%
£1,714m
£1,414m
+26%
£4.3bn
£3.4bn
+20%
23.85p
19.85p
2009
2010
2009
2010
2009
2010
GROUP SHAREHOLDERS’ FUNDS
(INCLUDING GOODWILL ATTRIBUTABLE TO SHAREHOLDERS)
EEV SHAREHOLDERS’ FUNDS PER SHARE
EEV shareholders’ funds
IFRS shareholders’ funds
Excluding goodwill
Including goodwill
Return on shareholders’ funds8
£18.2bn
£8.0bn
£15.3bn
£6.3bn
2009
15%
2010
18%
2009
23%
2010
25%
603p
551p
2009
+19%
+19%
715p
658p
2010
Notes
1 Asia new business amounts exclude Japan, which ceased writing new
business in 2010.
it in the supplementary analysis of profit in short-term fluctuations in investment
returns. 2009 amounts have been amended accordingly.
2 Payback: Expected period over which future undiscounted free surplus
5 2010 excludes an exceptional tax credit of £158 million which primarily relates
generation from shareholder-backed business recoups initial new business
investment.
to the impact of a settlement agreed with the UK tax authorities.
6 Underlying free surplus comprises underlying free surplus generated from
3 Net liability flows defined as movements in shareholder-backed policyholder
in-force business less investment in new business.
liabilities arising from premiums, surrenders, maturities and deaths.
4 The Company has amended the presentation of IFRS operating profit for
7 For 2010, IGD amounts are estimated.
8 Operating profit after tax and non-controlling interests (but excluding
its US insurance operations to remove the net equity hedge accounting effect
(incorporating related amortisation of deferred acquisition costs) and include
in 2010 exceptional tax credit of £158 million) as percentage of opening
shareholders’ funds.
20
BUSINESS REVIEW > CHIEF FINANCIAL OFFICER’S OVERVIEW
CHIEF FINANCIAL OFFICER’S
OVERVIEW
NIC NICANDROU
CHIEF FINANCIAL OFFICER
APE SALES
+23%
£3,485m
£2,844m
2009
2010
£2,028m
New business profit
58%
New business margin
2010 was a good year for Prudential as we delivered strong performance
in our key growth metrics. EEV new business profit (‘new business profit’)
was up 25 per cent to £2,028 million (2009: £1,619 million) and IFRS
operating profit based on longer-term investment returns (‘IFRS operating
profit’) increased 24 per cent to £1,941 million (2009: £1,564 million).
On our capital metric of net underlying free surplus generation we improved 21 per
cent to £1,714 million (2009: £1,414 million). Prudential’s ability to deliver on all of these
metrics is testament to the quality of our businesses and marks us out among our peers.
Our ongoing focus on driving value over volume coupled with our advantaged product
and geographic business footprint and the financial discipline that is ingrained within all
of our businesses has resulted in the Group delivering excellent performance in the
year and gives us confidence as we look into 2011 and beyond.
Growth
In life insurance, APE sales1 in 2010 were up 23 per cent to £3,485 million (2009: £2,844
million) and new business profit has increased by 25 per cent to £2,028 million (2009:
£1,619 million) as our new business margins1 increased to 58 per cent (2009: 57 per cent).
Asia produced APE sales1 of £1,501 million (2009: £1,209 million) and new business
profit1 of £902 million (2009: £725 million) in 2010, both figures up 24 per cent on the
prior year. AER sales performance across Asia was strong, particularly in Indonesia
(up 49 per cent), Malaysia (up 40 per cent), Hong Kong (up 19 per cent) and Singapore
(up 37 per cent) where we have a powerful market presence. Our agency and
bancassurance channels both continue to flourish, each growing at a rate in excess
of 25 per cent, and our health and protection rider strategy remains highly successful,
with health and protection products representing 27 per cent of new business
premiums in 2010.
Jackson delivered APE sales of £1,164 million (2009: £912 million) and £761 million of
new business profit (2009: £664 million), up 28 per cent and 15 per cent respectively
on the prior year. The decline in our new business margin in the US from 73 per cent
in 2009 to 65 per cent in 2010 was expected. Nevertheless, Jackson successfully
defended most of the exceptional margin gains achieved in 2009 in taking advantage
of the extreme dislocation prevalent in the corporate bond market. Jackson has
capitalised on the weakened competitive environment in the US life insurance market
and has emerged as one of the top three players in the variable annuity market in terms
of sales and number two in terms of net flows. However, our expansion in variable
annuities has been opportunistic and this market share may not be sustained as
competition re-emerges over the medium term.
In the UK, we delivered total retail and bulk annuity APE sales of £820 million
(2009: £723 million) and new business profit of £365 million (2009: £230 million),
up 13 per cent and 59 per cent respectively. At a retail level, new business profit of
£257 million was up 15 per cent from £223 million in 2009 at an expanded margin
of 35 per cent versus 31 per cent in the prior year. This reflects improved margins on
with-profits bond sales where we have seen volumes 11 per cent higher on improved
demand and the strong annuity margins experienced in 2009 continuing into 2010.
Prudential plc Annual Report 2010
Note
1 Excluding Japan which ceased writing new business in 2010.
“ In terms of profitability,
we have successfully built
on the momentum seen last
year and delivered another
strong performance thanks
to a continued focus on
our core disciplines of
value creation and capital
conservation.”
21
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In asset management, we have delivered £8.9 billion of net inflows over 2010 compared
with £15.4 billion in 2009, a year which benefited from exceptionally high flows into
M&G’s fixed income funds due to the credit spread environment at the time. M&G is the
driver of our inflows in asset management, producing £9.1 billion (2009: £13.5 billion)
of net inflows in the period (£7.4 billion retail, £1.7 billion institutional). M&G’s track
record in attracting positive net inflows is highly impressive, ranking number 1 in the
UK retail market for the last nine consecutive quarters, making it one of the leading
asset managers in Europe. At the end of 2010 it had external funds under management
of £89.3 billion, an increase of £19.0 billion from the position at the beginning of the
year; adding these funds to internal amounts, M&G’s total funds under management
were £198.3 billion. Asia asset management continues to make great strides forward
attracting £1.8 billion of retail and institutional inflows in 2010 (2009: £556 million).
These were offset by £2.1 billion of outflows (2009: £1.4 billion inflows) in low margin
money market funds where sales and redemptions tend to be highly volatile.
It is encouraging to note that we continue to grow our balance sheet with shareholder-
backed policyholder liabilities up by 22 per cent to £122 billion, benefiting from both
net inflows and investment market movements. We continue to see positive net inflows
into our life businesses, with a net £9.7 billion being received in 2010, an increase from
the net £7.2 billion received in 2009. In asset management our Group net inflows as a
percentage of opening external funds under management stands at 9.9 per cent for
2010. Both measures emphasise the significant organic growth we are delivering across
the Group. In addition, the returns we expect to generate on the capital we invest in
writing life new business have also reached a new high. For every £1 we invested in new
business strain in 2010 we expect to generate £2.2 of post-tax new business profit and
our initial capital investment is expected to be paid back within two years.
Profitability
In terms of profitability, we have successfully built on the momentum seen last year and
delivered another strong performance thanks to a continued focus on our core disciplines
of value creation and capital conservation. We have delivered record profitability in
2010 with Group IFRS operating profit up 24 per cent to £1,941 million (2009: £1,564
million) and Group EEV operating profit based on longer-term investment returns (‘EEV
operating profit’) up 20 per cent to £3,696 million (2009: £3,090 million) equivalent to
an annual return on embedded value of 18 per cent (2009: 15 per cent).
Central to this achievement is the active management of our portfolio of products
and businesses, which in 2010 saw us cease writing new business in our Japanese
life operations, exit from the equity release market in the UK, reduce our appetite
for sales of fixed annuities in the US and target, instead, the highly profitable markets
in South-East Asia (including Hong Kong) and variable annuities in the US. We have
also remained opportunistic in the UK bulk annuity market and entered into
one large transaction which comfortably exceeded our high return and short
payback requirements.
In Asia, long-term business IFRS operating profit was up 29 per cent to £536 million in
2010 (2009: £416 million), a strong performance in and of itself, even before factoring
in the £63 million one-off credit to the 2009 result from a change in reserving basis in
Malaysia. The result benefited notably from strong performance in Indonesia, Malaysia,
Singapore and Vietnam. In addition, management actions to close Japan to new
business and refocus our operations in Korea and Taiwan have also helped to eliminate
some of the negatives that were holding back our profitability. The ongoing build-out
of distribution across South-East Asia, the success of our health and protection rider
strategy, and the underlying strength of the economies in which we operate should
drive continuing strong growth in Asia IFRS operating profit going forward. Asia’s
long-term EEV operating profit, a measure of the economic value creation in the year,
grew by 31 per cent in 2010 to £1,450 million (2009: £1,105 million) further underlining
the creation of sustainable value by these operations.
22
BUSINESS REVIEW > CHIEF FINANCIAL OFFICER’S OVERVIEW > CONTINUED
CHIEF FINANCIAL OFFICER’S
OVERVIEW
In the US, long-term business IFRS operating profit was up 35 per cent from
£618 million in 2009 to £833 million in 2010. Jackson’s impressive growth in the variable
annuity market is a key driver behind its improved profitability. The ‘fees on assets’ that
Jackson earns on separate account assets are the highest across the Group’s unit-linked
businesses, and these revenues have increased significantly as these assets have grown
by over 51 per cent during 2010 to £31 billion at the end of the year. The majority of this
asset growth has come from £5.8 billion of net inflows in the period (2009: £3.6 billion).
Jackson’s general account has also contributed to the growth in IFRS profits during the
period. The size of the general account was up slightly during 2010, and closed the year
with policyholder liabilities of £29 billion but the average spread margin that we earn
on these liabilities increased from 179 bps in 2009 to 243 bps in 2010. This included a
£108 million benefit from various transactions undertaken during 2010 to more closely
match the overall asset and liability duration, as well as management actions to lower
crediting rates on fixed annuities. These actions also had the effect of improving the
2010 EEV operating profits by 18 per cent to £1,458 million (2009: £1,233 million).
In the UK long-term business IFRS operating profit was up by 11 per cent from
£606 million in 2009 to £673 million in 2010. Our UK business continues to optimise
the balance between growth and cash generation. The improvement in IFRS operating
profit reflects the benefit of cost saving initiatives, higher with-profits income and
increased annuity profits arising principally from a bulk annuity contract which
contributed £63 million to the total. At eight per cent, growth in EEV operating earnings
to £936 million (2009: £870 million) was in line with our strategy.
In asset management IFRS operating profit was up 27 per cent to £378 million compared to
£297 million in 2009. M&G had a strong year benefiting from rising markets and the strong
inflows described above, resulting in IFRS operating profit up 19 per cent to £284 million
in 2010 (2009: £238 million). Asia asset management produced IFRS operating profit
of £72 million up 31 per cent on the prior year (2009: £55 million), also benefiting from
rising markets and an element of improving mix as £1.8 billion of high margin retail and
institutional net inflows offset £2.1 billion of low margin money market net outflows.
Capital generation
Our strategy of efficiently deploying our capital to those products and geographies
with the most attractive profitability characteristics has, over the past three years,
transformed the capital position of our business. Across the Group, we are now
producing very significant amounts of free capital, which we measure as free surplus
generated. Our first priority for the use of this capital is reinvestment in new business
as we can achieve attractive internal rates of return (IRRs) and rapid paybacks on this
investment. However, such is the scale and efficiency of our businesses, we are now
producing significant amounts of free surplus over and above that which we can
reinvest in new business. This excess free surplus generation is being used to continue
to strengthen our balance sheet and to increase cash returns to our shareholders.
In 2010, we generated £2,359 million of underlying free surplus from our in-force
business, up 13 per cent from £2,089 million in 2009, and we reinvested £645 million of
this into writing new business. Asia is the priority destination when it comes to reinvesting
our capital and Prudential Corporation Asia (PCA)’s growth is not constrained by the
supply of capital from the Group. In the US, we invest in an opportunistic manner
reflecting the market and competitive environment at the time. In the UK, we take a
selective approach and focus only on lines of business where we believe we have both
the scale and expertise to compete successfully. In asset management, our businesses
require minimal capital to fund growth. Thus, the split of the investment in new business
in 2010 was £280 million into Asia, £300 million into the US and £65 million into the UK.
The IRRs on this invested capital were more than 20 per cent in Asia, the US and the
UK; with payback periods of three years, one year and four years respectively.
“ Our strategy of efficiently
deploying our capital
to those products and
geographies with the most
attractive profitability
characteristics has, over
the past three years,
transformed the capital
position of our business.”
Prudential plc Annual Report 2010
23
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Of the remaining free surplus generated after reinvestment in new business,
£935 million was remitted from the business units to Group. This cash was used
to meet central costs (including those associated with Solvency II implementation)
of £180 million, service net interest payments of £231 million and meet dividend
payments (net of scrip) of £449 million. In 2010, we also incurred significant exceptional
cash outflows relating to the AIA transaction costs of £377 million (pre-tax) and we
utilised our central resources to fund the acquisition of UOB Life of £276 million. Our
central cash resources amounted to £1,232 million at the end of the year, comfortably
above the £1 billion holding company cash buffer we seek to retain.
The remaining free surplus generated in the period was retained within our businesses
and this will bolster local capital ratios. The total free surplus balance deployed across
our life and asset management operations increased from £2,531 million at the
beginning of the period to £3,338 million at the end of the period.
New financial objectives – ‘Growth and Cash’
The following discussion contains forward-looking statements that involve inherent
risks and uncertainties. Prudential’s actual future financial condition or performance or
other indicated results may differ materially from those indicated in any such forward-
looking statement due to a number of important factors (including those discussed
under the heading ‘Risk factors’ in this report). See the discussion under the heading
‘Forward-looking statement’ at the end of this report.
At our 2010 investor conference entitled ‘Growth and Cash’ we announced new
financial objectives demonstrating our confidence in continued rapid growth in Asia,
and increasing levels of cash remittances from all of our businesses. These objectives
were defined as follows:
(i) Asia growth and profitability objectives1:
• To double the 2009 value of IFRS life and asset management pre-tax operating
profit in 2013 (2009: £465 million); and
• To double the 2009 value of new business profits in 2013 (2009: £713 million).
(ii) Business unit cash remittance objectives1:
• Asia to deliver £300 million of net cash remittance to the Group in 2013
(2009: £40 million);
• Jackson to deliver £200 million of net cash remittance to the Group in 2013
(2009: £39 million); and
• UK to deliver £350 million of net cash remittance to the Group in 2013
(2009: £284 million2).
(iii) Cumulative net cash remittances1:
• All business units in aggregate to deliver cumulative net cash remittances of at
least £3.8 billion over the period 2010 to end-2013. These net remittances are
to be underpinned by a targeted level of cumulative underlying free surplus
generation of £6.5 billion over the same period.
Notes
1 The objectives assume current exchange rates and a normalised economic
environment consistent with the economic assumptions made by Prudential
in calculating the EEV basis supplementary information for the half-year ended
30 June 2010. They have been prepared using current solvency rules and do not
pre-judge the outcome of Solvency II, which remains uncertain.
2 Representing the underlying remittances excluding the £150 million impact of
proactive financing techniques used to bring forward cash emergence of the in-force
book during the financial crisis.
24
BUSINESS REVIEW > CHIEF FINANCIAL OFFICER’S OVERVIEW > CONTINUED
CHIEF FINANCIAL OFFICER’S
OVERVIEW
The table below shows our progress towards these objectives from our results in 2010.
We believe we have made a strong start towards achieving these objectives.
ASIA GROWTH OBJECTIVES
Value of new business (including Japan)
IFRS operating profit*
BUSINESS UNIT NET REMITTANCE OBJECTIVES
Asia
Jackson
UK†
M&G‡
Total
CUMULATIVE NET CASH REMITTANCES FROM 2010
ONWARDS
CUMULATIVE UNDERLYING GROUP FREE SURPLUS
GENERATION NET OF INVESTMENT IN NEW
BUSINESS
Actual
Objective
2009
£m
2010
£m
2013
£m
713
465
40
39
434
175
688
901
604
233
80
420
202
935
1,426
930
300
200
350
3,800
6,500
* Total Asia operating profit from long-term business and asset management after
development costs.
† In 2009, the net remittances from the UK include the £150 million in 2009 arising from the
pro-active financing techniques used to bring forward cash emergence of the in-force book
during the financial crisis. The 2010 net remittances include an amount of £120 million
representing the releases of surplus and net financing payments.
‡ Including Prudential Capital.
In 2010 net remittances from business operations increased to £935 million, equivalent
to 55 per cent of underlying free surplus generated (after investment in new business) of
£1,714 million. The increased level of net remittances further illustrates both the strong
and improving capital generative nature of our business, with a greater proportion of this
capital being returned to the corporate centre in the form of dividends. The delivery of
the 2010 to 2013 financial objectives will see this trend continue.
Capital position, financing and liquidity
The Group has continued to maintain a strong capital position. At the end of 2010 our
IGD surplus stood at £4.3 billion (2009: £3.4 billion), with coverage a very strong 3.0
times the requirement. All of our subsidiaries maintain strong capital positions at the local
regulatory level. In particular, Jackson’s RBC ratio has continued to strengthen throughout
the period under review and at the end of 2010 this ratio stood at 483 per cent.
Prudential plc Annual Report 2010
“ These results demonstrate
that we are maximising the
growth opportunities of our
high quality franchises in
Asia, the US, and the UK.”
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Solvency II, which is expected to be implemented from 1 January 2013, represents
a complete overhaul of the capital adequacy regime for European insurers. We
welcome the risk-based focus of the Solvency II regime but, along with our European
peers, we do have concerns about the degree of prudence built in within the
proposed calibrations for the standard formula. We are engaging directly with our
peers, politicians and regulators to ensure a fair and reasonable outcome before
the regime becomes law.
Our financing and liquidity position has remained strong throughout the period.
The next call on external financing is in December 2011 on the ¤500 million Tier 2
subordinated notes. In early 2011 we successfully issued US$550 million Tier 1
subordinated debt in anticipation of calling the ¤500 million Tier 2 notes.
We continue to engage with rating agencies in order to provide insurance financial
strength ratings for the Group. Prudential is currently rated A+ by S&P, A2 (negative
outlook) by Moody’s and A by Fitch.
Embedded value
EEV shareholders’ funds increased by 19 per cent during 2010 to £18.2 billion
(2009: £15.3 billion). On a per share basis EEV at the end of 2010 stood at 715 pence,
up 19 per cent from the end of 2009 (2009: 603 pence).
2010 dividend
In view of the progress that the Group has made in recent years to improve IFRS
operating profitability and free surplus generation, the Board has decided to rebase
the full year dividend upwards by 4 pence per share, equivalent to an increase of
20 per cent. In line with this, the directors recommend a final dividend of 17.24 pence
per share, which brings the total dividend for the year to 23.85 pence per share
(2009: 19.85 pence per share). The scrip dividend scheme is not being offered
in respect of this dividend. In its place shareholders will be offered a Dividend
Reinvestment Plan (DRIP).
The Board will maintain its focus on delivering a growing dividend from this new higher
base, which will continue to be determined after taking into account the 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.
Summary
2010 was a good year for the Group in uncertain conditions as global economies
emerged from the financial crisis. These results demonstrate that we are maximising
the growth opportunities of our high quality franchises in Asia, the US, and the UK.
We remain disciplined in our approach of optimising value and are very focused on
improving the quality of our earnings. We have accelerated the generation of free
surplus and we are signalling our confidence in the future potential of our business
by proposing an increase in the payout to shareholders.
26
BUSINESS REVIEW > INSURANCE OPERATIONS > ASIA
ACCELERATING
ASIA
Prudential plc Annual Report 2010
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BUSINESS REVIEW > INSURANCE OPERATIONS > ASIA > CONTINUED
ASIA
BARRY STOWE
CHIEF EXECUTIVE
PRUDENTIAL CORPORATION ASIA
The Asian economies continue to lead the world in terms of current and
prospective growth and it is clear that Asia’s historic reliance on exports
is increasingly balanced with rapidly growing domestic consumption.
Across the region, we are seeing major demographic and socioeconomic
changes – with the emergence of a sizeable and growing middle class.
The Asian Development Bank estimates that there are now over 1.9 billion middle
class Asians, a threefold increase since 1990 and this means that, within a generation,
hundreds of millions of households in the region have ascended from poverty to living
standards and lifestyle aspirations that are consistent with those seen in Western
Europe and the US. These are urbanised households that are smaller, that are better
educated, that want good quality housing, consumer goods, access to good medical
services, transport, holidays, entertainment, education, to provide a quality of life for
their children that is better than the one they had and not least to have a long life with
a comfortable retirement.
Household savings rates in Asia have historically been multiples of those in the UK and
US and in markets where little exists in the way of state backed social security benefits
or welfare support, the need to save in case of an unplanned life changing event such
as a medical incident involving hospitalisation is real and strong. As households have
become wealthier the quantum of these emergency funds has increased materially,
resulting in significant amounts of undeployed or under-deployed capital waiting to be
brought into the formal economy as they migrate to insurance companies’ and banks’
balance sheets. Life insurance companies are ideally placed to provide some financial
protection and security to household balance sheets.
Although there will inevitably be some short-term fluctuations in demand for life
insurance and asset management products as other factors come into play, the
fundamental social and political drivers for growth in these sectors will continue
to support long-term growth.
Market overview
Overall, Asia’s life insurance industry saw a sharp recovery in new business volumes
during 2010 as markets moved beyond the 2008/2009 crisis.
The competitive landscape for the life sector varies by market but has largely remained
consistent with that seen in prior years. Most markets feature a mix of local and
multinational players whose definitions of business success may differ.
Competition is primarily around securing distribution. With insurance penetration
rates being generally low, growth is less constrained by the size of the market than by
companies’ ability to further expand it by adding distribution and making their products
available to parts of the population who have never used them. A large proportion of
sales in markets with low penetration are to consumers who have never bought a policy
before, thus expanding the market itself.
Prudential plc Annual Report 2010
29
£536m
Total IFRS
operating profit*
2011 PRIORITIES
• Continue expanding multi-
channel distribution platform
and improving its productivity
• Focus on regular premium
products with comprehensive
suite of protection riders
• Drive value through operational
efficiency
APE SALES
+24%
£1,501m
£1,209m
2009
2010
£902m
New business profit
FINANCIAL PERFORMANCE
APE sales (excluding Japan)
NBP (excluding Japan)
NBP margin (excluding Japan) (% APE)
Total IFRS operating profit*
Total EEV operating profit*
2010
£m
1,501
902
60%
536
1,450
2009
£m
Change
%
2009
£m
Change
%
CER
1,209
725
60%
416
1,105
24
24
29
31
1,300
783
60%
451
1,190
15
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Tied agency continues to dominate although distribution through banks is becoming
increasingly significant, with examples like HSBC Life and Bank of China Life in Hong
Kong. Across the region there is little direct competition on products; there are no
patents or copyrights in life insurance, or on product pricing, where regulators
typically define the parameters for the industry.
The region’s life insurance regulators tend to adopt a conservative stance and remain
focused on driving development of the sector in a way that balances the need to ensure
consumers have, first and foremost, access to appropriate products that are sold in a fair
and transparent manner with the need to reward shareholders for taking on the risks
of investing in the development of a relatively young and capital intensive industry.
The industry also employs millions of people in the region, an important consideration
when high unemployment rates can be a catalyst for political friction. India saw the
most impactful regulatory change during 2010, which in summary, was designed to
shift the emphasis of the industry away from products which are mostly investment
orientated and encourage more traditional savings and protection.
A positive development in a number of markets has been the development of the
financial press. Many leading publications carry regular sections on personal financial
planning and there is healthy debate on the uses of particular types of product.
Prudential is a champion of improving standards of financial literacy.
Strategy overview
The overarching objective for Prudential in Asia is to continue building scale profitably,
leveraging our advantaged platform. The strategic priorities articulated in 2006 remain
entirely relevant and continue to be driven in a highly focused and disciplined way.
While market outperformance in terms of new business growth is an indicator of scale,
we do not pursue volume for its own sake as we put profitability, returns on capital and
capital efficiency ahead of topline growth.
One of the key components of our strategy is driving agency distribution scale and
productivity. Our agency structures are differentiated by market depending upon
their size and maturity with the management emphasis balanced between recruitment
(newer markets like Indonesia and Vietnam) and productivity growth (more established
markets like Hong Kong and Singapore). However this is a simplification as those two
priorities are always present and not mutually exclusive; local management will always
focus on both.
Prudential’s agency management competencies drive effective selection discipline and
training designed to ‘fast start’ new agents and improve the skills and productivity of
the more experienced ones. Our combination of training programmes, comprehensive
product suites, specialised support allowing agents to address the evolving needs of
existing customers and technology solutions to facilitate the fact finding and proposal
submission processes combine to add value to agents, shareholders and customers.
* Operating profit from long-term operations including Japan but excluding asset
management operations, development costs and Asia regional head office expenses.
30
BUSINESS REVIEW > INSURANCE OPERATIONS > ASIA > CONTINUED
ASIA
“ Prudential currently
insures over 11 million life
customers in Asia and has
15 million in-force policies.
Highlighting the value
Prudential policies have
for our customers, we paid
out £2.6 billion in claims
and maturities during 2010.”
2013 FINANCIAL OBJECTIVES
• Double 2009 value of IFRS life
and asset management pre-tax
operating profit
• Double 2009 value of
new business profits
• Deliver £300 million of net
cash remittance to the Group
Prudential plc Annual Report 2010
During 2010 total average agent numbers excluding India at 154,000 were up 7.5 per
cent over 2009. In India, where significant regulatory changes were introduced during
the year, agent numbers were down 27 per cent to 168,000 at the end of December 2010.
This is in line with our strategy to rationalise expense levels and focus on productivity
improvements, which puts us in a strong position to respond to the recent regulatory
changes. Excluding India, our agency productivity in terms of average APE per agent
increased by 10 per cent.
Prudential is a pioneer and regional leader in partnership distribution in Asia. Key success
drivers are our expertise in developing, training and motivating in branch insurance
specialists and our investment in enduring and mutually beneficial relationships with our
partners, including Standard Chartered Bank across the region, E.Sun in Taiwan and most
recently United Overseas Bank in Singapore, Thailand and Indonesia.
Prudential’s product mix continues its emphasis on regular premium policies and
protection riders. The high proportion of health and protection, standalone and
riders, at 27 per cent of new business premiums in 2010, supports the new business
profit margins and reflects the higher proportion of risk based products in our book
than some competitors who focus on single premium investment orientated policies.
Prudential currently insures over 11 million life customers in Asia and has 15 million
in-force policies. Highlighting the value Prudential policies have for our customers,
we paid out £2.6 billion in claims and maturities during 2010. This customer base is
a tremendously valuable asset as over 40 per cent of new business APE came from
existing customers in 2010 (excluding India). This reflects our enduring relationship
with our customers and how our solutions are meeting their needs over time. The
customer retention rate continues to improve and at 91 per cent it is one per cent
up on 2009.
Financial performance
New business for the fourth quarter was a new record at £435 million, up eight per cent
on the same period last year, which was already a record quarter and the full year 2010
was £1,501 million up 24 per cent on 2009 and an impressive 44 per cent ahead of 2007,
the last full year to be unaffected by the 2008/2009 financial crisis. Agency remains the
largest distribution channel accounting for 66 per cent of new business volumes and
with the proportion from bancassurance increasing from 25 per cent to 26 per cent.
The proportion of linked and protection business remained broadly in line with prior
year at 41 per cent and 27 per cent respectively. With the economic recovery, the size
of average cases, excluding India, increased nine per cent. Importantly, our continued
emphasis on regular premium business is reflected in its 93 per cent contribution to total
APE, which is also in line with prior year.
New business market share statistics for full year 2010 are not yet available but based
on our estimates and market intelligence we expect to have retained or improved our
market rankings in most markets across the region.
Consistent with our ‘value over volume’ priority we have maintained our product and
pricing disciplines. New business profits of £9021 million are up 24 per cent over 2009.
Average new business profit margins have remained the same as prior year at 60 per
cent, with the positive impacts of country mix changes having largely been offset by
operating assumption changes.
In-force operating profits from long-term business of £549 million are up 40 per cent on
prior year. This increase reflects the growing size of the in-force book and a significantly
reduced level of net negative operating experience variance at £1 million compared to
negative £85 million in 2009, which, in part, reflects lower adverse persistency variances
of negative £48 million compared with the 2009 level of negative £76 million. The net
negative variance level of £1 million is small relative to the size of the EEV shareholders’
funds (before goodwill) of £7.4 billion.
Note
1 Excluding Japan which ceased writing new business in 2010.
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Full year 2010 operating profits from long-term business reported under the IFRS basis
were £536 million, up 29 per cent over 2009 reflecting increased crystallisation of profits
from the in-force book and lower new business strain of four per cent of APE compared
to six per cent last year1. All operations aside from Japan, China and Taiwan made an
IFRS profit in 2010.
Underlying free surplus net of investment in new business has improved to £326 million
in 2010 compared to £119 million in 2009 driven principally by growth in in-force profits
reflecting the increasing size and inherent profitability of the in-force book.
The life business significantly increased remittance of cash to the Group in 2010,
at £267 million up from £80 million in 2009. This includes an exceptional £130 million
from Malaysia representing the remittance of distributable earnings accumulated over
recent years. Whilst this one-off type of remittance will not be repeated, it further
demonstrates our ability to upstream cash from the region.
Looking at individual countries:
CHINA
APE sales
AER
2009
£m
45
2010
£m
58
CER
Change
%
2009
£m
Change
%
29
46
26
In China, Prudential’s 50 per cent share of new business volumes for 2010 was £58 million
up 29 per cent on prior year. Agency remains the largest distribution channel although
bank distribution grew at a slightly faster pace, up 35 per cent. Leading bank partners are
SCB, CITIC and ICBC. In a market where bank sales are overwhelmingly dominated by
single premium investment products it is important to note that 25 per cent of our bank
channel APE is now regular premium unit-linked business.
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 trying to
achieve short-term sales volume growth.
HONG KONG
APE sales
AER
2009
£m
241
2010
£m
287
CER
Change
%
19
2009
£m
244
Change
%
18
Hong Kong delivered an excellent result in 2010 with new business APE of £287 million
up 19 per cent on prior year. Our continuing success in this market is underpinned by the
quality of both our distribution and product development. In 2010 some 42 per cent of
our new business sales were from new products launched in the year.
Our average agency headcount increased by 15 per cent, principally through organic
recruitment initiatives, closing the year with an agency count in excess of 5,000. Our
long-term bancassurance relationship with Standard Chartered Bank saw a strong
rebound following the 2008/2009 crisis. In-branch insurance specialists continue to
focus on recurring premium savings and protection products and the profitability of the
product mix continues to improve. Bancassurance now accounts for 37 per cent of our
total sales, growing by 24 per cent in 2010.
Note
1 Excluding Japan which ceased writing new business in 2010.
32
BUSINESS REVIEW > INSURANCE OPERATIONS > ASIA > CONTINUED
ASIA
INDIA
APE sales
AER
2009
£m
168
2010
£m
188
CER
Change
%
12
2009
£m
179
Change
%
5
The India market has been through a significant period of change during 2010,
particularly with the regulatory driven refocus on savings and protection products,
which came into effect on 1 September. Sales have fallen by 56 per cent in the last
quarter of the year and we expect that the unit-linked market will remain disrupted in
the short-term. Nevertheless during 2010 ICICI-Prudential grew new business APE
by 12 per cent to £723 million (Prudential’s 26 per cent share is £188 million). Agency
remains the largest distribution channel and following reductions in the size of the
agency force, initiatives to improve agency productivity are delivering good results.
INDONESIA
APE sales
AER
2009
£m
190
2010
£m
283
CER
Change
%
49
2009
£m
219
Change
%
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Prudential’s business in Indonesia where we sell both conventional and takaful products,
continues to be a clear market leader. New business volumes for 2010 of £283 million were
driven by a very effective agency management approach that prioritises not only disciplined
recruitment but also professional training and activation programmes. Average agency
numbers have increased by 5 per cent during 2010 (to 81,000) and APE per active agent is
higher by 21 per cent. Our agency generates over 90 per cent of total new business and this
is predominantly regular premium unit-linked with protection riders.
During 2010 we have added new bancassurance agreements with UOB, SCB and
Permata.
KOREA
APE sales
AER
2009
£m
122
2010
£m
96
CER
Change
%
(21)
2009
£m
135
Change
%
(29)
In Korea we remain focused on writing profitable business and remain resolute in our
unwillingness to compete in the low margin, capital-intensive guaranteed products sector.
New business volumes of £96 million for 2010 are 21 per cent lower than last year. We
remain confident in our approach and the value this is generating for shareholders. The
fourth quarter 2010 APE sales at £27 million were four per cent higher than the fourth
quarter 2009. Persistency in Korea continues to improve.
MALAYSIA
APE sales
AER
2009
£m
146
2010
£m
204
CER
Change
%
40
2009
£m
163
Change
%
25
Our traditional and takaful businesses in Malaysia had a record 2010 with new business
APE of £204 million. In local currency terms we are the first insurer in the history of the
industry to pass RM1 billion in new business APE in a year. This growth has been driven
primarily by the agency channel where the strategy to expand into the Bumi and takaful
sectors has proven to be successful with our average agent numbers increasing by nine
per cent (to 13,000 of which 46 per cent are Bumi).
Prudential plc Annual Report 2010
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Productivity initiatives targeting the enhancement of existing policies have also been very
effective, for example a recent offer to upgrade a health plan resulted in a 30 per cent take
up rate. Average APE per agent is 16 per cent higher reflecting both renewed confidence
in the market and the impact of these cross selling initiatives.
SINGAPORE
APE sales
AER
2009
£m
128
2010
£m
175
CER
Change
%
37
2009
£m
138
Change
%
27
Singapore also had a very strong 2010 with new business of £175 million up 37 per cent
on prior year with improvements in agency productivity (APE per agent up 15 per cent)
and the very successful launch of bancassurance with UOB that generated 11 per cent
of new business.
TAIWAN
APE sales
AER
2009
£m
107
2010
£m
120
CER
Change
%
12
2009
£m
114
Change
%
5
Following our exit of the agency channel in 2009, Taiwan is now successfully focused
on bank distribution principally with partners E.Sun and SCB. New business volumes of
£120 million for the year are up 12 per cent on prior year and Taiwan remains a material
contributor to Asia’s results.
OTHERS – PHILIPPINES, THAILAND AND VIETNAM
APE sales
AER
2009
£m
62
2010
£m
90
CER
Change
%
2009
£m
Change
%
45
62
45
Vietnam delivered a very strong result in 2010, up 17 per cent on the prior year, driven
by improvements in agency manpower and productivity. Although still relatively small
both Philippines and Thailand delivered excellent results with APE up 109 per cent
and 63 per cent respectively. Our new distribution agreement with UOB in Thailand has
made a strong start, contributing 41 per cent of total APE and helping to nearly double
our market share.
JAPAN
As previously announced, PCA Life Japan ceased writing new business with effect from
15 February 2010. Sales for Japan in 2010 amounted to £7 million (2009: £52 million). In
order to reflect the results of our ongoing Asian operations, APE sales and NBP metrics
included in this report exclude the contribution from Japan.
34
BUSINESS REVIEW > INSURANCE OPERATIONS > UNITED STATES
STRENGTHENING
UNITED STATES
Prudential plc Annual Report 2010
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BUSINESS REVIEW > INSURANCE OPERATIONS > UNITED STATES > CONTINUED
UNITED STATES
MIKE WELLS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
JACKSON NATIONAL LIFE INSURANCE COMPANY
The United States is the world’s largest retirement savings market. Each
year, more of the 78 million baby boomers1 reach retirement age, triggering
a shift from savings accumulation to retirement income generation for
more than US$10 trillion of accumulated wealth over the next decade.2
During 2010, the US financial services industry continued to face many challenges.
The recovery witnessed in the first quarter reversed in the second quarter but was more
visible again in the third and fourth quarters. At half year, the S&P 500 index was down
7.6 per cent, 10-year Treasury rates had dropped below three per cent, swap rates had
declined to near historic lows, AA corporate spreads had increased slightly and volatility
had risen to levels more consistent with the first half of 2009. By year-end, the S&P 500
index was up 12.8 per cent for the year. Rates on 10-year Treasuries, which continued
to decline through the third quarter before increasing in the fourth quarter, finished the
year at 3.3 per cent, down from 3.9 per cent at the end of 2009. Swap rates also declined
through the third quarter before rebounding slightly in the fourth quarter, although
they still were near historic lows at year-end. Corporate AA spreads and volatility
both declined through the second half of the year to fall below year-end 2009 levels.
We believe these unstable market conditions continue to provide a competitive
advantage to companies with strong financial strength ratings and a relatively
consistent product set. Companies that were hardest hit by the market disruption
over the last few years are in general still struggling to regain market share as customers
and distributors continue to seek product providers that offer consistency, stability and
financial strength. Jackson continues to benefit significantly from this flight to quality
as its financial strength ratings from the four primary rating agencies have remained
unchanged for more than eight years. Through its financial stability and innovative
products that provide clear value to the consumer, Jackson has enhanced its reputation
as a high-quality and reliable business partner, with sales increasing as more advisers
have recognised the benefits of working with Jackson.
Jackson’s strategy continues to focus on balancing volume and capital consumption for
both variable and fixed annuities. Jackson continued to sell no institutional products during
2010, as available capital was directed to support higher-margin variable annuity sales.
“ Jackson’s strategy
continues to focus on
balancing volume and
capital consumption
for both variable and
fixed annuities.”
2011 PRIORITIES
• Continue to drive positive net
retail flows
• Innovate around our key
variable annuity product
• Further enhance operational
efficiency
Notes
1 Source: US Census Bureau.
2 Source: McKinsey.
Prudential plc Annual Report 2010
37
£833m
Total IFRS
operating profit*†
“ In 2010, for the fifth
consecutive year, Jackson
was rated as a ‘World
Class’ service provider
by Service Quality
Measurement Group1. ”
APE SALES
+28%
£1,164m
£912m
2009
2010
£761m
New business profit
2013 FINANCIAL OBJECTIVE
• Deliver £200 million of net
cash remittance to the Group
FINANCIAL PERFORMANCE
APE sales
NBP
NBP margin (% APE)
Total IFRS operating profit*†
Total EEV operating profit*
2010
£m
1,164
761
65%
833
1,458
AER
CER
2009
£m
Change
%
2009
£m
Change
%
912
664
73%
618
1,233
28
15
35
18
924
673
73%
626
1,249
26
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Business overview
Initiatives in 2010
Continue to innovate around our key variable annuity product
Jackson continues to be innovative in its product offerings, implementing various
changes in 2010 to increase sales, to comply with revised regulations or to enhance
risk management flexibility and/or increase profitability.
In 2010, Jackson added two new optional lifetime guaranteed minimum withdrawal
benefits (GMWBs) to its variable annuity products. LifeGuard Freedom 6 Net GMWB,
introduced in May, gives investors the opportunity to help offset their tax liability by
increasing their available withdrawal amounts to generate more income. LifeGuard
Freedom Flex, introduced in October, is the industry’s first customisable guaranteed
minimum withdrawal benefit. Freedom Flex extends the menu-driven construction that
Jackson offers in its variable annuity products, which gives investors the ability to build
a personalised benefit based on their individual retirement planning objectives, while
paying only for those options elected. Additionally, Jackson added six portfolios from
American Funds and added BlackRock, managing two portfolios, to its variable annuity
fund line-up during the year.
Continue to focus on improving efficiency of operations
Jackson continues to invest in its back office staffing and systems to provide world
class customer service in an efficient and cost effective manner. In 2010, for the fifth
consecutive year, Jackson was rated as a ‘World Class’ service provider by Service
Quality Measurement Group1. Jackson was able to provide this level of service
in 2010 while processing record retail sales and maintaining its ratio of statutory
general expenses to average assets (one measure of efficiency) at the 2009 level
of 44 basis points.
Expand retail operation
With consistent, high-quality wholesaling support and customer service, combined
with stability in product offering, pricing and financial strength ratings and the ability
to bring new products to market swiftly, Jackson continues to be an attractive business
partner for its long-term distributors, as well as attract new distributors. During 2010,
Jackson increased the number of licensed agents and registered representatives to
more than 130,000.
Financial performance
IFRS pre-tax operating profit for the long-term business was £833 million in 2010,
up 35 per cent over the £618 million in 2009. This increase was primarily due to higher
separate account fee income due to substantial positive net flows and the improved
equity markets and higher spread income.
* Based on longer-term investment returns and excluding broker-dealer, fund
management and Curian.
† The Company has amended the presentation of IFRS operating profit for its US
operations to remove the net equity hedge accounting effect (incorporating related
amortisation of deferred acquisition costs) and include it in short-term fluctuations.
2009 amounts have been amended accordingly.
Note
1 Source: Service Quality Measurement Group.
38
BUSINESS REVIEW > INSURANCE OPERATIONS > UNITED STATES > CONTINUED
UNITED STATES
“ Jackson ranked third
in new variable annuity
sales in the US in 2010
with a market share
of 11 per cent, up from
fourth and a market
share of eight per cent
in 20091.”
Prudential plc Annual Report 2010
At 31 December 2010, Jackson had £31 billion in separate account assets, more than
doubling the balance in the last 18 months. Separate account assets in 2010 averaged
£9 billion higher than during 2009, reflecting the impact of sales and the higher average
market levels. This growth resulted in variable annuity separate account fee income of
£506 million in 2010, up 56 per cent over the £324 million in 2009.
Total spread income, including the expected return on shareholders’ assets, of
£817 million increased 31 per cent over the £622 million in 2009, primarily due to
decreased crediting rates on fixed annuities and higher income on the growing
general account assets. Jackson undertook various interest rate swap transactions
during 2010 to more closely match the overall asset and liability duration, benefiting
spread income in 2010 by £108 million.
Acquisition costs have increased in absolute terms compared to 2009 due to the
significant increase in sales. However, acquisition costs as a percentage of APE has
fallen from 76 per cent in 2009 to 73 per cent in 2010 as more advisors are electing to
take asset based commissions which are paid over the life of the policy based on fund
value. This asset based commission is not a deferrable acquisition cost and is expensed
in the current period as an administration expense.
DAC amortisation of £334 million in 2010 compared to £223 million in 2009. 2010 includes
£11 million additional amortisation as equity market returns fell below assumed rates
(2009: £39 million benefit from improved equity markets). Excluding this effect, the
underlying amortisation increased £61 million due to higher gross profits.
Administration expenses totalling £344 million in 2010 compared to £259 million in
2009, with the increase due primarily to higher asset based commissions which are
excluded from acquisition costs.
With the improvement in the bond markets in 2010, and active management of the
investment portfolio to reduce certain investment risks, Jackson realised net gains of
£11 million in 2010 compared to net realised losses of £506 million in 2009. Jackson
incurred losses, net of recoveries and reversals, on credit related sales of bonds of
£89 million (2009: less than £1 million). Write downs were £124 million (£630 million
in 2009), including £71 million on RMBS and £39 million on ABS. More than offsetting
these losses were interest related gains of £224 million (2009: £125 million), primarily
due to sales of lower rated CMBS and corporate debt.
Gross unrealised losses improved from £966 million at 31 December 2009 to
£370 million at 31 December 2010. The net unrealised gain position has also
improved significantly, from £4 million at 31 December 2009 to £1,210 million at
31 December 2010 due primarily to a decline in the US Treasury rates.
Jackson delivered record retail APE sales of £1,164 million in 2010, representing a
28 per cent increase over 2009. With no institutional sales in 2010, total APE sales were
also £1,164 million, the highest total in the company’s history. This achievement further
demonstrates the resilience of Jackson’s business model, as well as stability of our
high-quality product offerings, exceptional wholesaling support and consistency
demonstrated throughout the economic downturn.
While the equity markets rebounded in 2010, reaching two-year highs in December,
and in light of continued volatility in US equity markets and historically low interest
rates, customers continue to seek to mitigate equity risk while receiving an acceptable
return through the purchase of variable annuities with guaranteed living benefits.
Jackson is a beneficiary of this trend while being well placed to benefit from the huge
wave of baby boomers starting to retire, as they increasingly use variable annuities to
structure their retirement income.
In 2010, record variable annuity APE sales of £948 million were up 48 per cent from
2009. Jackson ranked third in new variable annuity sales in the US in 2010 with a
market share of 11 per cent, up from fourth and a market share of eight per cent in 20091.
With significant sales increases and continued low surrender rates, Jackson held steady
with its ranking of second in variable annuity net flows in 20104.
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Fixed annuity APE sales of £84 million were down 20 per cent from the prior year,
as consumer demand for the products fell due to the continued low interest rate
environment. Jackson’s new business opportunities were balanced with the goals of
capital and cash conservation. Jackson ranked eighth in sales of traditional deferred
fixed annuities through the third quarter of 2010, with a market share of three per cent
compared to 13th with a two per cent market share for the full year 20092.
Fixed index annuity (FIA) APE sales of £109 million in 2010 were down 24 per cent
from 2009 as Jackson focused its marketing efforts on the higher margin variable
annuity products. Jackson ranked sixth in sales of fixed index annuities through the
first three quarters of 2010, with a market share of five per cent, down from fourth
and a market share of eight per cent for the full year 20093.
Retail annuity net flows increased 38 per cent, benefiting from record sales and
continued low levels of surrender activity.
Jackson achieved extraordinary EEV new business margins in 2009, partially as a result
of our ability to take advantage of the extreme dislocation prevalent in the corporate
bond market. While the recovery in the corporate bond market has led to somewhat
lower EEV new business margins due to lower spreads in 2010, we continue to write
new business at internal rates of return in excess of 20 per cent.
The exceptionally high EEV spread levels in 2009 included an allowance that crediting
rates and spreads would normalise in the future.
EEV basis new business profits of £761 million were up 15 per cent on 2009, reflecting
a 28 per cent increase in APE sales offset somewhat by lower new business margins.
Total new business margin was 65 per cent, compared to 73 per cent achieved in 2009.
The variable annuity new business margin of 72 per cent in 2010 decreased somewhat
from 81 per cent in 2009, as lower assumed separate account returns and lower
assumed spreads on the guaranteed funds were partially offset by an increase
in-the take-up rate on guaranteed benefits – particularly guaranteed minimum
withdrawal benefits.
The fixed index annuity new business margin decreased from 51 per cent in 2009 to
41 per cent in 2010 due to decreased spread assumptions and lower interest rates,
offset somewhat by longer maturity contracts sold in 2010. These same interest rate
and spread factors also caused the fixed annuity new business margin to normalise from
57 per cent to 34 per cent. For both products, the spread assumptions decreased due
primarily to abnormally high investment yields during 2009.
Total EEV basis operating profit for the long-term business in 2010 was £1,458 million,
compared to £1,233 million in 2009. In-force EEV profits of £697 million for 2010 were
22 per cent higher than 2009 profit of £569 million. During 2010, EEV basis operating
profit benefited as a result of the interest rate swap transactions noted earlier. Including
this benefit, experience variances and other items were £201 million higher in 2010 due
primarily to favourable spread and persistency variances that were partially offset by
lower expense and mortality variances.
In 2010, Jackson invested £300 million of free surplus to write £1,164 million of new
business (2009: £326 million and £912 million, respectively). The reduction in capital
consumption year-on-year was caused predominantly by the differing business mix
in 2010, when Jackson wrote a higher proportion of variable annuity business, which
consume lower levels of initial capital, while maintaining a disciplined approach to
fixed and fixed index annuity pricing.
Notes
1 Source: Morningstar
2 Source: LIMRA
3 Source: AnnuitySpecs
4 Source: SimFund
40
BUSINESS REVIEW > INSURANCE OPERATIONS > UNITED KINGDOM
FOCUSING
UNITED KINGDOM
Prudential plc Annual Report 2010
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BUSINESS REVIEW > INSURANCE OPERATIONS > UNITED KINGDOM > CONTINUED
UNITED KINGDOM
ROB DEVEY
CHIEF EXECUTIVE
PRUDENTIAL UK AND EUROPE
Prudential UK competes selectively in the UK’s retirement savings and
income market. The focus of the business is to balance writing profitable
new business at attractive returns on capital with sustainable cash
generation, which is key for the Group and capital preservation. It is this
discipline that has enabled Prudential UK to deliver another strong
performance in 2010.
The UK has a mature life and pensions market which is characterised by an ageing
population – in particular, through two waves of baby-boomers born after World
War II and in the 1960s – with wealth distribution significantly skewed and very
much concentrated in the 45-74 age group. In this context, the retirement and
near-retirement segments are highly attractive.
UK consumers are insufficiently prepared as they will have to face increasingly long
periods of retirement. This will result in longer working lives and a more flexible approach
towards retirement. It will also mean that the baby-boomers will need to target their
wealth on the provision of dependable retirement income. Prudential UK’s expertise
in areas such as longevity risk management and multi-asset investment, together with
its financial strength and strong brand, mean that the business is strongly positioned
in the retirement planning space with a particular focus on with-profits and annuities.
Business overview
Selective participation in the retirement income and savings market
Prudential UK has a strong individual annuity business, built on a robust pipeline of
internal vestings from maturing individual and corporate pension policies. The internal
vestings pipeline is supplemented by sales through intermediaries and strategic
partnerships with third parties where Prudential is the recommended annuity provider
for customers vesting their pensions at retirement.
Total individual annuity sales of APE £205 million were six per cent lower than in 2009,
mainly due to lower sales of conventional annuities where Prudential UK proactively
managed the flow of new business to control capital consumption. This was partially
offset by strong sales of with-profits annuities which represented 22 per cent of total
annuity sales, compared with 15 per cent last year, due to the continuing success of the
innovative Income Choice Annuity (ICA). The ICA is a with-profits product, launched
in March 2009, which offers consumers security with a potential for income growth.
Internal vestings annuity sales of APE £124 million were nine per cent down on 2009,
principally due to the number of customers retiring being lower than in 2009. Although
fewer Prudential customers invested in conventional annuities, there continues to be
a positive increase in the number of customers choosing an ICA, with sales of APE
£16 million resulting in a 38 per cent increase in with-profits annuity sales.
“ Prudential UK’s expertise
in areas such as longevity
risk management and
multi-asset investment,
together with its financial
strength and strong brand,
mean that the business is
strongly positioned in the
retirement planning space.”
2011 PRIORITIES
• Balance writing profitable new
business at attractive returns
on capital with sustainable
cash generation and capital
preservation
• Continue to pursue a value-
driven strategy built around
our core strengths in with-
profits and annuities
• Deliver further improvements
to operational performance
and customer service while
maintaining a strict focus
on costs
• Continue building
complementary
distribution channels
Prudential plc Annual Report 2010
43
£719m
Total IFRS
operating profit
2013 FINANCIAL OBJECTIVE
• Deliver £350 million of net
cash remittance to the Group
TOTAL IFRS OPERATING PROFIT
+9%
£719m
£657m
2009
2010
£365m
New business profit
FINANCIAL PERFORMANCE
APE sales
NBP
NBP margin (% APE)
Total IFRS operating profit
Total EEV basis operating profit
AER
CER
2009
£m
Change
%
2009
£m
Change
%
723
230
32%
657
921
13
59
9
7
723
230
32%
657
921
13
59
9
7
2010
£m
820
365
45%
719
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Onshore bond sales of APE £166 million were up 15 per cent, including with-profits
bond sales of APE £146 million which increased 11 per cent with an exceptionally
strong fourth quarter. PruFund made up 78 per cent of our total with-profits bond sales.
Demand for Prudential UK’s with-profits products remains resilient and the business
has continued to innovate to maintain and enhance its position in the market. This
includes broadening access to PruFund across its retail savings product range and
PruFund now has over £3 billion invested.
Unit-linked bond sales of APE £20 million were 61 per cent up on 2009, helped by the
launch of PruDynamic portfolio funds in January 2010 and the continued success of the
PruSelect fund range.
Individual pension sales of APE £69 million (including income drawdown) were three
per cent up on 2009. Sales of the Flexible Retirement Plan, Prudential UK’s RDR-
compliant individual pension and income drawdown product, grew by four per cent
to APE £22 million. PruFund Cautious, launched in the fourth quarter of 2009, and
the new PruDynamic portfolio funds, launched in January 2010, together made up
34 per cent of individual pension sales.
Corporate pension sales of APE £221 million were five per cent above 2009 levels.
Prudential UK administers corporate pensions for over 600,000 scheme members
sponsored by some of the UK’s largest employers and has also built a very strong
position in the provision of with-profits Additional Voluntary Contribution (AVC)
arrangements. Prudential UK provides AVCs to 66 of the 99 Local Government
Authorities in England & Wales. During 2010, Prudential UK continued to focus on
strengthening existing relationships through further improvements to online servicing
capabilities as well as targeted marketing activity.
In August 2010, Prudential UK’s joint venture partner Discovery SA announced the
completion of the acquisition of Standard Life Healthcare and its combination with the
PruHealth business. As part of the transaction, Prudential UK reduced its shareholding
in the combined PruHealth and PruProtect businesses from 50 per cent to 25 per cent of
the enlarged Group and sales are included on a proportionate basis from 1 August 2010.
PruProtect sales had previously been included at 100 per cent and PruHealth sales at
50 per cent. The effect of this reporting change is that Prudential UK’s share of PruProtect
sales is reported at APE £16 million, an increase of 18 per cent. Prudential UK’s share of
PruHealth sales of APE £12 million was nine per cent higher than in 2009, and at the end
of 2010, the combined health business covered approximately 680,000 lives.
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BUSINESS REVIEW > INSURANCE OPERATIONS > UNITED KINGDOM > CONTINUED
UNITED KINGDOM
“ Demand for Prudential
UK’s with-profits products
remains resilient and the
business has continued
to innovate to maintain
and enhance its position
in the market.”
Capitalising on our competitive advantages
The strength and investment performance of Prudential UK’s With-Profits Fund is
widely recognised in the industry and was demonstrated by the 12.7 per cent pre-tax
investment return achieved for policyholder asset shares in the Fund in 2010. The Fund
has delivered investment returns of 82.1 per cent over ten years, which compares
favourably with other with-profits funds and the FTSE All-Share Index (total return)
of 43.3 per cent over the same period. This strong performance has shown that
with-profits, when invested in an actively managed, and financially strong fund like
Prudential’s, continues to be a very attractive medium to long-term investment, offering
strong annualised returns compared with other investment options. Prudential’s
with-profits customers benefit from the security offered by Prudential’s large inherited
estate, with the free assets of the with-profits fund valued at approximately £6.8 billion
at the year end, valued on a realistic basis.
In the Wholesale market, Prudential UK’s aim is to continue to participate very selectively
in bulk and back-book buyouts using its financial strength, superior investment track
record and annuitant mortality risk assessment and servicing capabilities. In line with this
approach, in the fourth quarter of 2010, Prudential UK signed a bulk annuity buy-in
insurance agreement of £88 million APE.
Building capabilities
In September 2010, Prudential UK announced a five-year exclusive agreement with
Santander to distribute its market-leading investment bonds in the UK. Prudential
UK’s Flexible Investment Plan, including PruFund, will be available to Santander’s UK
customers in 1,300 high street branches throughout the country.
This new agreement, which is expected to go live in the second half of 2011, forms
part of Prudential UK’s continuing strategy to develop diversified and complementary
distribution across its Direct, Intermediary and Partnership channels.
Prudential UK’s focus on delivering improved levels of customer service was recognised
again at the 2010 Financial Adviser Service Awards, where it retained its 5-Star rating for
excellent service in the Investment category.
Financial performance
Retail APE sales of £725 million were up one per cent on 2009, with the new business
margin increasing from 31 per cent to 35 per cent. This performance was entirely
consistent with Prudential UK’s strategy of not pursuing top-line sales growth but
instead deploying capital to opportunities that play to the core strengths of the business
and generate the best returns.
Total APE sales increased by 13 per cent to £820 million and included the bulk annuity
buy-in insurance agreement. This transaction generated EEV new business profit of
£104 million and IFRS operating profits of £63 million. Prudential UK will continue to
maintain a very strict focus on value and only participate in capital-efficient transactions
that meet its strict return on capital requirements. Including this transaction, Prudential
UK’s new business margin increased from 32 per cent to 45 per cent.
Prudential plc Annual Report 2010
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Higher sales and margins resulted in total EEV new business profits increasing by
59 per cent to £365 million. This improvement included the impact of the bulk annuity
transaction, but also reflected improved retail margins, in particular on with-profits
bonds. Retail EEV new business profits at £257 million were 15 per cent up on 2009
(£223 million).
IFRS total operating profits before restructuring costs were up nine per cent at
£719 million, reflecting increased sales. Commission received on Prudential-branded
General Insurance products contributed £46 million to IFRS operating profits in 2010,
£5 million lower than 2009 as the book of business originally transferred to Churchill
in 2004 is decreasing as expected.
EEV total operating profit of £982 million was up seven per cent mainly due to an
increase in new business profits. In-force EEV operating profit included £37 million from
renewal expense assumptions and £41 million from the change in the long-term tax rate
assumption from 28 per cent to 27 per cent. These positive impacts were offset by a
£40 million negative net impact from the strengthening of mortality improvement
assumptions, partially offset by the release of excess margins previously held.
Prudential UK continues to manage actively the retention of the in-force book. During
2010, the experience at an aggregate level has been in line with long-term assumptions.
Prudential UK writes with-profits annuity, with-profits bond and with-profits corporate
and individual 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 in the UK was in excess of 20 per cent. The average free
surplus undiscounted payback period for shareholder backed business written in 2010
was four years.
As announced at the half-year, the business met its cost savings target of £195 million
per annum, six months early. Prudential UK has commenced a number of cost saving
initiatives to reduce costs by a further £75 million per annum on a consistent basis by
the end of 2013. The business has already made good progress towards this objective
in 2010.
During 2010 Prudential UK remitted cash of £420 million to the Group, comprising
£202 million from the annual with-profits transfer to shareholders and £218 million from
the shareholder backed business, which included £120 million from one-off releases of
surplus and net financing repayments. The business expects to generate £350 million
per annum sustainable cash remittances by 2013, supported by the strength of the
with-profits business and surpluses arising from the large book of shareholder backed
annuities, maintained into the future by the pipeline of maturing individual and
corporate pensions.
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BUSINESS REVIEW > ASSET MANAGEMENT
OPTIMISING
ASSET MANAGEMENT
Prudential plc Annual Report 2010
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BUSINESS REVIEW > ASSET MANAGEMENT > M&G
ASSET MANAGEMENT
M&G
MICHAEL McLINTOCK
CHIEF EXECUTIVE
M&G
M&G is the UK and European fund manager of the Prudential Group
with responsibility for £198 billion of investments as at 31 December 2010
on behalf of both internal and external clients. M&G is an investment-led
business whose aim is to generate superior long-term returns for its
third-party investors and the internal funds of the Prudential Group.
This aim is achieved by creating an environment that is attractive to investment talent.
The core focus on investment performance, combined with a well-diversified business
mix and established distribution capabilities, has helped M&G achieve strong net sales
performance, growth in funds under management and increased profitability.
In the retail market, M&G’s aim is to operate a single fund range and to diversify the
distribution base by accessing a wide variety of channels and geographies. In recent
years, key themes have included growing the proportion of business sourced from
intermediated channels and the increased sales of UK-based funds in European and
other international markets.
In the institutional marketplace, M&G’s approach centres on leveraging capabilities
developed primarily for the Prudential internal funds to create higher margin external
business opportunities. This has allowed M&G to offer third-party clients an innovative
range of specialist fixed income strategies, including leveraged finance and
infrastructure investment.
Sales performance
2009 was an exceptional year for M&G in terms of net sales. The Retail business
experienced unprecedented net purchases of its top-performing bond funds by
investors seeking to exploit a near unique opportunity in fixed income markets. On the
institutional side, M&G benefited in particular from winning a very substantial single
institutional mandate. It was not expected that the business would be able to repeat
these levels of net sales in 2010. In the event, the Retail business achieved full year net
inflows of £7.4 billion, a decrease of only one per cent compared to the record level of
£7.5 billion in 2009. On the institutional side, M&G still achieved very healthy net sales
of £1.7 billion.
Gross fund inflows for the full year rose six per cent to £26.4 billion. This set a
new record for the M&G business, surpassing the £24.9 billion achieved in 2009.
Maintaining this strong sales performance over 2010, and in some highly volatile
markets, demonstrates M&G’s strength in depth across all the main asset classes and
distribution channels.
M&G’s Retail business in the UK has been number one for gross and net retail sales
over nine consecutive quarters based on data to the end of December 20101. As already
highlighted, it was sales of M&G’s top-performing fixed income funds that accounted
for the lion’s share of net inflows in 2009 with 68 per cent of the net retail flows. During
2010, fixed income products continued to sell extremely well, accounting for 43 per
cent of flows, but, with market sentiment turning more bullish, investor appetite for our
equity and property funds increased. Net inflows into equity funds have increased in
share from 26 per cent in 2009 to 48 per cent of total net retail sales in 2010. Over the
same period, property funds’ share of total net sales trebled to nine per cent.
“ The Retail business
achieved full year net
inflows of £7.4 billion,
a decrease of only
one per cent compared
to the record level of
£7.5 billion in 2009.”
2011 PRIORITIES
• Maintain long-term
investment performance
for both internal and
external funds
• Continue growth in
third-party retail and
institutional businesses
Prudential plc Annual Report 2010
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FUNDS UNDER MANAGEMENT
M&G
+14%
£198bn
£174bn
2009
2010
£198bn
Funds under
management
£284m
Total IFRS
operating profit
GLOBAL GROUP OF THE YEAR
The consistency and
excellence of its performance
resulted in M&G being awarded
the prestigious 2010 Global
Group of the Year award at the
15th annual Investment Week
Fund Manager of the Year
Awards. This is the second
time in three years that M&G
has received this award.
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
AER
CER
2010
£m
2009
£m
Change
%
2009
£m
Change
%
9,105
612
3
(263)
(123)
13,478
457
13
(205)
(100)
229
17
246
38
165
12
177
61
284
198bn
238
174bn
(32)
34
(77)
(28)
(23)
39
42
39
(38)
19
14
13,478
457
13
(205)
(100)
165
12
177
61
238
174bn
(32)
34
(77)
(28)
(23)
39
42
39
(38)
19
14
The improved diversification of sales by asset class was matched by an increased
diversification of sales performance by region. In 2009, 19 per cent of net retail flows
were from M&G’s distribution business outside of the UK, primarily based in Europe.
This figure had increased to 39 per cent by the end of 2010.
The retail investment market in Europe is substantially larger than the UK market. In
further response to this opportunity, M&G’s European Retail business registered its
core OEIC fund range for distribution in the Netherlands and Sweden in the fourth
quarter of 2010. Registration in both markets has already boosted sales results with
M&G being able to leverage off existing client relationships established in other
European markets. M&G already has a proven track record of success in distributing
into Europe with its registration in France in 2007, for example, having already
generated funds under management of £1.3 billion and achieved status as a top ten
cross border player in the French market2. Total funds under management sourced
outside of the UK amounted to £13.4 billion at the end of 2010, equivalent to 31 per
cent of total retail external funds managed by M&G.
The consistency and excellence of its performance resulted in M&G being awarded the
prestigious 2010 Global Group of the Year award at the 15th annual Investment Week
Fund Manager of the Year Awards. This is the second time in three years that M&G has
received this award.
In the institutional market, M&G also attracted healthy net new business on the back of
outstanding investment performance with inflows of £1.7 billion. This compares with
net inflows of almost £6.0 billion in 2009, although this latter figure was dominated by
a single £4 billion fixed income mandate. Like M&G’s retail distribution, the institutional
business also benefits from an increasingly diverse investor base with distribution
activities covering Scandinavia and the Netherlands.
M&G’s institutional business was also recognised for its investment performance
winning the 2010 UK Asset Management Firm of the Year award at Financial News’
Awards for Excellence in Institutional Asset Management.
M&G’s total funds under management at 31 December 2010 were at a record level of
£198.3 billion, up 14 per cent on the 2009 year end. External funds under management
at the end of 2010 of £89.3 billion were 27 per cent higher than the start of the year and
now represent 45 per cent of M&G’s total funds under management.
Notes
1 Source: Fundscape Pridham Report.
2 Source: Lipper FMI Saleswatch.
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ASSET MANAGEMENT
M&G
UK ASSET MANAGEMENT
FIRM OF THE YEAR
M&G’s institutional business
was also recognised for its
investment performance
winning the 2010 UK Asset
Management Firm of the
Year award at Financial News’
Awards for Excellence
in Institutional Asset
Management.
Financial performance
M&G’s IFRS operating profit rose to £246 million, an increase of 39 per cent compared
with the 2009 result of £177 million.
The full year 2010 result was a record profit level for M&G, being eight per cent higher
than the previous record achieved in 2008. If performance-related fees and carried
interest on private equity investments are excluded, M&G’s operating profit would
actually display underlying growth of 24 per cent over 2008. Equity market levels have
boosted business results, with the FT All Share averaging three per cent higher over 2010
compared to 2008. It is also the exceptionally strong net inflows over 2009 and 2010,
particularly from the Retail business that have contributed to the increased profit levels.
M&G remains focused on cost control with the cost/income ratio1 at 63 per cent over
the full year, an improvement on the 2009 result of 65 per cent. A key aspect to cost
management is to create a more flexible operational cost base, where appropriate, to
enable the business to react to significant changes in its business profile. During 2010,
M&G outsourced fund accounting, taxation and pricing operations for its UK regulated
retail funds to an external supplier. The transition of these services has secured for
M&G access to a scalable global platform to support both the current and future needs
of its funds. Outsourcing this element of its operational platform to a dedicated
provider of these services also ensures that M&G can focus on the continued delivery
of strong investment performance and winning new business.
M&G continues to provide capital efficient profits and cash generation for the
Prudential Group, as well as strong investment returns on the internally managed
funds. Cash remittances of £150 million in 2010 provided strong support for the
Group’s corporate objectives.
PRUDENTIAL CAPITAL
Prudential Capital (PruCap) manages Prudential Group’s balance sheet for profit
by leveraging Prudential Group’s market position. This business has three strategic
objectives: to provide professional treasury services to the Prudential Group; to
operate a first-class wholesale and capital markets interface; and to realise profitable
proprietary opportunities within a tightly controlled risk framework. PruCap generates
revenue by providing bridging finance, managing investments and operating a securities
lending and cash management business for the Prudential Group and its clients.
The business has consolidated its position in a period of difficult and volatile markets,
focusing on liquidity across the Prudential 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. PruCap is committed to continuing to work closely with other business
units across the Prudential Group to exploit opportunities and increase value creation
for Prudential as a whole. In particular, PruCap offers to the Prudential Group a holistic
view on hedging strategy, liquidity and capital management.
PruCap has a diversified earnings base derived from its portfolio of secured loans, debt
investments and the provision of wholesale markets services. As a result of lower net
operating revenue and prevailing market conditions, IFRS operating profits decreased
by 38 per cent to £38 million, however PruCap still delivered a cash remittance to the
Group holding company of £52 million.
Note
1 Excluding performance related fees and carried interest on private equity investments.
Prudential plc Annual Report 2010
BUSINESS REVIEW > ASSET MANAGEMENT > ASIA
51
ASSET MANAGEMENT
ASIA
£72m
Total IFRS
operating profit
FUNDS UNDER MANAGEMENT
+22%
£51.9bn
£42.4bn
2009
2010
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R
E
V
I
E
W
ASIA ASSET MANAGEMENT
Retail and institutional business net inflows
Money Market Funds net (outflows)/
inflows (MMF)
Funds under management
Total IFRS operating profit
AER
2009
£m
556
2010
£m
1,838
CER
Change
%
231
2009
£m
569
Change
%
223
(2,053)
51.9bn
72
1,443
42.4bn
55
(242)
22
31
1,550
47.2bn
58
(232)
10
24
Prudential’s asset management business in Asia manages investments for
UKIO and the Asian life companies and has also successfully leveraged
these investment capabilities to build a strategically significant and
market leading third party funds management business.
Business overview
Under the leadership of a new Chief Executive, the team has driven strong
improvements in the business.
Investment performance is a key driver of success and for 2010, 68 per cent of our
funds outperformed their peer medians or benchmarks1. Accolades received during
the year included the PCA Indonesia Equity Open Fund being recognised as ‘Fund of
the Year 2010’ in Japan by Morningstar amongst 557 open-ended funds in the domestic
market, as well as the PCA China Dragon A-share Equity Fund being named ‘Best fund
in overseas equity category’ in Korea’s 2010 MoneyToday – Morningstar Fund Awards.
In India and China, funds offered by our joint venture businesses were ranked top-
decile by their respective local rating agencies.
The business has been actively implementing its strategy of targeting higher-margin
equity and bond asset classes. Third party net inflows of £1.8 billion were driven
predominantly by Japan, which saw strong interest for its white-labelled Asia Oceanic
High Dividend Equity and its open-ended Indonesian Equity Open funds. In addition,
positive bond fund flows resulted from Taiwan and China’s successful new product
launches and strong demand for our offshore product range. Money market funds
saw net outflows totalling £2.1 billion in 2010, mainly attributed to redemptions
in India as a result of tighter liquidity conditions.
Financial performance
Prudential’s Asian asset management business’ total FUM crossed the £50 billion mark
for the first time and closed the year at £52 billion which includes a core £25 billion
from Prudential Corporation Asia’s life funds, £5 billion of assets from the Group and
£22 billion from third-party customers. Compared to 2009, the overall FUM increased
by 22 per cent, driven by net inflows of £1.8 billion and a total of £7.7 billion of positive
market and currency related movements.
IFRS operating profit from fund management of £72 million is 31 per cent higher than
in the prior year. The Funds business remitted a net £33 million of surplus capital to the
Group during 2010.
Note
1 Based on a blend of 1-year and 3-year performance.
52
BUSINESS REVIEW > ASSET MANAGEMENT > UNITED STATES
ASSET MANAGEMENT
UNITED STATES
PPM AMERICA
Total IFRS operating profit
AER
CER
2010
£m
10
2009
£m
Change
%
2009
£m
Change
%
6
67
5
100
Business overview
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 derived 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.
Financial performance
IFRS operating profit in 2010 was £10 million, compared to £6 million in 2009.
At 31 December 2010, funds under management of £54 billion were as follows:
AER
2010
2009
US
£bn
31
1
1
33
UK
£bn
15
1
–
16
Asia
£bn
Total
£bn
–
5
–
5
46
7
1
54
US
£bn
29
–
1
30
UK
£bn
12
1
–
13
Asia
£bn
Total
£bn
–
4
–
4
41
5
1
47
Insurance
Unitised
CDOs
Total funds under
management
CURIAN
Gross investment flows
Revenue
Costs
Total IFRS operating profit/(loss)
Total funds under management
AER
CER
2010
£m
2009
£m
Change
%
2009
£m
Change
%
1,361
39
(38)
1
3,457
796
25
(31)
(6)
2,260
71
56
23
117
53
806
26
(32)
(6)
2,331
69
50
19
117
48
Business overview
Curian Capital, Jackson’s registered investment advisor, provides innovative fee-based
managed accounts and investment products to advisers through a sophisticated
technology platform. Curian expands Jackson’s access to advisers while also
complementing Jackson’s core annuity product lines with Curian’s retail asset
management products.
Prudential plc Annual Report 2010
53
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Financial performance
At 31 December 2010, Curian had total assets under management of £3.5 billion,
compared to £2.3 billion at the end of 2009. Curian generated deposits of £1,361
million in 2010, up 71 per cent over 2009. The increase in both deposits and assets
under management was mainly due to an expansion of Curian’s investment platform
with the addition of two new investment strategies, plus an expansion of the firm’s
wholesaling team, in addition to a rebound from the difficult conditions in the equity
markets in early 2009.
Curian’s assets under management surpassed the break-even point during the year,
resulting in the firm reporting its first full-year IFRS basis operating profit in 2010, with
a net profit of £1 million versus a loss of £6 million during 2009.
US BROKER DEALER
NATIONAL PLANNING HOLDINGS, INC.
AER
CER
Revenue
Costs
Total IFRS operating profit
2010
£m
449
(438)
11
2009
£m
Change
%
2009
£m
Change
%
390
(386)
4
15
13
175
395
(391)
4
14
12
175
Business overview
National Planning Holdings, Inc. (NPH) is Jackson’s affiliated independent broker-
dealer network. The business is comprised of four broker-dealer firms, including
INVEST Financial Corporation, Investment Centers of America, National Planning
Corporation, and SII Investments.
NPH continues to grow the business and revenue per representative. By utilising
high-quality, state-of-the-art technology, we provide NPH’s advisers with 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 revenues of £449 million in 2010, up from £390 million in 2009, on
gross product sales of £9.3 billion. The network continues to achieve profitable results,
with 2010 IFRS operating profit of £11 million, a 175 per cent increase from £4 million in
2009. At 31 December 2010, the NPH network had 3,461 registered advisers, down
slightly from 3,478 at year-end 2009.
54
BUSINESS REVIEW > FINANCIAL REVIEW
BUSINESS REVIEW > FINANCIAL REVIEW
FINANCIAL
REVIEW
RESULTS SUMMARY
International Financial Reporting Standards (IFRS) basis results*
Statutory IFRS basis results
Profit after tax attributable to equity holders of the Company
Basic earnings per share
Shareholders’ equity, excluding non-controlling interests
Supplementary IFRS basis information
Asian operations
US operations
UK operations:
UK insurance operations
M&G
Other income and expenditure
Restructuring and Solvency II implementation costs
2010
2009
£1,431m
56.7p
£8.0bn
£676m
27.0p
£6.3bn
2010 £m
2009 £m
note i
604
855
719
284
(450)
(71)
465
622
657
238
(395)
(23)
OPERATING PROFIT BASED ON LONGER-TERM INVESTMENT RETURNS* note i
1,941
1,564
Short-term fluctuations in investment returns on shareholder-backed business
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes
Costs of terminated AIA transaction
Gain on dilution of holding in PruHealth
Loss on sale and results of Taiwan agency business
Profit from continuing operations before tax attributable to shareholders
Operating earnings per share*note ii
European Embedded Value (EEV) basis results*
Asian operations
US operations
UK operations:
UK insurance operations
M&G
Other income and expenditure
Restructuring and Solvency II implementation 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
Costs of terminated AIA transaction
Gain on dilution of holding in PruHealth
Profit on sale and results of Taiwan agency business
PROFIT FROM CONTINUING OPERATIONS BEFORE TAX
(INCLUDING ACTUAL INVESTMENT RETURNS)
Operating earnings per share*note ii
Shareholders’ equity, excluding non-controlling interests
Prudential plc Annual Report 2010
(123)
(10)
(377)
30
–
1,461
62.0p
(123)
(74)
–
–
(621)
746
47.5p
2010 £m
2009 £m
1,518
1,480
982
284
(494)
(74)
3,696
(30)
(164)
(11)
(10)
(377)
3
–
1,154
1,237
921
238
(433)
(27)
3,090
351
(795)
(84)
(910)
–
–
91
3,107
106.9p
18.2bn
1,743
88.8p
15.3bn
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2010
2009
20.17p
23.85p
£340bn
£4.3bn
19.20p
19.85p
£290bn
£3.4bn
DIVIDENDS PER SHARE DECLARED AND PAID IN REPORTING PERIOD
DIVIDENDS PER SHARE RELATING TO REPORTING PERIOD
FUNDS UNDER MANAGEMENT
INSURANCE GROUPS DIRECTIVE CAPITAL SURPLUS (AS ADJUSTED)*
Notes
i
The Company has amended the presentation of IFRS operating profit for its US insurance operations to remove the net equity hedge
accounting effect (incorporating related amortisation of deferred acquisition costs) and include it in the supplementary analysis of profit
in short-term fluctuations in investment returns. The 2009 amounts have been amended accordingly. As explained below and in Note C
to the IFRS financial statements.
ii Operating earnings per share reflects operating profit based on longer-term investment returns after related tax and non-controlling
interests but excludes in 2010 an exceptional tax credit of £158 million which primarily relates to the impact of a settlement agreed
with the UK tax authorities.
* Basis of preparation
Results bases
With the exception of the adoption of IFRS 3 (Revised) on
business combinations and associated amendments to other
standards and the altered basis of presentation for Jackson’s
IFRS operating profit referred to below, the basis of preparation
of the statutory IFRS basis results and supplementary IFRS
basis information is consistent with that applied for the 2009
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.
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 Group’s in-force long-term businesses and is a valuable
supplement to statutory accounts. With the exception of the
presentation of the new business results of the Japan life
operation which ceased writing new business in February
2010, there has been no change to the basis of presentation of
the EEV results from the 2009 results and financial statements.
Exchange translation – Actual Exchange Rate (AER)
and Constant Exchange Rate (CER)
The comparative results have been prepared using
previously reported exchange rates (AER basis) except
where otherwise stated.
Operating profit based on longer-term investment returns
Consistent with previous reporting practice, the Group provides
supplementary analysis of IFRS profit before tax attributable
to shareholders and analyses its EEV basis results, so as to
distinguish operating profit based on longer-term investment
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 non-controlling 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.
The operating profit based on longer-term investment returns
for 2010 also excludes the costs associated with the terminated
AIA transaction and the gain arising upon the dilution of the
Group’s holding in PruHealth. Consistent with the prior year
presentation, the effect of disposal and the results of the
Taiwan agency business are shown separate from operating
profit based on longer-term investment returns for 2009.
In 2010 the Company amended its presentation of IFRS
operating profit for its US insurance operations to exclude the
net equity hedge accounting effect of negative £367 million
(2009: negative £159 million) relating principally to its variable
annuity business and reclassified it as a short-term fluctuation.
Prior year comparatives have been amended accordingly.
This is a presentational change and it has no impact on the IFRS
profit before tax or the IFRS shareholders’ funds. The change
also has no impact on our EEV financial statements.
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.
After adjusting for related tax and non-controlling interests,
the amounts excluded from operating profit based on longer-
term investment returns are included in the calculation of basic
earnings per share.
Insurance Groups Directive capital surplus (as adjusted)
The surpluses shown for 2010, which is estimated, and 2009
are before allowing for the final dividends for 2010 and 2009
respectively.
56
BUSINESS REVIEW > FINANCIAL REVIEW > CONTINUED
FINANCIAL
REVIEW
IFRS RESULTS
IFRS basis operating profit based on longer-term investment returns
AER
CER
2010 £m
2009 £m
Change %
2009 £m
Change %
Insurance business
Long-term business:
Asia
USnote i
UK
Development expenses
536
833
673
(4)
416
618
606
(6)
LONG-TERM BUSINESS OPERATING PROFIT
2,038
1,634
UK general insurance commission
Asset management business:
M&G
Asia asset management
Curian
US broker-dealer and asset management
Other income and expenditure
Solvency II implementation costs
Restructuring costs
46
284
72
1
21
51
238
55
(6)
10
2,462
1,982
(450)
(45)
(26)
(395)
–
(23)
29
35
11
33
25
(10)
19
31
117
110
24
14
100
13
451
626
606
(6)
1,677
51
238
58
(6)
10
2,028
(396)
–
(23)
TOTAL IFRS BASIS OPERATING PROFIT BASED ON
LONGER-TERM INVESTMENT RETURNSnote i
1,941
1,564
24
1,609
19
33
11
33
22
(10)
19
24
117
110
21
14
100
13
21
Note
i
The Company has amended the presentation of IFRS operating profit for its US insurance operations to remove the net equity hedge
accounting effect (incorporating related amortisation of deferred acquisition costs) and include it in the supplementary analysis of profit
in short-term fluctuations in investment returns. 2009 amounts have been amended accordingly.
Group IFRS operating profit before tax based on longer-term
investment returns after Solvency II implementation and
restructuring costs was £1,941 million, an increase of
24 per cent on 2009.
In Asia, IFRS operating profit for long-term business increased
by 29 per cent from £416 million in 2009 to £536 million in 2010,
with the £416 million in 2009 being inclusive of a £63 million
one-off credit relating to changes to the Malaysia reserving
basis. Profits from in-force business grew by 20 per cent
from £494 million in 2009 to £593 million in 2010, reflecting
the continued build-up of the business in the region and the
positive impact of currency fluctuations. New business strain
of £56 million1 (2009: £72 million) was 3.7 per cent of APE new
business sales, a significant improvement compared to last year
(2009: 6.0 per cent1) demonstrating management’s continued
focus on capital efficient growth.
There was a continued strong performance across the
Asian region. Hong Kong, Singapore, Malaysia and Indonesia
accounted for 81 per cent or £434 million of operating profits
(2009: £390 million, including the impact of the one-off credit
recorded in Malaysia). Strong underlying improvements
were reported in Indonesia with operating profits higher by
54 per cent to £157 million, reflecting both the success of our
product offering and the growing maturity of this business.
Malaysia operating profits, excluding the one-off credit in
2009, were also higher by 49 per cent to £97 million, reflecting
the growing size of our book of business and the strong earnings
profile of our health and protection business. The contribution
to IFRS profits from the other Asian businesses is also improving.
The closure of Japan to new business has substantially reduced
the IFRS losses of this business and Taiwan saw an improvement
in the year as it refocused on bancassurance business. Korea
benefited from improved in-force profits in the period and
Prudential plc Annual Report 2010
Note
1 Excluding Japan which ceased writing new business in 2010.
IFRS new business strain including Japan was £57 million
(2009: £78 million).
57
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Vietnam was up 43 per cent to £43 million. Changes to reserving
bases in India and China contributed a £19 million one-off profit,
with both countries showing improvement in their underlying
results excluding this change.
Guaranteed Minimum Withdrawal Benefit (GMWB) with
‘for-life’ features. This mismatch creates additional short-term
volatility in our profit which does not reflect changes in the
underlying economic position.
The US long-term business operating profit increased by
35 per cent from £618 million in 2009 to £833 million in 2010,
reflecting strong growth in spread and fee income, up £195
million and £182 million respectively, as Jackson’s policyholder
liability balances grew. Jackson undertook various transactions
in 2010 to more closely match the overall asset and liability
duration. This contributed £108 million to operating profit in
the period. These positive contributions to profits have been
partially offset by increased costs and DAC amortisation
primarily reflecting Jackson’s growth.
Over the long-term the impact of this accounting distortion
should cumulatively net out to a broadly neutral effect, but in
the short-term the impact to the IFRS total profit can be highly
volatile. The recent growth in Jackson’s variable annuity business
has resulted in this short-term effect having a greater impact on
our IFRS operating profit than in prior years. In the 2010 half
year financial statements this accounting mismatch produced a
positive contribution to the IFRS operating profit of £123 million
for the first six months as compared to a negative contribution of
£367 million for the full year.
Jackson’s operating profit net of related DAC amortisation
excludes the net equity hedge accounting effect of negative
£367 million (2009: negative effect of £159 million) following a
change in the presentation of operating profit based on longer-
term investment returns. Jackson’s hedging approach has
always focused on optimising the economic outcome ahead
of accounting results, which means we accept an element of
variability in accounting outcomes in order to ensure we achieve
the right economic result. We believe this presentational change,
which reclassifies net equity hedge accounting effects as
short-term fluctuations in investment returns, will ensure that
Jackson’s operating results better reflect its unchanged and
continued focus on optimising economic value.
Accounting volatility previously arose within the reported IFRS
operating profit due to the difference between the movement in
the fair value of free standing derivatives within Jackson’s equity
hedging programme for annuity business and the movement
in the accounting value of Jackson’s liabilities for variable and
fixed index annuity guarantees. Typically, under IFRS, reserves
are not fair valued, which for the US variable annuities business
produces a distorting accounting effect on the IFRS operating
profit that is not representative of the true economics of
Jackson’s hedging programme. Jackson’s economically based
hedges are marked-to-market. As a result, when the marked-
to-market value of the hedges changes, there are offsetting
changes in the economic value of the hedged liabilities which
are not reflected in our accounts. This is particularly relevant
for the Guaranteed Minimum Death Benefit (GMDB) and the
In our UK business, total IFRS operating profit grew by nine per
cent to £719 million in 2010, reflecting higher retail profits and
the bulk annuity transaction agreed in the last quarter of 2010.
Profit from UK general insurance commission decreased by
£5 million to £46 million in 2010 in line with the decline in the
in-force policy numbers as the business matures.
M&G’s operating profit for 2010 was £284 million, an increase
of 19 per cent from £238 million in 2009, primarily reflecting
the continuation of exceptionally strong net inflows, including
increased sales of higher margin equity products and higher
equity market levels. In 2010 M&G had net inflows of £9.1 billion,
the second highest annual level of flows after 2009.
The Asian asset management operations reported operating
profits of £72 million, up by 31 per cent from £55 million in 2009,
driven by increased operating revenues as a result of higher
funds under management (FUM). Strong net inflows for retail
and institutional business of £1.8 billion together with positive
market and currency movements have contributed to a
22 per cent increase in FUM (including internal funds) to
£52 billion at the end of 2010.
The £55 million increase in the charge for other income and
expenditure to £450 million primarily reflects an increase in
interest payable on core structural borrowings.
We incurred £45 million of Solvency II implementation costs
in 2010.
58
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FINANCIAL
REVIEW
IFRS basis results – Analysis of long-term insurance business pre-tax IFRS operating profit based on longer-term
investment returns by driver
Margin ii
bps
Operating
profit
£m
Margin ii
bps
Operating
profit
£m
AER
2009 i
Average
liability
£m
51,000
43,373
84,063
148
106
37
2,896
94,373
(51)%
(86)
CER
2009 i
Average
liability
£m
49,735
43,153
83,964
Margin ii
bps
153
109
37
2,947
92,888
(52)%
(91)
2010
Average
liability
£m
53,858
57,496
89,693
Operating
profit
£m
1,013
688
342
592
1,241
Spread income
Fee income
With-profits
Insurance margin
Margin on revenues
Expenses
188
120
38
Acquisition costs iii
Administration expenses
(1,674)
3,492
(924) 111,354
(48)%
(83)
DAC adjustments
Expected return on
shareholder assets
Non-recurrent release of
reserve for Malaysia Life
Operating profit
518
242
–
2,038
753
458
310
448
1,041
(1,487)
(814)
614
248
63
1,634
762
469
311
466
1,112
(1,547)
(844)
628
250
70
1,677
Notes
i
The Company has amended the presentation of IFRS operating profit for its US insurance operations to remove the net equity hedge
accounting effect (incorporating related amortisation of deferred acquisition costs) and include it in short-term fluctuations.
2009 amounts have been amended accordingly.
ii Margin represents the operating return earned in the period as a proportion of the relevant class of policyholder liabilities excluding
unallocated surplus. Opening and closing policyholder liabilities have been used to derive an average balance for the period.
iii Acquisition cost ratio represents shareholder acquisition costs as a percentage of total APE, including Japan APE new business sales of
£7 million (2009: £52 million).
Spread income has increased by £260 million to £1,013 million,
an increase of 35 per cent. This is higher than the six per cent
increase in average liabilities, leading to an increase in margin,
from 148 bps in 2009 to 188 bps in 2010. The increase in spread
income arises primarily in the US, where investment spread has
increased by £168 million. This reflects transactions in the period
to more closely match the overall asset and liability duration in
2010, with an overall impact of £108 million, as well as decreased
crediting rates on fixed annuities.
Fee income has increased by £230 million to £688 million. This
principally reflects improved equity market performance and net
cash inflows into unit-linked liabilities of £6.7 billion during 2010,
equivalent to an increase on opening liabilities of 13 per cent.
The increase in fee margin from 106 bps to 120 bps reflects a
richer mix of the higher fee variable annuity business.
Insurance margin has increased £144 million to £592 million
in 2010. This increase is driven by growth in the in-force
book in Asia which has a relatively high proportion of
risk-based products.
Margin on revenues principally comprises amounts deducted
from premiums to cover acquisition costs and administration
expenses and has increased by 19 per cent from £1,041 million
in 2009 to £1,241 million in 2010. This is driven by the growth of
the business in Asia.
Acquisition costs have increased in absolute terms by
£187 million to £1,674 million in 2010, but as percentage of APE
new business sales they have fallen from 51 per cent in 2009 to
48 per cent in 2010. This is primarily due to Asia’s continuing
improvements to new business strain, and in the US a move away
from up front commission to on-going asset based commission,
which is treated as an administration expense.
Administration expenses have increased by £110 million to
£924 million in 2010 reflecting the growth of the business in the
year. Overall the margin in 2010 is 83 bps, lower than the prior
year margin of 86 bps.The improvement in this margin reflects
operational leverage benefits in Asia and UK cost savings which
have more than offset the effect of the move towards asset
based commission in the US as described above.
DAC adjustments represents the level of costs deferred in
the year offset by amortisation in the period. The year-on-year
movement reflects changes in business mix and, in part, the
acceleration of DAC amortisation in US.
Prudential plc Annual Report 2010
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investment returns
Operating income*
Operating profit based on longer-term investment returns
Average funds under management (FUM)†
Margin based on operating income†
Cost/income ratio‡
M&G
632
246
Asia
191
72
£186.5bn
34 bps
63%
£47.2bn
40 bps
64%
2010 £m
PruCap
88
38
US
229
22
Total
1,140
378
Operating income*
Operating profit based on longer-term investment returns
M&G
482
177
2009 £m
PruCap
89
61
Asia
160
55
US
183
4
Total
914
297
Average funds under management (FUM)†
Margin based on operating income†
Cost/income ratio‡
£157.5bn
31 bps
65%
£39.6bn
40 bps
67%
* Operating income is net of commissions and includes performance related fees.
† Margin represents operating income as a proportion of the related funds under management (FUM). Opening and closing FUM have been used to
derive the average.
‡ Cost/income ratio is calculated as cost as a percentage of income excluding performance-related fees.
M&G increased its asset management fee margin during the year
from 31 bps in 2009 to 34 bps in 2010. This reflects increased
sales of higher margin equity funds in the year.
Asia maintained its margin at 40 bps from 2009 to 2010. This is
driven by an improvement in the retail margin following positive
inflows into higher margin equity and bond funds, offset by a
decline in institutional margin caused by net outflows of money
market funds.
PruCap’s operating profit fell during 2010, reflecting market
conditions and higher funding costs.
The increase in US asset management operating income
principally arises in PPMA, reflecting increased performance
fees and higher management fees.
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IFRS basis profit after tax
OPERATING PROFIT BASED ON LONGER-TERM INVESTMENT RETURNS
Short-term fluctuations in investment returns:note i
Insurance operations
IGD hedge costs
Other operations
Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes
Costs of terminated AIA transaction
Gain on dilution of holding in PruHealth
Loss on sale and results of Taiwan agency business
PROFIT BEFORE TAX FROM CONTINUING OPERATIONS ATTRIBUTABLE
TO SHAREHOLDERS
Tax charge attributable to shareholders’ profit note ii
Discontinued operations (net of tax)
Non-controlling interests
PROFIT FOR THE YEAR ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY
AER
2010 £m
2009 £m
1,941
1,564
(148)
–
25
(123)
(10)
(377)
30
–
1,461
(25)
–
(5)
1,431
7
(235)
105
(123)
(74)
–
–
(621)
746
(55)
(14)
(1)
676
Notes
i
The Company has amended the presentation of IFRS operating profit for its US insurance operations to remove the net equity hedge
accounting effect (incorporating related amortisation of deferred acquisition costs) and include it in short-term fluctuations. 2009
amounts have been amended accordingly.
ii Tax charge attributable to shareholders’ profit includes a credit of £158 million which primarily relates to the impact of a settlement agreed
with the UK tax authorities.
IFRS basis profit after tax
The total profit before tax from continuing operations
attributable to shareholders was £1,461 million in 2010,
compared with £746 million in 2009. The improvement reflects
the increase in operating profit based on longer-term investment
returns and the impact of one-off items. The profit in 2010 was
reduced by the terminated AIA transaction costs of £377 million,
whereas 2009 was adversely impacted by the £621 million loss
recorded as part of the disposal of the Taiwan Agency business
and IGD hedge costs of £235 million.
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 negative £148 million comprise
positive £114 million for Asia, negative £378 million for
US operations and positive £116 million in the UK.
The positive short-term fluctuations of £114 million for our
Asian operations primarily reflect unrealised gains on the
shareholder debt portfolio, as well as a £30 million unrealised
gain on the Group’s 8.66 per cent stake in China Life Insurance
Company of Taiwan.
The negative short-term fluctuations of £378 million for our
US operations principally arise on derivative and embedded
derivative value movements. They include the negative net
equity hedge accounting effect (net of related DAC amortisation)
of £367 million (2009: negative £159 million). The strong rise
in the S&P Index in the last quarter of 2010 resulted in fair
value reductions in the free-standing derivatives backing the
guarantees embedded in Jackson’s variable and fixed index
annuity products. As a substantial proportion of these
guarantees are not fair valued for accounting purposes, there
is no accounting offset to these losses. Other US short-term
fluctuations were negative £11 million.
Prudential plc Annual Report 2010
61
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As a result of this dilution in holding and the consequential loss
of control, PruHealth has been reclassified from a joint venture
to an associate and the entity is no longer proportionally
consolidated from the date of the transaction. In accordance with
IAS 31 ‘Interests in joint ventures’ a gain of £30 million arises
upon the dilution, representing the difference between the fair
value of the enlarged 25 per cent investment still held and the
IFRS book value of the original 50 per cent investment holding.
Effective tax rates
The effective rate of tax on operating profits, based on longer-
term investment returns, was 11 per cent (2009: 24 per cent).
Adjusting the reported tax rate to exclude the exceptional tax
credit of £158 million which primarily relates to the impact of a
settlement agreed with the UK tax authorities, the underlying
tax rate on 2010 operating profits was 19 per cent. This is lower
than 2009 primarily due to 2010 benefiting from revisions to prior
period tax returns in the UK and an increase in the proportion of
income in Asia which attracts lower tax. The effective rate of tax
at the total IFRS profit level for continuing operations was two
per cent (2009: seven per cent). Adjusting the rate in 2010 to
exclude the exceptional tax credit of £158 million gives an
underlying tax rate at the total IFRS profit level for 2010 of
13 per cent. In both 2009 and 2010, we have benefited from
utilising carried forward tax losses for which no deferred tax
asset had been previously recognised.
The positive short-term fluctuations of £116 million for our UK
operations reflect principally value movements on fixed income
assets backing the capital of the shareholder-backed annuity
business, brought about by the falls in yields during 2010.
Short-term fluctuations for other operations were positive
£25 million and mainly represent unrealised appreciation on
Prudential Capital’s debt securities portfolio offset by unrealised
value movements on centrally held derivatives. The 2009 result
included £235 million costs incurred in respect of the hedge
temporarily put in place during the first quarter to protect the
IGD capital position in exceptional market conditions.
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 negative £10 million
reflects the impact of assumption changes, being primarily
a lower discount rate applied to the liabilities of the Scottish
Amicable and M&G schemes, partially offset by actual asset
returns being higher than the long-term rate assumed.
Costs of terminated AIA transaction
During the period the Group incurred pre-tax costs in relation
to the AIA transaction of £377 million. This comprises the
termination break fee of £153 million, the costs associated with
foreign exchange hedging of £100 million, underwriting fees
of £58 million and adviser and other fees totalling £66 million.
After expected tax relief, the post-tax cost is £284 million.
Gain on dilution of holding in PruHealth
On 1 August 2010, Discovery Holdings of South Africa, the
Group’s joint venture partner in its investment in PruHealth,
completed the acquisition of the entire share capital of Standard
Life Healthcare, a wholly-owned subsidiary of the Standard Life
Group, for £138 million. Discovery funded the purchase of
the Standard Life Healthcare transaction, and contributed
Standard Life Healthcare to PruHealth as a capital investment
on completion. As a result of the transaction, Discovery
have increased their shareholding in PruHealth from the
previous level of 50 per cent to 75 per cent, and Prudential’s
shareholding reduced from 50 per cent of the previous joint
venture structure to 25 per cent of the new structure of the
much enlarged business.
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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
Solvency II implementation costs
Restructuring costs
TOTAL EEV BASIS OPERATING PROFIT
AER
CER
2010 £m
2009 £m
Change %
2009 £m
Change %
1,450
1,458
936
(4)
3,840
46
284
72
1
21
1,105
1,233
870
(6)
3,202
51
238
55
(6)
10
4,264
3,550
(494)
(46)
(28)
(433)
–
(27)
3,696
3,090
31
18
8
33
20
(10)
19
31
117
110
20
14
100
4
20
1,190
1,249
870
(6)
3,303
51
238
58
(6)
10
3,654
(434)
–
(27)
3,193
22
17
8
33
16
(10)
19
24
117
110
17
14
100
4
16
In 2010, Prudential Group’s total EEV basis operating profit
based on longer-term investment returns was £3,696 million,
an increase of 20 per cent from the same period in 2009.
Long-term business profits generated by the Group increased
by 20 per cent to £3,840 million. These profits comprise:
• New business profits1 of £2,028 million (2009: £1,619 million);
• In-force profits of £1,817 million (2009: £1,601 million); and
• Negative £5 million of other items including development
expenses (2009: negative £18 million).
New business profits1 at £2,028 million, were 25 per cent higher
than last year, reflecting both a 23 per cent increase in sales
volumes as compared to 2009. This represents a one percentage
point increase in the average Group new business APE profit
margin from 57 per cent in 2009 to 58 per cent in 2010.
Strong new business APE profit margins were recorded across
the Group. The margin for the Asian business was maintained
at 60 per cent and the UK new business margin increased by
13 percentage points to 45 per cent, benefiting both from the
bulk annuity buy-in agreement written in December and higher
underlying margins on retail business. The US maintained much
of the high margins achieved in 2009, with margins falling by
eight percentage points to 65 per cent, due primarily to
anticipated reductions in spread margins on fixed and fixed
index annuities and the impact of lower assumed equity return
assumptions on variable annuities.
The contribution to operating profit from in-force business
increased by £216 million to £1,817 million. This includes a
£71 million increase in the unwind discount and other expected
returns from £1,421 million in 2009 to £1,492 million in 2010,
Prudential plc Annual Report 2010
principally reflecting the growing maturity of the Asian
in-force book. In-force profit in 2010 also includes the effect
of operating assumption changes, experience variances
and other items which had an aggregate positive impact of
£325 million (2009: positive impact of £180 million). Of this
amount, £328 million arises in the US, primarily reflecting
positive mortality, persistency, expense and spread
experience variances. The most significant of these relates to
spread experience, contributing £158 million in 2010, arising
principally from transactions undertaken in the year to more
closely match the overall asset and liability duration, the effect
of which is expected to persist in 2011, but at a reduced level.
Overall the impact of operating assumption changes, experience
variances and other items on Asia was negative £24 million, with
adverse expense and persistency changes being offset by
positive mortality and morbidity amounts.
In the UK operating assumption changes, experience variances
and other items had an overall impact of positive £21 million,
which is not significant in the context of the size of this business.
Operating profit from the asset management business and
other non-long term businesses increased to £424 million,
up 22 per cent from £348 million in 2009.
Other income and expenditure totalled a net expense of
£494 million compared with £433 million in 2009. The £61 million
increase principally reflects the higher interest payable on core
structural borrowings.
Note
1 Excludes Japan which ceased writing new business in 2010.
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AER
2010 £m
2009 £m
3,696
3,090
(55)
–
25
(30)
(164)
(11)
(10)
(377)
3
–
3,107
(530)
–
(4)
2,573
481
(235)
105
351
(795)
(84)
(910)
–
–
91
1,743
(481)
(14)
(3)
1,245
EEV basis profit after tax and non-controlling 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
Costs of terminated AIA transaction
Gain on dilution of holding in PruHealth
Profit on sale and results of Taiwan agency business
PROFIT BEFORE TAX FROM CONTINUING OPERATIONS
Tax charge attributable to shareholders’ profitnote i
Discontinued operations (net of tax)
Non-controlling interests
PROFIT AFTER NON-CONTROLLING INTERESTS
Note
i
Tax charge attributable to shareholders’ profit includes a credit of £158 million which primarily relates to the impact of a settlement agreed
with the UK tax authorities.
EEV basis profit after tax and non-controlling interests
Short-term fluctuations in investment returns
EEV operating profit is based on longer-term investment return
assumptions rather than actual investment returns achieved.
Short-term fluctuations represent the difference between the
actual investment return and those assumed in arriving at the
reported operating profit.
For our US business, short-term fluctuations in investment
returns were negative £678 million (2009: negative £401 million),
principally reflecting a reduction in expected yields on assets as
a result of derisking activities within the portfolio and higher
hedging costs, partially offset by separate account return in 2010
of 14.5 per cent being higher than the long-term expected level
of 6.8 per cent.
Short-term fluctuations in investment returns for insurance
operations of negative £55 million comprise a positive
£287 million for Asia, negative £678 million for our US
operations and positive £336 million in the UK.
For our Asian business, short-term fluctuations of positive
£287 million (2009: positive £437 million) primarily reflected
the improvement in equity markets in 2010 and unrealised
gains on the bond portfolio.
For our UK business, the short-term fluctuations in investment
returns were positive £336 million (2009: positive £445 million),
principally due to the 2010 return on the investments of the
with-profits life fund (covering policyholder liabilities and
unallocated surplus) of positive 12.0 per cent being higher
than the long-term assumed return of 6.7 per cent and to the
unrealised gains arising on corporate bonds held as part of the
annuity portfolio.
Mark to market movement on core borrowings
The mark to market movement on core borrowings was a
negative £164 million, as credit spreads continued to narrow
to more normal levels.
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EEV basis profit after tax and non-controlling
interests > continued
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 on the EEV basis comprises the
IFRS charge attributable to shareholders, and the shareholders’
share of movements in the scheme assets and liabilities
attributable to the PAC with-profits fund. On the EEV basis there
was a charge of negative £11 million (2009: negative £84 million)
which mainly reflects the impact of assumption changes, being
primarily a lower discount rate to the liabilities of the Scottish
Amicable and M&G schemes partially offset by actual asset
returns being higher than the long-term rate assumed.
Effect of changes in economic assumptions
The effect of changes in economic assumptions of negative
£10 million comprises negative £71 million for Asia, negative
£1 million for the US and positive £62 million for the UK.
In our Asian business, economic assumption changes were
negative £71 million mainly reflecting the impact of falls in
interest rates and the derisking of the portfolios in Hong Kong
and Singapore.
In our US business, economic assumption changes were negative
£1 million, with the fall in the separate account return being
offset by the beneficial effect arising from the decrease in the
risk discount rate following a reduction of 0.6 per cent in the US
10-year Treasury rate during the period.
In our UK business, economic assumption changes were positive
£62 million, where the impact of the lower risk discount rate
more than offset the effect of lower expected long-term
rates of return following a reduction in UK Gilt rates of
0.4 per cent during 2010.
Costs of terminated AIA transaction
As previously discussed, the Group incurred pre-tax costs of
£377 million in 2010 (£284 million post-tax) related to the
terminated AIA transaction.
Gain on dilution of holding in PruHealth
As previously discussed, the Company’s holding of PruHealth
has been reduced from 50 per cent to 25 per cent, following
the injection into PruHealth of Standard Life Healthcare by
the Group’s joint venture partner, Discovery Holdings of
South Africa.
On an EEV basis, a gain of £3 million arises upon the dilution,
representing the difference between the fair value of the
enlarged investment still held and the embedded value of the
original 50 per cent investment holding. From 1 August 2010
the Group incorporates 25 per cent of PruHealth’s new business
sales, profits and EEV in-force results into its consolidated EEV
financial results.
Effective tax rates
The fall in the total tax rate, excluding the impact of the
exceptional tax credit, from 28 per cent in 2009 to
22 per cent in 2010 arises from the effect of the mark to
market value movements on core borrowings. As noted above,
these movements gave rise to a charge in the EEV income
statement of £164 million in 2010 and £795 million in 2009.
As the liabilities are generally held to maturity or for the
long-term, no deferred tax asset or liability is established on
the market value adjustments and therefore, in 2010 and 2009
no deferred tax credits were established. The underlying tax rate
on profits excluding the mark to market value adjustment on
core borrowings and the exceptional tax credit was 21 per cent
in 2010 as against 19 per cent in 2009.
Prudential plc Annual Report 2010
65
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EARNINGS AND DIVIDEND PER SHARE
Earnings per share (EPS)
2010
Excluding
exceptional
tax credit i
pence
2010
Including
exceptional
tax credit
pence
2009
pence
Basic EPS based on
operating profit after
tax and non-controlling
interests:
IFRSnote ii
EEV
62.0
106.9
68.3
113.2
47.5
88.8
Basic EPS based on total profit after
non-controlling interests:
IFRS
EEV
2010
pence
2009
pence
56.7
101.9
27.0
49.8
Notes
i
The exceptional tax credit in 2010 relates to a £158 million credit
which primarily relates to the impact of a settlement agreed with
the UK tax authorities.
ii The Company has amended the presentation of IFRS operating
profit for its US insurance operations to remove the net equity
hedge accounting effect (incorporating related amortisation of
deferred acquisition costs) and include it in short-term
fluctuations. 2009 amounts have been amended accordingly.
Dividend per share
Interim dividends are recorded in the period in which they are
paid. Final dividends are recorded in the period in which they
are approved by shareholders. The second interim dividend of
13.56 pence per ordinary share for the year ended 31 December
2009 was paid to eligible shareholders on 27 May 2010 and the
2010 interim dividend of 6.61 pence per ordinary share was paid
to eligible shareholders on 23 September 2010.
Following the Board’s decision to rebase the dividend upwards
and subject to shareholders’ approval, the 2010 final dividend
of 17.24 pence per ordinary share will be paid on 26 May 2011
in sterling to shareholders on the principal and Irish branch
registers at 6.00pm BST on Friday, 1 April 2011 (the ‘Record
Date’), and in Hong Kong dollars to shareholders on the Hong
Kong branch register at 4.30pm Hong Kong time on the Record
Date (‘HK Shareholders’). Holders of US American Depositary
Receipts (‘US Shareholders’) will be paid their dividends in
US dollars on or about five days after the payment date of the
dividend to shareholders on the principal register. The final
dividend will be paid on or about 2 June 2011 in Singapore
dollars to shareholders with shares standing to the credit of their
securities accounts with The Central Depository (Pte.) Limited
(‘CDP’) at 5.00pm Singapore time on the Record Date (‘SG
Shareholders’). The dividend payable to the HK Shareholders
will be translated using the exchange rate quoted by the WM
Company at 4.00pm UK time on 8 March 2011. The exchange
rate at which the dividend payable to the SG Shareholders will
be translated into SG$ will be determined by CDP. The dividend
will distribute an estimated £439 million of shareholders’ funds.
The scrip dividend is not being offered in respect of this
dividend. In its place shareholders will be offered a Dividend
Reinvestment Plan (DRIP).
The final dividend of 17.24 pence per share brings the total
dividend for the reporting period to 23.85 pence per share,
four pence per share (20 per cent) higher than the 2009 total
dividend.
The Board will maintain its focus on delivering a growing
dividend from this new higher base, which will continue to
be determined after taking into account the 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.
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MOVEMENT ON SHAREHOLDERS’ FUNDS
IFRS
EEV
Operating profit based on longer-term investment returns
Items excluded from operating profit
TOTAL PROFIT BEFORE TAX
Exceptional tax credit
Tax, discontinued operations and non-controlling interests
PROFIT FOR THE PERIOD
Exchange movements, net of related tax
Unrealised gains and losses on Jackson securities classified as
available for salenote a
Dividends
New share capital subscribed
Other
NET INCREASE IN SHAREHOLDERS’ FUNDS
Shareholders’ funds at beginning of year
SHAREHOLDERS’ FUNDS AT END OF YEAR
Comprising
Long-term business
Free surplus note b
Required capital
Net worth note c
Value of in-force
Total
Other business note d
TOTAL note f
2010
£m
1,941
(480)
1,461
158
(188)
1,431
251
478
(511)
75
36
1,760
6,271
8,031
2009
note e
AER
£m
1,564
(818)
746
–
(70)
676
(195)
1,043
(481)
141
29
1,213
5,058
6,271
2010
£m
3,696
(589)
3,107
158
(692)
2,573
693
–
(511)
75
104
2,934
15,273
18,207
2,748
3,415
6,163
12,051
18,214
(7)
2009
AER
£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)
18,207
15,273
Notes
a Net of related changes to deferred acquisition costs and tax.
b
The increase in free surplus of £683 million from 2010 arises primarily from £1,284 million being generated by the long-term business, off-set
by cash paid to the holding company and other items.
The increase in net worth in the period principally reflects the free surplus generated in the period, offset by cash paid to the holding
company, changes to required capital and other items.
Shareholders’ funds for other than long-term business of negative £7 million (2009: negative £69 million) comprises £1,787 million for asset
management operations (2009: £1,659 million), including goodwill of £1,230 million (2009: £1,230 million), holding company net borrowings
of £2,212 million (2009: £1,780 million) and net other shareholders’ funds of £418 million (2009: £52 million).
The Company has amended the presentation of IFRS operating profit for its US insurance operations to remove the net equity hedge
accounting credit effect (incorporating related amortisation of deferred acquisition costs) and include it in short-term fluctuations.
2009 amounts have been amended accordingly.
EEV shareholders’ funds excluding goodwill attributable to shareholders is £16,741 million (2009: £13,963 million).
c
d
e
f
IFRS
Statutory IFRS basis shareholders’ funds at 31 December
2010 were £8.0 billion. This compares to the £6.3 billion at
31 December 2009, an increase of £1.7 billion, and equivalent
to 28 per cent.
The movement reflects the profit for the year after tax and
non-controlling interests of £1.4 billion, exchange translation
gains of £0.3 billion, the improvement in the level of net
unrealised gains on Jackson’s debt securities of £0.5 billion
from the position at 31 December 2009 and other items of £0.1
billion, offset by dividend payments of £0.5 billion.
EEV
On an EEV basis, which recognises the shareholders’ interest in
long-term business, shareholder funds at 31 December 2010
were £18.2 billion, an increase of £2.9 billion from the 2009 level,
equivalent to 19 per cent. This increased level of shareholders’
funds primarily reflects the profit after tax of £2.6 billion, the
Prudential plc Annual Report 2010
67
positive effects of exchange movements of £0.7 billion offset
by the dividend payments of £0.5 billion.
The shareholders’ funds at 31 December relating to long-term
business of £18.2 billion comprise £7.4 billion (up 29 per cent
from 2009) for our Asian long-term business operations,
£4.8 billion (up 16 per cent from 2009) for our US long-term
business operations and £6.0 billion (up 10 per cent from 2009)
for our UK long-term business operations.
At 31 December 2010, the embedded value for our Asian
long-term business operations was £7.4 billion, with £6.0 billion
(up 31 per cent from 2009) being in the South East Asia countries
of Indonesia, Malaysia, Philippines, Singapore, Thailand,
Vietnam together with Hong Kong. For Prudential’s other Asian
markets, the embedded value was £1.4 billion (up 21 per cent
from 2009) in aggregate.
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FREE SURPLUS AND HOLDING COMPANY CASH FLOW
The total movement in free surplus net of tax in the year 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 FROM IN-FORCE BUSINESS
Market related items
Investment in new business:
Excluding Japan
Japan
Total 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 differencesnote 1
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
Note
1
Included within other movements and timing differences is £18 million arising on the acquisition of UOB.
AER
2010 £m
2009 £m
2,139
220
2,359
(94)
(643)
(2)
(645)
1,620
–
(935)
122
807
2,531
3,338
2,748
33
557
3,338
1,914
175
2,089
(198)
(660)
(15)
(675)
1,216
987
(688)
157
1,672
859
2,531
2,065
37
429
2,531
Overview
The Group manages its internal cash flow by focusing on the free
surplus generated by the life and asset management businesses
as defined below and the percentage of net underlying free
surplus that is remitted to the holding company as cash (‘the
remittance ratio’). The tables below set out the Group’s free
surplus generation for 2010, the holding company cash flow
statement and a table showing the remittance ratio for each of
the business operations.
Free surplus generation
Sources and uses of free surplus generation from the
Group’s insurance 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
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REVIEW
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
shareholders’ other income and expenditure, and centrally
arising restructuring and Solvency II implementation costs.
During 2010 we generated total free surplus from the retained
businesses of £1,620 million (2009: £1,216 million). Underlying
free surplus generated from the in-force book increased
13 per cent from £2,089 million in 2009 to £2,359 million in 2010,
principally reflecting the underlying growth of the portfolio and
positive changes in operating assumptions and variances of
positive £220 million for our life businesses (2009: positive
£175 million). These positive changes include positive £3 million
in Asia (2009: negative £98 million), £26 million arising in the UK
(2009: positive £158 million), £191 million in the US, principally
reflecting favourable spread experience (2009: positive
£115 million).
Underlying free surplus generated has been used by our life
businesses to invest in new business. Investment in new
business1 has fallen by three per cent to £643 million in 2010.
This compares to a 23 per cent increase in sales1 and a
25 per cent increase in new business profits1. The strong
improvement in capital efficiency is primarily the result of
continuing the active management of the product and
geographical mix of the new business sold, in line with the
Group’s disciplined approach to capital conservation and
cash optimisation.
Market-related movements have improved from negative
£198 million in 2009 to negative £94 million in 2010, of which
negative £192 million relates to the US, principally reflecting
investment returns on variable annuity business and related
hedging activity. In addition, negative £74 million relates to the
UK and is offset by positive £146 million relating to Asia principally
related to favourable equity markets during 2010 and positive
£26 million relating to our asset management businesses.
Note
1 Excludes Japan which ceased writing new business in 2010.
Value created through investment in new business by life operations
2010 £m
Asian operations
Excluding
Japan
Japan
Total
US
operations
UK
insurance
operations
Group
total
excluding
Japan
Group
total
including
Japan
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
(278)
84
(194)
866
672
230
902
(2)
–
(2)
1
(1)
–
(1)
(280)
84
(196)
867
671
230
(300)
270
(30)
525
495
266
(65)
107
(643)
461
(645)
461
42
(182)
(184)
224
1,615
1,616
266
99
1,433
595
1,432
595
901
761
365
2,028
2,027
New business sales (APE)
New business margins (% APE)
Internal rate of return*
1,501
60%
>20%
1,508
60%
>20%
1,164
65%
>20%
820
45%
>20%
* 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 required capital. The impact of the time value of options and guarantees is included in the calculation.
Prudential plc Annual Report 2010
69
Value created through investment in new business by life operations > continued
AER
2009 £m
Asian operations
Excluding
Japan
Japan
Total
US
operations
UK
insurance
operations
Group
total
excluding
Japan
Group
total
including
Japan
B
U
S
I
N
E
S
S
R
E
V
I
E
W
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*
(231)
69
(162)
707
545
180
725
1,209
60%
>20%
(15)
–
(15)
3
(12)
–
(12)
(246)
69
(177)
710
533
180
713
1,261
57%
>20%
(326)
300
(26)
458
432
232
664
912
73%
>20%
CER
2009 £m
(103)
82
(21)
187
166
64
(660)
451
(675)
451
(209)
(224)
1,352
1,355
1,143
476
1,131
476
230
1,619
1,607
723
32%
>15%
Asian operations
Excluding
Japan
Japan
Total
US
operations
UK
insurance
operations
Group
total
excluding
Japan
Group
total
including
Japan
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*
(245)
75
(170)
759
589
194
783
1,300
60%
>20%
(16)
–
(16)
3
(13)
–
(13)
(261)
75
(186)
762
576
194
770
1,356
57%
>20%
(330)
304
(26)
464
438
235
673
924
73%
>20%
(103)
82
(21)
187
166
64
(678)
461
(694)
461
(217)
(233)
1,410
1,413
1,193
493
1,180
493
230
1,686
1,673
723
32%
>15%
* 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 required capital. The impact of the time value of options and guarantees is included in the calculation.
70
BUSINESS REVIEW > FINANCIAL REVIEW > CONTINUED
FINANCIAL
REVIEW
Overall, the Group wrote £3,485 million of sales on an APE basis1
in 2010 (2009: £2,844 million) generating a post-tax new
business contribution to embedded value of £1,433 million
(2009: £1,143 million). To support these sales, we invested
£643 million of capital (2009: £660 million). By focusing on sales
of products and in geographies which are less capital intensive,
the Group has increased the amount of post-tax new business
profit contribution1 to embedded value per £1 million of
free surplus invested by 29 per cent to £2.2 million
(2009: £1.7 million). We estimate the Group’s internal rate
of return for the 12 months ended 31 December 2010 to be
greater than 20 per cent. The amount of capital invested covers
both new business strain, including commissions, of £182 million
(2009: £209 million) and the required capital of £461 million
(2009: £451 million). Management will continue to focus on
capital preservation and investment in those areas which add
most value to the Group.
In Asia, investment in new business1 was £278 million, which was
up 20 per cent compared to 2009 (£231 million). This compares
to a 24 per cent increase in new business sales (APE). For each
£1 million of free surplus invested we generated £2.4 million of
post-tax new business contribution to embedded value broadly
consistent with 2009, excluding Japan (2009: £2.4 million)1. The
average free surplus undiscounted payback period for business
written in the 12 months to 31 December 2010 was three years
(2009: three years).
In the US, investment in new business was £300 million,
eight per cent lower than 2009 (£326 million) and considerably
lower than the 28 per cent increase in APE new business sales.
For each £1 million of free surplus invested we generated
£1.7 million of post-tax new business contribution to embedded
value (2009: £1.3 million). This higher return reflects a change
in business mix with a higher proportion of variable annuity
business and a reduced proportion of more capital intensive
fixed annuities. The average free surplus undiscounted payback
period for business written in the 12 months to 31 December
2010 was one year (2009: two years).
In the UK, investment in new business decreased by 37 per cent
from £103 million in 2009 to £65 million in 2010. This decrease
compares with a 13 per cent increase in APE new business sales
in the period. For each £1 million of free surplus invested we
generated £4.1 million of post-tax new business contribution to
embedded value (2009: £1.6 million). This increase reflects the
UK’s disciplined approach to pricing which has led to higher
retail margins across the product range in 2010. It is also
improved by the large bulk annuity transaction undertaken in
2010, the size of which may not be repeated in future years.
The average free surplus undiscounted payback period for
shareholder-backed business written in the 12 months to
31 December 2010 was four years (2009: five years).
Prudential plc Annual Report 2010
Note
1 Excludes Japan which ceased writing new business in 2010.
71
B
U
S
I
N
E
S
S
R
E
V
I
E
W
The preceding tables focused on actual free surplus in the year
from the in-force book of business and the level of investment in
new business. The tables below show how the VIF generated by
the in-force long-term business and the associated required
capital is modelled as emerging into free surplus over future
years. The modelled cash flows use the same methodology
underpinning the Group’s embedded value reporting and so
are subject to the same assumptions and sensitivities.
In addition to showing the amounts, both discounted and
undiscounted, expected to be generated from all in-force
business at 31 December 2010, the tables also present the
expected future free surplus to be generated from the
investment made in new business during 2010.
Expected transfer of value of in-force (VIF) and required capital business to free surplus
Expected period of emergence
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031–2035
2036–2040
2041–2045
2046–2050
2050+
Total
Undiscounted expected generation from all
in-force business at 31 December*
Undiscounted expected generation from
2010 long-term new business written*
2010 £m
Asia
635
598
573
558
554
554
541
521
495
478
468
461
446
439
429
438
433
425
422
416
2,040
1,992
2,007
2,021
10,453
US
852
546
490
440
449
380
371
349
288
274
255
216
178
162
138
123
113
106
88
84
303
171
–
–
–
UK
Total
Asia
US
UK
Total
436
407
516
451
443
433
432
428
424
416
409
405
406
401
393
383
375
368
361
350
1,445
1,040
510
301
344
1,923
1,551
1,579
1,449
1,446
1,367
1,344
1,298
1,207
1,168
1,132
1,082
1,030
1,002
960
944
921
899
871
850
3,788
3,203
2,517
2,322
10,797
93
106
132
99
91
78
79
80
79
74
73
68
69
67
65
62
64
61
64
57
303
271
269
279
1,997
313
134
85
(18)
97
72
56
89
73
63
59
49
38
32
27
23
19
17
14
9
27
4
–
–
–
21
28
27
24
26
28
26
25
26
37
24
24
25
24
24
24
24
25
24
26
115
118
75
50
41
427
268
244
105
214
178
161
194
178
174
156
141
132
123
116
109
107
103
102
92
445
393
344
329
2,038
28,397
6,376 11,877
46,650
4,680
1,282
911
6,873
* The analysis excludes amounts incorporated into VIF at 31 December 2010 where there is no definitive timeframe for when the payments will be
made. In particular it excludes the value of the shareholders’ interest in the estate. All amounts have been translated at year end exchange rates.
72
BUSINESS REVIEW > FINANCIAL REVIEW > CONTINUED
FINANCIAL
REVIEW
The above amounts can be reconciled to the new 2010 business amounts as follows:
2010 New business
Undiscounted expected free surplus generation
Less: discount effect
Discounted expected free surplus generation
Less: Free surplus investment in new business
Other items†
Post-tax EEV new business profit
Tax
PRE-TAX EEV NEW BUSINESS PROFIT
Asia*
£m
4,680
(3,713)
967
(280)
(16)
671
230
901
US
£m
1,282
(434)
848
(300)
(53)
495
266
761
UK
£m
911
(582)
329
(65)
2
266
99
365
Total
£m
6,873
(4,729)
2,144
(645)
(67)
1,432
595
2,027
* Includes Japan.
† Other items represents the impact of the time value of options and guarantees on new business, foreign exchange effects and other non-
modelled items. Foreign exchange effects arise as EEV new business profit amounts are translated at average exchange rates and expected free
surplus generation uses year end closing rates.
The equivalent discounted amounts of the totals shown in the table on the preceding are outlined below:
Discounted expected generation from all
in-force business at 31 December
Discounted expected generation from
2010 long-term new business written
2010 £m
Asia
575
510
444
405
370
343
310
280
249
225
207
190
170
157
142
139
128
117
108
99
400
275
195
139
152
US
UK
Total
800
481
408
344
325
258
237
207
161
144
125
99
78
66
53
45
40
35
28
25
79
40
–
–
–
403
348
405
333
303
274
255
234
215
195
177
163
151
138
126
113
102
93
84
76
240
109
29
11
6
1,778
1,339
1,257
1,082
998
875
802
721
625
564
509
452
399
361
321
297
270
245
220
200
719
424
224
150
158
6,329
4,078
4,583
14,990
Asia
88
91
101
70
59
47
44
41
38
33
30
27
25
22
19
19
18
16
15
12
53
35
24
18
22
967
US
292
116
68
(13)
68
48
35
50
39
31
27
21
15
11
9
7
6
5
4
2
5
2
–
–
–
848
UK
18
24
22
18
19
19
16
15
14
19
12
11
11
9
9
8
8
7
7
7
25
18
8
4
1
Total
398
231
191
75
146
114
95
106
91
83
69
59
51
42
37
34
32
28
26
21
83
55
32
22
23
329
2,144
Expected period of emergence
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031–2035
2036–2040
2041–2045
2046–2050
2050+
TOTAL
Prudential plc Annual Report 2010
The above amounts can be reconciled to the Group’s financial statements as follows:
Discounted expected generation from all in-force business at 31 December 2010
Add: Free surplus of life operations held at 31 December 2010
Less: Time value of options and guarantees
Other non-modelled items*
Total EEV of life operations
73
B
U
S
I
N
E
S
S
R
E
V
I
E
W
Total £m
14,990
2,748
(369)
845
18,214
* These relate to items where there is no definitive timeframe for when the payments will be made and are, consequently, excluded from the
amounts incorporated into the tables above showing the expected generation of free surplus from in-force business at 31 December 2010.
In particular it excludes the value of the shareholders’ interest in the estate.
In recent years, our strategic focus on capital conservation and
value optimisation has enabled us to transform the free surplus
generation profile of the Group. The undiscounted in-force free
surplus generation ability of the Group is now significant, with all
businesses contributing material amounts.
Our disciplined approach to writing low strain, high return, short
payback new business, produces an expected free surplus
generation profile with sizeable free surplus releases in the early
years, thereby ensuring that the initial investment is paid back
quickly and incremental profits are earned thereafter.
The combination of the long-term business in-force releases
depicted in the previous tables, coupled with asset management
profits, returns on excess assets together with the impact of
future new business, reinforces our confidence that we remain
on track to deliver a cumulative net free surplus after new
business investment of £6.5 billion in the 2010 to 2013 period.
74
BUSINESS REVIEW > FINANCIAL REVIEW > CONTINUED
FINANCIAL
REVIEW
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
Solvency II costs
TOTAL CENTRAL OUTFLOWS
OPERATING HOLDING COMPANY* CASH FLOW BEFORE DIVIDEND
Dividend paid net of scrip
OPERATING HOLDING COMPANY* CASH FLOW AFTER DIVIDEND
Exceptional Items:
Cash flow arising from sale of Taiwan agency business
Acquisition of UOB Life and related distribution agreements
Costs of terminated AIA transaction
IGD hedge costs
Bank loan reorganisation
Other cash movements:
Issue of hybrid debt, net of costs
Repayment of maturing debt
Receipts arising from foreign exchange movements on US$ hedging instruments
Total holding company cash flow
Cash and short-term investments at beginning of period
Foreign exchange movements
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD
* Including central finance subsidiaries.
Prudential plc Annual Report 2010
2010 £m
2009 £m
202
275
(57)
218
420
80
–
80
330
33
363
(63)
(67)
(130)
233
150
52
935
(231)
185
(146)
(34)
(226)
709
(449)
260
–
(276)
(377)
–
120
–
–
–
(273)
1,486
19
1,232
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
75
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 retention and 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 ordinarily balance close to zero before exceptional cash
flows, but from time to time additional remittances from business
operations will be made to provide the Group with greater
financial flexibility at the corporate centre.
Operating holding company cash flow for 2010 before the
shareholder dividend was £709 million, £327 million higher
than 2009. After deducting the shareholder dividend paid net
of scrip, the operating holding company cash flow was positive
£260 million (2009: £38 million).
B
U
S
I
N
E
S
S
R
E
V
I
E
W
Remittance ratio analysis
Asia
US
UK
M&G (including PruCap)
Total
2010
Net
underlying
free surplus
note i
£m
383
627
497
207
1,714
Net
remittance
to Group
£m
233
80
420
202
935
Remittance
ratio
%
Net
Remittance
to Group
£m
61
13
85
98
55
40
39
434
175
688
2009
Net
underlying
free surplus
note i
£m
161
516
562
175
1,414
Remittance
ratio
%
25
8
77
100
49
Note
i
Underlying free surplus generated in the period from in-force business less investment in new business.
Cash remittances as a percentage of free surplus
As previously highlighted, the Group focuses on the generation
of free surplus by each of the Group’s business units and then
balances cash remittances from these units between financing
new business growth, managing market shocks and covering
the Group’s central outgoings, including the shareholder
dividend. The table above highlights this balance by comparing
the 2010 net underlying free surplus generated with the net
amounts that have been remitted by each of our underlying
business operations.
Remittance ratio analysis
The holding company received £935 million of net cash
remittances from the business units in 2010, an increase of
£247 million from 2009. Overall net remittances as a percentage
of net underlying free surplus increased from 49 per cent in
2009 to 55 per cent in 2010. In line with the Group’s strategy
the highest remittance ratios are from the UK businesses.
The UK insurance operations remitted £420 million in 2010
(2009: £434 million), equivalent to 85 per cent of net underlying
free surplus. Contributions from UK with-profits were lower,
reflecting the bonus reductions effected at the start of 2009,
resulting in a lower share for shareholders in that year and lower
remittances in 2010. Net remittances from our shareholder-
backed businesses were £218 million, an increase of £68 million
from 2009. M&G and PruCap collectively remitted £202 million
in 2010 (2009: £175 million) equivalent to 98 per cent of net
underlying free surplus.
Asia remitted net cash of £233 million in 2010, an increase of
£193 million from the net £40 million remitted in 2009. This
includes a one-off remittance of £130 million from Malaysia,
representing the accumulation of historic distributable reserves.
Total injections in 2010 were £130 million; £57 million lower than
the £187 million paid in 2009. This primarily reflects the injection
made into Taiwan in 2009 to facilitate the required restructuring
after the sale of the agency business in that year.
Cash received from Jackson was £80 million in 2010, £41 million
higher than the £39 million remitted in 2009. This is equivalent to
a modest proportion of net underlying free surplus generated,
reflecting our decision to retain free surplus in the business,
in order to provide the capital to capture the attractive new
business returns created by the market dislocation and to rebuild
the capital buffers of this business following the 2008/2009
financial crisis. From 2011, it is planned that Jackson will increase
the level of remittances to the Group.
Central outflows improved by £80 million to £226 million in
2010 (2009: £306 million). Lower corporate costs and higher
tax receipts in 2010 more than offset increased net interest
payments, following the additional debt raised in 2009, and
Solvency II project spend.
Following a settlement reached with the UK tax authorities
in relation to matters arising principally in 2001 to 2008,
£266 million in exceptional tax outflows are expected to be made
over the period from 2011 to 2013. We anticipate that half will be
paid in 2011 and the remainder split evenly over 2012 and 2013.
After central costs, there was a net cash inflow before dividend
of £709 million in 2010 compared to £382 million for 2009. The
dividend paid net of scrip, was £449 million in 2010 compared to
£344 million in 2009. The take-up of scrip dividends in 2010 was
£62 million compared to £137 million for 2009.
In 2010, central cash resources funded the acquisition of
UOB Life and related distribution agreements. In addition,
£377 million relating to costs associated with the terminated
AIA transaction were also funded from our central resources.
Offsetting these outflows were net funds received of
£120 million following bank loan reorganisation.
As a result of the transactions above, together with a £19 million
foreign exchange revaluation gain, the overall holding company
cash and short-term investment balances at 31 December 2010
decreased by £254 million to £1.2 billion from the £1.5 billion at
31 December 2009.
76
BUSINESS REVIEW > FINANCIAL REVIEW > CONTINUED
FINANCIAL
REVIEW
Balance Sheet
Summary
Goodwill attributable to shareholders
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 non-controlling interest
Total liabilities and non-controlling interest
EEV BASIS NET ASSETS
Share capital and premium
IFRS basis shareholders’ reserves
IFRS basis shareholders’ equity
Additional EEV basis retained profit
EEV BASIS SHAREHOLDERS’ EQUITY (EXCLUDING NON-CONTROLLING INTEREST)
The following sections focus on key areas of interest in the balance sheet.
Investments
AER
2010 £m
2009 £m
1,466
239,297
1,232
18,811
1,310
208,722
1,486
16,236
260,806
227,754
214,727
10,253
224,980
(10,176)
214,804
3,676
24,119
186,398
10,019
196,417
(9,002)
187,415
3,394
21,672
242,599
212,481
18,207
15,273
1,983
6,048
8,031
10,176
18,207
1,970
4,301
6,271
9,002
15,273
Debt securities
Equity
Property investments
Commercial mortgage loans
Other loans
Deposits
Other investments note i
Total
2010 £m
Participating
funds
Unit-linked
and variable
annuities
Shareholder-
backed
Total
Group
53,261
31,371
8,993
256
1,888
7,272
3,887
9,054
54,274
745
–
–
749
131
54,037
990
1,509
4,693
2,424
1,931
1,832
116,352
86,635
11,247
4,949
4,312
9,952
5,850
2009 £m
Total
Group
101,751
69,354
10,905
4,634
4,120
12,820
5,138
106,928
64,953
67,416
239,297
208,722
Note
i
Includes £71 million of investments, including PruHealth from 1 August 2010, accounted for using the equity method (2009: £6 million).
Prudential plc Annual Report 2010
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Total investments held by the Group at 31 December 2010 were
£239 billion, of which £107 billion were held by participating
funds, £65 billion by unit-linked funds and £67 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 £ 67 billion investments related to shareholder-backed
operations, £6 billion was held by Asia long-term business,
£32 billion by Jackson and £26 billion by the UK long-term
business respectively. In addition £3 billion is held by our asset
management and other operations.
The investments held by the shareholder-backed operations are
predominantly debt securities, totalling £54 billion, £4 billion,
£26 billion and £22 billion for Asia, the US and the UK long-term
businesses respectively, of which 84 per cent, 95 per cent
and 98 per cent are rated, either externally or internally, as
investment grade.
In addition, £2 billion of debt securities was held by asset
management and other operations, substantially all of which
was managed by Prudential Capital.
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Policyholder liabilities and unallocated surplus of with-profits funds
Shareholder-backed business
Asia
US
UK
Total
Total
AER
2010 £m
2009 £m
At 1 January
Premiums
Surrenders
Maturities/Deaths
NET FLOWS
Investment related items and other movements
Assumption changes
Acquisition of UOB Life Assurance Limited
Dilution of holding in PruHealth
Disposal of Taiwan agency business
Foreign exchange translation difference
At 31 December
WITH-PROFITS FUNDS
– Policyholder liabilities
– Unallocated surplus
TOTAL AT 31 DECEMBER
TOTAL POLICYHOLDER LIABILITIES INCLUDING
UNALLOCATED SURPLUS AT 31 DECEMBER
13,050
3,270
(1,800)
(172)
48,311
11,735
(3,598)
(769)
38,700
4,579
(1,326)
(2,224)
100,061
19,584
(6,724)
(3,165)
1,298
1,523
19
464
–
–
1,362
7,368
3,464
–
–
–
–
1,380
1,029
4,289
(46)
–
(27)
–
(1)
9,695
9,276
(27)
464
(27)
–
2,741
92,189
15,757
(5,672)
(2,914)
7,171
10,820
(113)
–
–
(3,508)
(6,498)
17,716
60,523
43,944
122,183
100,061
92,544
10,253
102,797
86,337
10,019
96,356
224,980
196,417
Policyholder liabilities and unallocated surplus of
with-profits funds
Policyholder liabilities related to shareholder-backed business
grew by £22.1 billion from £100.1 billion at 31 December 2009
to £122.2 billion at 31 December 2010.
The increase reflects positive net flows (premiums less
surrenders and maturities/deaths) of £9.7 billion in 2010
(2009: £7.2 billion), driven by strong inflows in the US
(£7.4 billion) and Asia (£1.3 billion) and the £0.9 billion bulk
annuity transaction in the UK. Positive investment-related
and other items of £9.3 billion (2009: £10.8 billion)
also contributed to the growth following improvements in
the bond and equity markets during the year.
Other movements include foreign exchange movements of
positive £2.7 billion (2009: negative £6.5 billion) and an increase
following the acquisition of UOB Life of £464 million.
During 2010, the unallocated surplus, which represents the
excess of assets over policyholder liabilities for the Group’s
with-profit funds on a statutory basis, increased two per cent
in 2010 to £10.3 billion.
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FINANCIAL
REVIEW
Fair valuation of guarantees attaching to Jackson’s
variable annuity business
The IFRS accounting for guarantees on US variable annuity
contracts has a mixed measurement approach. GMWB ‘not for
life’ contract features are fair valued under IAS 39 and FAS 157
with a capping feature to prevent early anticipation of expected
fees for guarantees. However, the GMDB and GMWB ‘for life’
blocks of business are accounted for under grandfathered US
GAAP which does not, and is not intended to, fair value the
liabilities.
If we had fair valued the GMDB and GMWB ‘for life’ guarantees
as if they were embedded derivatives but restricted or capped
the recognition of future fees in line with IFRS, the liabilities at
31 December 2010 would have been higher by some
£650 million and £50 million, respectively. After offsetting
related adjustments to DAC amortisation and deferred tax,
the net effect would have been a reduction in shareholders’
equity of approximately £150 million.
If the liabilities were remeasured to fair value them using IAS 39
and FAS 157 principles, but with the removal of the fee capping
feature, so as to include the full value of future expected fees for
guarantees, the change in liability from the IFRS accounting
value would be favourable by some £100 million. After offsetting
related adjustments to DAC amortisation on the respective
GMDB and GMWB components of the change, and for deferred
tax, the net effect would be an increase in shareholders’ equity,
which is also estimated to be approximately £100 million.
Shareholders’ net borrowings and ratings
Shareholders’ net borrowings at 31 December 2010:
AER
2010 £m
Mark to
market
value
IFRS basis
EEV basis
IFRS basis
2009 £m
Mark to
market
value
Perpetual subordinated
Capital securities (Innovative Tier 1)
Subordinated notes (Lower Tier 2)
Senior debt
2023
2029
Holding company total
Prudential Capital
Jackson surplus notes (Lower Tier 2)
Total
Less: Holding company cash and short-term
1,463
1,255
2,718
300
249
3,267
250
159
3,676
28
117
145
33
(1)
177
–
13
190
1,491
1,372
2,863
333
248
3,444
250
172
3,866
1,422
1,269
2,691
300
249
3,240
–
154
3,394
investments
(1,232)
–
(1,232)
(1,486)
Net core structural borrowings of
shareholder-financed operations
2,444
190
2,634
1,908
(71)
103
32
8
(14)
26
–
4
30
–
30
EEV basis
1,351
1,372
2,723
308
235
3,266
–
158
3,424
(1,486)
1,938
Shareholders’ net borrowings and ratings
The Group’s core structural borrowings at 31 December 2010
totalled £3.7 billion on an IFRS basis, compared with £3.4 billion
at 31 December 2009. The movement of £0.3 billion mainly
reflects the addition of a £250 million bank funding facility in
the period following activities to reorganise certain bank loans
in the period.
After adjusting for holding company cash and short-term
investments of £1.2 billion, net core structural borrowings at
31 December 2010 were £2.4 billion compared with £1.9 billion
at 31 December 2009. The movement of £0.5 billion includes
positive operating cash flows of £0.3 billion, the movement in
borrowings of £0.3 billion mentioned above and the use of
£0.7 billion of central resources to fund the acquisition of UOB
Life and related distribution agreements and the terminated
AIA transaction costs.
In January 2011, the Company issued US$550 million
7.75 per cent Tier 1 subordinated debt, primarily to retail
investors. The proceeds, net of costs, were US$539 million
and are intended to finance the repayment of the ¤500 million
Tier 2 subordinated notes in December 2011.
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.
Prudential plc Annual Report 2010
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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 2010, we had issued commercial
paper under this programme totalling £127 million,
US$2,350 million, EUR 743 million and CHF 50 million.
The central treasury function also manages our £5,000 million
medium-term note (MTN) programme, covering both core and
non-core borrowings. During January 2010, we raised non-core
borrowings of £250 million from this programme. In April and
October 2010 we refinanced an existing internal £200 million
issue under the same programme. In total, at 31 December 2010
the outstanding subordinated debt under the programme was
£835 million, US$750 million and EUR 520 million, while the
senior debt outstanding was £450 million. In addition, our
holding company has access to £2.1 billion of syndicated and
bilateral committed revolving credit facilities, provided by
17 major international banks, expiring between 2011 and 2015.
Apart from small drawdowns to test the process, these facilities
have never been drawn, and there were no amounts outstanding
at 31 December 2010. The commercial paper programme, the
MTN programme and the committed revolving credit facilities
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 2010, the gearing
ratio (debt, net of cash and short-term investments, as a
proportion of EEV shareholders’ funds plus debt) was
11.8 per cent, compared with 11.1 per cent at 31 December
2009. Prudential plc has strong debt ratings from Standard &
Poor’s, Moody’s and Fitch. Prudential’s long-term senior debt is
rated A+, A2 (negative outlook) and A from Standard & Poor’s,
Moody’s and Fitch, while short-term ratings are A-1, P-1 and
F1 respectively.
The financial strength of PAC is rated AA by Standard & Poor’s,
Aa2 (negative outlook) by Moody’s and AA by Fitch.
Jackson National Life’s financial strength is rated AA by Standard
& Poor’s, A1 (negative outlook) by Moody’s and AA 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. No formal deficit plan was
required. However, in recognition of the fall in value of the
Scheme’s investments between 5 April 2008 and the completion
of the actuarial valuation, additional funding akin to deficit
funding was agreed by the Trustees. This is subject to
reassessment when the next valuation is completed. The total
contributions being currently made by the Group into the
scheme, representing the annual accrual cost and deficit
funding, are £50 million per annum. Deficit funding for PSPS is
apportioned in the ratio of 70/30 between the PAC with-profits
fund and shareholder-backed operations.
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
and subsequent agreements with the Trustees, £13.1 million
per annum of deficit funding is currently being paid into the
scheme. The next triennial valuations for the PSPS and SAPS
schemes are scheduled to take place as at 5 April 2011 and
31 March 2011 respectively.
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 have been agreed with
£14.1 million being paid in each of 2010 and 2011 and
£9.3 million per annum for the subsequent three years.
The valuation basis under IAS 19 for the Group financial
statements differs markedly from the full triennial actuarial
valuation basis. In particular, reflecting the trust deed provisions
over distributions, the net underlying surplus of £421 million for
PSPS is not recognised. As at 31 December 2010, on the Group
IFRS statement of financial position, the shareholders’ share of
the liabilities for these UK schemes amounted to a £83 million
liability net of related tax relief. The total share attributable to the
PAC with-profits fund amounted to a liability of £99 million net of
related tax relief.
Changes to Group holdings during the period
During 2010 we completed the acquisition of UOB Life for total
cash consideration, of SGD 495 million (£220 million), giving rise
to goodwill of £141 million. This acquisition accompanied a
long-term strategic partnership with UOB facilitating distribution
of Prudential’s life insurance products through UOB’s bank
branches in Singapore, Indonesia and Thailand.
We also announced the acquisition of Standard Life Healthcare
by our PruHealth joint venture partner Discovery and its
combination with the existing PruHealth business. This led to
a reduction in our shareholding in the enlarged combined
businesses from 50 per cent to 25 per cent effective from
1 August, the date of the acquisition. The effects on our EEV
and IFRS accounting are as previously set out in this review.
Financial instruments
The Group is exposed to financial risk through its financial assets,
financial liabilities, and policyholder liabilities. The key financial
risk factors that affect the Group include market risk, credit risk
and liquidity risk. Information on the 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 the Group’s
financial instruments to market risk and its use of derivatives is
also provided in the financial statements.
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RISK AND CAPITAL
MANAGEMENT
As a provider of financial services, including
insurance, the management 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 appetite for
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 capital requirements at all times including EU
Insurance Groups Directive (IGD) capital requirements, (b) the
Group achieves its desired target rating to meet its business
objectives, and (c) supervisory intervention is avoided.
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.
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 plan proposed by individual business units.
In the event that the business unit plans imply risk limits will be
exceeded, this will necessitate a dialogue between the executive
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’. The Group Risk and the Group Credit
Risk Committee monitor our actual exposures against these
limits on at least a monthly basis, escalating matters to Group
Executive Risk Committee (GERC) as appropriate.
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.
The key financial and non-financial risks and uncertainties faced
by the Group, and our approaches to managing them, are
described below.
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 £6.8 billion as at 31 December 2010 (2009:
£6.4 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 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 guaranteed minimum
death benefits (GMDB) on all policies in this class, guaranteed
minimum withdrawal benefits (GMWB) on 64 per cent of the
book, and guaranteed minimum income benefits (GMIB) on
only six per cent. To protect the shareholders against the
volatility introduced 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.
Prudential plc Annual Report 2010
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CATEGORY
FINANCIAL RISKS
RISK TYPE
Market risk
DEFINITION
• The risk that arises from adverse changes in the value of,
or income from, assets and changes in interest rates or
exchange rates.
Credit risk
• The risk of loss if another party fails to meet its obligations,
or fails to do so in a timely fashion.
Insurance risk
• The inherent uncertainty as to the occurrence, amount and
Liquidity risk
NON-FINANCIAL
RISKS
Operational risk
timing of insurance liabilities. This includes 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.
Business environment risk
• Exposure to forces in the external environment that could
Strategic risk
significantly change the fundamentals that drive the
business’s overall objectives and strategy.
• 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.
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
generally select conservative investment options. We are able
to meet the needs of these customers because our unique and
market-leading operational platform allows us to tailor more
than 3,400 product combinations.
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 risk in
the US business. 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. Internal positions are generally netted before any
external hedge positions are considered. The hedging programme
also covers the fees on variable annuity guarantees.
Jackson hedges the economics of its products rather than the
accounting result. This focus means that we sometimes accept a
degree of variability in our accounting results in order to ensure
we achieve the appropriate economic result. Accordingly, while
its hedges are effective on an economic basis, due to different
accounting treatment for the hedges and some of the underlying
hedged items on an IFRS basis, the reported income effect is
more variable. As previously highlighted, this resulted in a
negative net equity hedge accounting effect of £367 million
in the period (net of related DAC amortisation) as compared to
an equivalent negative effect of £159 million in 2009. During
2010, we reclassified these effects from operating profit based
on longer-term investment returns to short-term fluctuations
to ensure the Group’s operating results better reflect Jackson’s
continued focus on optimising economic value.
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.
In the US, there is interest rate risk across the portfolio. The
majority of Jackson’s fixed annuity and life liabilities allow for an
annual reset of the crediting rate, which provides for a greater
level of discretion in determining the amount of interest rate risk
to assume. The primary concerns with these liabilities relate to
potential surrenders when rates increase and, in a low interest
environment, the minimum guarantees required by state law.
With its large fixed annuity and fixed index annuity books,
Jackson has natural offsets for its variable annuity interest-rate
related risks. Jackson manages interest rate exposure through
a combination of interest rate swaps and interest rate options.
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MANAGEMENT
In the UK, the investment policy for the shareholder-backed
annuity business is to match the cash flows from investments
with the annuity payments. As a result, assets and liabilities
are closely matched by duration. The impact on profit of any
residual cash flow mismatching can be adversely affected by
changes in interest rates; therefore the mismatching position
is regularly monitored.
The exposure to interest rate risk arising from Asia is at
modest levels.
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.
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
In addition to business unit operational limits on credit risk,
we monitor closely our counterparty exposures at Group level,
highlighting those that are large or of concern. Where
appropriate, we will reduce our exposure, purchase credit
protection or make use of collateral arrangements to control
our levels of credit risk.
Debt portfolio
Our debt portfolio on an IFRS basis was £116.4 billion
at 31 December 2010. £54.0 billion of these assets backed
shareholder business, of which 95 per cent were investment
grade, compared to 93 per cent at 31 December 2009.
Sovereign debt represented 16 per cent of the debt portfolio
backing shareholder business, or £8.8 billion, at 31 December
2010. Exposures to sovereign debt have increased since
December 2009 due mainly to an enlarged position in US
Treasuries. 73 per cent of this was rated AAA and 93 per cent
investment grade. Eurozone sovereign exposures backing
shareholder business were £3.6 billion at 31 December 2010,
of which 99 per cent were AAA rated. Of the remaining
one per cent, the highest exposure was in respect of Italy
(£52 million) and Spain (less than £1 million) whilst there was
no sovereign exposure to Greece, Portugal or Ireland. The total
banking exposure to Portugal, Ireland, Italy, Greece and Spain
(PIIGS) was £363 million at 31 December 2010.
Asia
Asia’s debt portfolio totalled £14.1 billion at 31 December 2010.
Of this, approximately 69 per cent was in unit-linked and with-
profits funds with minimal shareholders’ risk. The remaining
31 per cent is shareholder exposure and is invested predominantly
(84 per cent) in investment grade bonds. For Asia, the portfolio
has performed very well, and did not experience any default
losses in 2010.
UK
The UK’s debt portfolio on an IFRS basis is £74.3 billion as at
31 December 2010, including £46.5 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 £6.0 billion in
unit-linked funds where the shareholders’ risk is limited, with
the remaining £21.8 billion backing the shareholders’ annuity
business and other non-linked business (of which 80 per cent
is rated AAA to A, 18 per cent BBB and two per cent non-
investment grade).
On a statutory (Pillar 1) basis at 31 December 2010, we held
prudent credit reserves within the UK shareholder annuity
funds of £1.8 billion to allow for future credit risk. For Prudential
Retirement Income Limited (PRIL) this allowance is set at 68 bps
decrease in the valuation discount rate at 31 December 2010
(2009: 71 bps). This now represents 43 per cent of the portfolio
spread over swaps compared to 41 per cent as at 31 December
2009. No defaults were reported on the debt portfolio held by
the UK shareholder backed annuity business in 2010.
During 2010, we continued to materially reduce our holdings
in subordinated financial debt backing our annuity business,
improving the overall credit quality of our bond portfolios.
This has resulted in gross losses of £104 million on shareholder-
backed business and £62 million on policyholder-backed
business in the period. On a Pillar I basis these losses have
been fully offset by a reduction in long-term default reserves
of £98 million shareholder/£39 million policyholder that arose as
a result of the improvement in the quality of our remaining bond
portfolios and a further release of short-term default reserves of
£6 million shareholder and £23 million policyholder, 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 a small overall pre-tax loss to operating profit of
£4 million to shareholders and £15 million to policyholders.
Prudential plc Annual Report 2010
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US
The most significant area of exposure to credit risk for the
shareholders is Jackson in the US. At 31 December 2010
Jackson’s fixed income portfolio totalling £26.4 billion,
comprised £20.2 billion corporate and government debt,
£2.8 billion of Residential Mortgage-Backed Securities (RMBS),
£2.4 billion of Commercial Mortgage-Backed Securities (CMBS)
and £1 billion of other instruments.
The US corporate and government debt portfolio of £20.2 billion
is comprised of £17.8 billion of corporate debt and £2.4 billion of
government debt. Of the £17.8 billion of corporate debt 95 per
cent is investment grade. Concentration risk within the corporate
debt portfolio is low, with the top ten holdings accounting for
approximately eight per cent of the portfolio. Our largest sector
exposures in the investment grade corporate debt portfolio are
Utilities and Energy at 16 per cent and 15 per cent respectively.
We actively manage the portfolio and will sell exposures as
events dictate.
Within the RMBS portfolio of £2.8 billion, the agency
guaranteed portion is 55 per cent. Another 22 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 £424 million of which £413 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 £11 million. The total
RMBS portfolio has an average fair value price of 88 cents on
the dollar.
The CMBS portfolio of £2.4 billion is performing strongly, with
36 per cent of the portfolio rated AAA and one 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 were £213 million (2009: £631 million). This is net
of recoveries/reversals recognised in the year of £10 million
(2009: £5 million).
In 2010, Jackson’s total defaults were £nil (2009: less than
£1 million). In addition, as part of our active management of the
book, we incurred losses net of recoveries and reversals of
£89 million (2009: less than £1 million) on credit-related sales
of impaired bonds.
IFRS write-downs excluding defaults for the year were
£124 million compared to £630 million in 2009. Of this
amount £71 million (2009: £509 million) was in respect
of RMBS securities.
The impairment process reflects a rigorous review of every bond
and security in our portfolio. Our accounting policy 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.
Unrealised gains and losses on debt securities in the US
Jackson’s net unrealised gains from debt securities has steadily
improved from negative £2,897 million at 31 December 2008
to positive £4 million at 31 December 2009 to positive
£1,210 million at 31 December 2010. The gross unrealised loss
position moved from £966 million at 31 December 2009 to
£370 million at 31 December 2010. Gross unrealised losses on
securities priced at less than 80 per cent of face value totalled
£224 million at 31 December 2010 compared to £594 million at
31 December 2009.
Asset management
The debt portfolio of the Group’s asset management operations
of £1.6 billion as at 31 December 2010 is principally related to
Prudential Capital operations. Of this amount £1.5 billion were
rated AAA to A- by S&P or Aaa by Moody’s.
Loans
Of the total Group loans of £9.3 billion at 31 December 2010,
£7.1 billion are held by shareholder-backed operations
comprised of £4.7 billion commercial mortgage loans and
£2.4 billion of other loans.
Of the £7.1 billion held by shareholder-backed operations, the
Asian insurance operations held £0.5 billion of other loans, the
majority of which are commercial loans held by the Malaysian
operation that are rated investment grade by two local rating
agencies. The US insurance operations held £4.2 billion of loans,
comprising £3.6 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 £1.0 billion of loans, the majority of which are
mortgage loans collateralised by properties.
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The balance of the total shareholder loans amounts to £1.4 billion
and relates to bridging loan finance managed by Prudential Capital.
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 annuity portfolio. The
assumptions that Prudential makes about future expected levels
of mortality are particularly relevant in its UK annuity business.
The attractiveness of reinsurance is regularly evaluated. It is used
as a risk management tool where it is appropriate and attractive
to do so.
Prudential’s persistency assumptions reflect recent experience
for each relevant line of business, and any expectations of future
persistency. Persistency risk is mitigated by appropriate training
and sales processes and managed proactively post sale. 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, expiring between 2011 and 2015. In
addition, the Group has access to liquidity via the debt capital
markets. Recent issues include a £250 million senior three-year
MTN in 2010 and the US$550 million perpetual subordinated
Tier 1 securities issued in January 2011. Prudential also has in
place an unlimited commercial paper programme and has
maintained a consistent presence as an issuer in this market
for the last 10 years. Liquidity uses and sources have been
assessed at a business unit level under base case and stressed
assumptions. The liquidity resources available and the
subsequent Liquidity Coverage Ratio (LCR) 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.
With regard to operational risk, the Group 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, including tax, regimes. Prudential
also has 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.
This results in reliance upon the operational performance
of these outsourcing partners.
Prudential’s systems and processes incorporate controls that are
designed to manage and mitigate the operational risks associated
with its activities. The Prudential Group Governance Manual was
developed to make a key contribution to the sound system of
internal control that the Group is expected to maintain under the
Combined Code of Corporate Governance in the UK and the
Hong Kong Code on Corporate Governance Practices. Business
units confirm that they have implemented the necessary controls
to evidence compliance with the Manual.
The Group also has an operational risk management
framework in place that facilitates both the qualitative and
quantitative analysis of operational risk exposures. The output
of this framework, in particular management information
on key operational risk components such as risk and control
assessments, internal incidents and external incidents, is
reported by the business operations and presented to the Group
Operational Risk Committee. This information also supports
business decision-making and lessons-learned activities; the
ongoing improvement of the control environment; the informing
of overall levels of capital held; and determination of the
adequacy of Prudential’s corporate insurance programme.
With regard to business environment risk, the Group
has a wide-ranging programme of active and constructive
engagement with governments, policymakers and regulators
in our key markets and with relevant international institutions.
Such engagement is undertaken both directly and indirectly
via trade associations. The Group has procedures in place to
monitor and track political and regulatory developments.
Where appropriate, we provide submissions and technical
input to officials and others, either via submissions to formal
consultations or through interactions with officials.
Prudential plc Annual Report 2010
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With regard to strategic risk, both business operations and
the corporate centre are required to adopt a forward-looking
approach to risk management by performing risk assessments as
part of the annual strategic planning process. This supports the
identification of potential threats and the initiatives needed to
address them, as well as competitive opportunities. The impact
on the underlying businesses and/or Group-wide risk profile is
also considered to ensure that strategic initiatives are within the
Group's risk appetite.
3 Risk factors and contingencies
Our disclosures covering risk factors can be found at the end
of this document. Note H14 of the IFRS basis consolidated
financial statements gives an update on the position for
contingencies of the Group since those published in the
2009 Annual Report.
We continue to have further options available to us to manage
available and required capital. These could take the form of
increasing available capital (for example, through financial
reinsurance) or reducing required capital (for example, through
the mix and level of new business) and the use of other risk
mitigation measures such as hedging and reinsurance.
In addition to our strong capital position, on a statutory (Pillar 1)
basis, the total credit reserve for the UK shareholder annuity
funds also protects our capital position in excess of the IGD
surplus. This credit reserve as at 31 December 2010 was
£1.8 billion. This represents 43 per cent of the portfolio spread
over swaps, compared to 41 per cent as at 31 December 2009.
Stress Testing
As at 31 December 2010, stress testing of our IGD capital
position to various events has the following results:
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 involve 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.
• An instantaneous 20 per cent fall in equity markets from
31 December 2010 levels would reduce the IGD surplus by
£200 million;
• A 40 per cent fall in equity markets (comprising an instantaneous
20 per cent fall followed by a further 20 per cent fall over a four-
week period) would reduce the IGD surplus by £650 million;
• A 150 bps reduction (subject to a floor of zero) in interest
rates would reduce the IGD surplus by £500 million; and
• Credit defaults of ten times the expected level would reduce
IGD surplus by £550 million.
Our capital position remains strong. We have continued to place
emphasis on maintaining the Group’s financial strength through
optimising the balance between writing profitable new business,
conserving capital and generating cash. We estimate that our
IGD capital surplus was £4.3 billion at 31 December 2010 (before
taking into account the 2010 final dividend), covering our capital
requirements 3.0 times. This compares to a capital surplus of
£3.4 billion at the end of 2009 (before taking into account the
2009 final dividend).
We believe that the results of these stress tests, together with
the Group’s strong underlying earnings capacity, our established
hedging programmes and our additional areas of financial
flexibility, demonstrate that we are in a position to withstand
significant deterioration in market conditions.
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.
The movements during 2010 mainly comprise:
• Net capital generation mainly through operating earnings
(in-force releases less investment in new business) of
£1.7 billion;
• Release of tax provisions of £0.2 billion;
• Foreign exchange movements of positive £0.1 billion;
Offset by:
• Final 2009 dividend, net of scrip, of £0.3 billion and interim
2010 dividend, net of scrip, of £0.1 billion;
• Inadmissible assets arising on the purchase of UOB’s life
insurance subsidiary in Singapore of £0.2 billion;
• Impact of costs incurred in relation to the terminated AIA
acquisition, net of tax, of £0.3 billion; and
• External financing costs and other central costs, net of tax,
of £0.2 billion.
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 framework,
was formally approved by the Economic and Financial Affairs
Council in November 2009 and is expected to be implemented
from 1 January 2013. 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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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.
The European Commission is in the process of consulting on the
detailed rules that complement the high-level principles in the
Directive, referred to as ‘implementing measures', which are not
expected to be finalised before late 2011.
In particular, the Committee of European Insurance and
Occupational Pensions Supervisors (CEIOPS) published a
number of consultation papers in 2009 and 2010 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 Forums, together with the Association of British
Insurers (ABI) and the Comité Européen des Assurances (CEA).
In addition, further guidance and technical standards are
currently being developed by the European Insurance and
Occupational Pensions Authority (EIOPA). These are expected
to be subject to a formal consultation in mid-2011 and finalised
by early 2012.
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 capital required
to support its 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 centrally
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 continue to engage in the ‘pre-application’
stage of the approval process for the internal model.
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.
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.
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.
Prudential plc Annual Report 2010
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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 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 2010, the new business profit mix in our Asian insurance
business was derived 59 per cent (2009: 56 per cent) from health
and protection products, 32 per cent (2009: 31 per cent) from
unit-linked products and nine per cent (2009: 13 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.
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 2010, we were offering
unit-linked products in 10 of the 11 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.
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 – similar to a UK annuity in payment.
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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, less expenses.
Fixed annuities continue to be a profitable book of business,
benefiting from favourable spread income in recent years.
Fixed index 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. An annual minimum interest
rate is guaranteed, although actual interest credited may be
higher and is linked to an equity index over the product’s index
option period. Profit comes primarily from the spread between
the return earned on investments and the amounts credited to
the contract holder’s account, less expenses, which include the
costs of hedging the equity component of the interest credited
to the contract. As previously described, hedge results are
reflected in short-term fluctuations. 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 investment 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 guarantees: 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.
Variations of the GMWBs are offered whereby the guaranteed
base can be increased, either through step-ups to a more recent
market value of the account, or through bonuses offered if
withdrawals are delayed for a particular number of years.
Additional charges are assessed for these features. 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.
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 hedging the guarantees.
As previously described, hedge results are reflected in short-
term fluctuations. 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 to cost effectively 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 on both 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 continues to believe
that, on a long-term economic basis, the equity exposure remains
well managed.
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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 favourable mortality
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. Jackson sold no institutional products
during 2010 or 2009, as available capital was directed to support
higher-margin variable annuity sales.
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, Onshore Bonds or
Flexible Investment Bonds) or regular premium (for example,
certain 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.
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.
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.
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INFORMATION
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; and
• 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.
Prudential plc Annual Report 2010
BUSINESS REVIEW > CORPORATE RESPONSIBILITY REVIEW
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CORPORATE
RESPONSIBILITY REVIEW
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Corporate Responsibility (CR) continues to be guided by
Harvey McGrath, Chairman, Prudential plc. Led by the
Chairman, the Board regularly discusses the Group’s CR
performance and reviews strategy annually.
We direct our resources towards the issues that we believe are
most relevant to our business and where we can make the most
impact through our actions and expertise. As such, we have
established four global areas of focus:
The following review provides an overview of our activities and
progress. Prudential publishes an annual CR report, available
online at www.prudential.co.uk
1 Fair and transparent products meeting customer needs
2 Best people for the best performing business
3 Protecting the environment
4 Supporting local communities
“Through 163 years of experience looking after
our customers’ interests, and supporting wider
society, we have established a heritage of
responsibility.”
Our approach
The very nature of our products is long term and we do not
underestimate the trust our customers place in us to ensure
we effectively plan and provide for them in the future. Through
163 years of experience looking after our customers’ interests,
and supporting wider society, we have established a heritage of
responsibility that is integrated into the way we run our business.
This culture of individual responsibility also extends to the high
standards of behaviour we expect from our agents and
intermediaries.
“We direct our resources towards the issues that
we believe are most relevant to our business and
where we can make the most impact.”
We are in no doubt that acting responsibly with our customers’
investments, supporting the welfare of the communities in which
they live and playing our part in protecting the environment are
fundamental to managing a sustainable company. We firmly
believe that these activities are best managed by our businesses
on the ground, those who are closest to the customer and local
stakeholders.
However, we also recognise the importance of ensuring good
governance and achieving consistent standards across the
Company, which is why the Group is accountable for developing
the overarching framework, principles and policies for each of
our CR priorities, and for reporting progress to the Board and
external stakeholders.
Fair and transparent products meeting customer needs
We are deeply aware of the importance our customers attach
to the financial decisions they face in meeting their changing
requirements for savings, income and protection.
Across the Group we serve more than 25 million customers.
The demographics of our geographies mean the profiles of our
customers and the products we offer vary across our operations.
But, in all our markets, we are committed to listening to our
customers and understanding their individual needs so that they
are able to make well-informed decisions.
In 2011 we will be publishing our Customer Charter on the
Prudential plc website, which highlights our key commitments
to our customers across the Group.
In Asia, we serve more than 15 million customers, with a mix of
life insurance, pensions, mutual funds, consumer finance, asset
management, health and protection products and services.
Healthcare is particularly important in a number of our markets
in Asia, and we continue to broaden our health and protection
product offering. Our evolving suite of health-related products
includes innovative solutions such as PRUmy child, the first
of its kind to offer coverage during pregnancy and infancy.
PRUmy child also combines protection with savings, enabling
parents to provide for their children’s education.
Last year, Prudential was the first insurance company in Asia to
launch an iPhone app. Our iPhone Retirement Calculator allows
customers to model different financial scenarios and lifestyle
variables to calculate the savings they would need to fund their
retirement. The app is available in Hong Kong, Malaysia, the
Philippines and Singapore, with local language versions also
launched in Indonesia, Korea, Taiwan, Thailand and Vietnam.
We continue to innovate in this field and have a BlackBerry
Retirement Calculator in development.
OUR FOUR CORPORATE RESPONSIBITY 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
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The United States is the world’s largest retirement savings
market. Each year more of the 78 million ‘baby boomers’1
will move into retirement. Jackson, our US business, has more
than 2.8 million policies and contracts in force. The economic
downturn and demographic changes have led many people to be
unprepared as they approach retirement. Jackson’s educational
programme, ‘Retirementology’, is designed to help people
understand how better to prepare for their financial future.
With inflation once again a concern for investors, M&G has
developed a number of innovative investment strategies for
clients. For institutional investors, M&G offers the Secured
Property Income Fund, which matches commercial property
rents against pension funds' long-term liabilities. In the retail
market, the recently-launched M&G inflation-linked Corporate
Bond Fund enables savers to protect their investments in
corporate bonds from rising prices.
Recognised for its financial strength, in 2010, Jackson increased
the number of advisers selling its variable annuity products to
more than 130,000. This made these products more widely
available as customers continued to seek greater security in
times of economic uncertainty. We also introduced further
innovations that deliver long-term value to customers. This
includes the launch of the LifeGuard Freedom Flex, the
Company’s first guaranteed minimum withdrawal benefit,
giving investors the ability to build a personalised benefit
that meets their retirement planning objectives.
Like the US, many people in the UK are insufficiently prepared
for increasingly long periods of retirement. Prudential UK is one
of the largest annuity providers in the country, paying an income
to more than one million customers every year. In addition, our
with-profits offering is among the strongest in the industry,
consistently outperforming the market for our long-term investors
and providing them with attractive returns compared with many
other investment options. The with-profits offering also protects
investors from the full impact of volatile market conditions while
giving them the comfort of knowing that their savings are invested
in a financially strong and well managed fund.
To help customers make informed financial decisions, Prudential
UK has developed a series of online guides offering clear
product information. This includes an interactive questionnaire
which helps customers find an annuity product to meet their
needs by calculating what level of income could be generated.
“As one of the largest active investors in the
UK stock market, M&G takes seriously its
responsibilities as a shareholder.”
M&G, Prudential’s UK and European fund management
business, has served retail and institutional investors for
80 years. It has a history of innovation, designing new funds
and investment plans that meet a clear client need.
As one of the largest active investors in the UK stock market,
M&G takes seriously its responsibilities as a shareholder.
Its strategy is to invest in companies, not chase share prices.
M&G takes a long-term approach to investment opportunities
and, provided the investment case remains intact, maintains its
conviction in the companies it holds.
As a Group with a long-term view, it is clearly important to
participate in global debates and policy considerations that affect
our customers. Across our business we share our knowledge and
expertise to help inform policy debates.
In October 2010, in partnership with the Washington DC-based
think tank, the Center for Strategic and International Studies
(CSIS), we published the Global Aging Preparedness Index.
This study discussed the policy implications of aging populations
in 20 countries and potential reform strategies. During 2011, we
will continue to participate in the debate. A copy of the report is
available at http://gapindex.csis.org
Customer service and performance
Prudential’s reputation for good customer service has continued to
be recognised through a number of awards and industry rankings.
In 2010...
• Prudential Corporation Asia achieved:
’Best in Achieving Total Customer Satisfaction’ (Life Insurance)
at the 2010 Indonesia Customer Satisfaction Awards,
sponsored by SWA Magazine
’Best Fund in Overseas Equity’ in the 2010 Money Today-
Morningstar Fund Awards, sponsored by KOFIA (Korea
Financial Investment Association)
’Best Performing Fund of its Category’ awarded to PRUAsia
Pacific Shariah Equity Fund at the Edge-Lipper Malaysia
Fund Awards
• In the US, Jackson achieved:
‘World Class’ status and ‘Highest Customer Satisfaction’ from
the Service Quality Measurements Group (SQM). This marked
the fifth consecutive year that Jackson has achieved world
class status
Prudential plc Annual Report 2010
Note
1 US Census Bureau – those born since 1945.
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Best people for the best performing business
Across the Group, we have around 25,000 employees.
We work in an extremely competitive marketplace that
demands we attract the most talented people. It is important
that we continue to create an environment that appeals to the
right individuals – those who are committed and able to
deliver top performance for our customers and shareholders.
Developing credible successors
Strong leadership is critical to the continued success of our
business. Every year we conduct a review across the Group to
identify, develop and reward people with leadership potential.
During 2010, we held four events in each of our Management
Development and Leadership Development programmes.
These events support the Group’s succession and development
strategy and, in 2010, more than 75 individuals were assessed
for their long-term leadership potential.
It is important that we not only develop talent from within the
business, but also use our brand strength and heritage to attract
new talent. Our flagship development programme, Momentum,
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, participants gain the management skills and experience
required to succeed in an international business. Momentum
places a strong emphasis on diversity and is open to people
both within and outside Prudential. In 2010, the Momentum
website received more than 58,000 visits from 142 countries.
More than 2,800 people from 83 countries applied for the
programme. The 30 successful applicants increased the total
number of participants in the programme to 60, who are in roles
across the Group.
• Prudential UK achieved:
Five-star rating for excellent service at the Financial Adviser
Service Awards for the second year running
‘Best Annuity Provider’ at the 2010 Professional Adviser Awards
• M&G was awarded:
‘Global Group of the Year’ at the 2010 Investment Week Fund
Manager of the Year Awards
‘Outstanding Investment House Award’ at the OBSR Honours
for Excellence Awards
In the UK, Prudential is a member of the Association of British
Insurers’ (ABI) Customer Impact Scheme, which seeks to drive
continuous improvement through monitoring customers’
experiences. We are one of 35 companies that participate in the
annual Customer Impact Survey. In 2010, our UK business saw
an increase in the number of customers rating it ‘very good’ or
‘excellent’ for the time taken to arrange an annuity (64 per cent).
In part this is due to our participation in the ‘Options’ initiative.
This industry-wide scheme, of which we are a founding member,
is designed to speed up the exchange of information and funds
between pension and annuity providers.
Despite improvements in consumer confidence and market gains
in 2009, some scores in the ABI Customer Impact Scheme fell
sharply across the industry in the 2009/10 study, especially for
return on investment and industry reputation. Our scores came
within the industry average. While this demonstrates that we
have achieved a solid performance in very challenging market
conditions, we are taking action. This includes providing more
information about how our with-profits fund is performing and
what impact this may have on a policy. We are also improving our
service to our annuity customers. We have revised our annuity
quotes to make them clearer, and we are providing interactive
online tools which explain the effects of different annuity choices.
Across the Group, we always try to resolve problems for our
customers as quickly and smoothly as possible, and we are
committed to handling any customer complaints in a fair and
timely manner.
In the UK, the Financial Ombudsman Service (FOS) publishes
complaint data on case adjudications for more than 150 financial
services companies. Prudential performed well and was placed
in the top 10 per cent of all companies in the FOS data.
“ In 2010, the website for
our flagship development
programme, Momentum,
received more than 58,000
visits from 142 countries.”
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Building and rewarding performance
We believe that employees should be rewarded for the
contribution they make to our business as a whole. Our reward
system is therefore based on both individual performance and
behaviours. 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.
It is important for our employees to have an opportunity 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 2010, more than 14 per cent of eligible employees participated
in the SAYE scheme and almost six per cent in the SIP. Through
these plans, more than two-thirds of employees in the UK now
own, or have an interest in, Prudential shares. In Asia, we operate
two SAYE schemes, similar to those in the UK, which are open
to both employees and agents. Almost a quarter of eligible
employees and more than 37 per cent of eligible agents
participated in these schemes in 2010.
Developing an organisation that works
We recognise that an important part of sustaining performance
comes from effectively engaging and communicating with our
employees. We conduct regular surveys in our businesses to:
monitor levels of engagement with Prudential as an employer;
identify the effectiveness of our organisations’ structures and
practices, and highlight areas for improvement.
Across the Group there are dedicated intranet sites to
keep employees up to date, and ‘Town Hall’ events that
offer employees the opportunity to ask questions of senior
management teams. 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.
Our UK business also has a long-standing relationship with the
union Unite.
At Group Head Office, a dedicated team provides regular
communication to employees across the Group, through the
Group intranet. This includes communication from senior
management on Group strategy, direction and performance.
We also regularly hold a conference for the Group Leadership
Team, approximately 75 senior managers from across the
Company who are either leading a significant part of the Group
strategy or responsible for implementing a major part of it.
Diversity
“We fully recognise the value that a diverse
workforce brings to our organisation and believe
Prudential should reflect the diversity of the
markets in which we operate.”
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. These are also
incorporated into our Group Code of Business Conduct which
sets individual standards of employee behaviour. The code is
made available to all employees on the Group intranet site.
We fully recognise the value that a diverse workforce brings
to our organisation and believe Prudential 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 our policy to recruit and develop talented people, regardless
of their disability status, and to continue employing people who
become disabled.
We also train our people to be aware of, and sensitive to,
the needs of employees and customers with a disability.
Protecting the environment
Our environmental strategy is focused on increasing the
efficiency of our business operations by reducing the direct
impact of the properties we occupy, and the properties we
manage through PRUPIM, our real estate investment manager.
Reducing our direct impact: occupied properties
For all UK buildings, and Jackson’s main premises in North
America (in Lansing, Michigan and Denver, Colorado) we
assess the direct impact that our occupied properties have
on the environment. This includes monitoring energy
consumption, carbon dioxide emissions, water consumption,
waste and recycling.
One of the challenges we face in reporting our environmental
impacts on a global basis is the collection of robust data for our
operations in Asia. Across the region we are often an occupier
of multi-tenanted properties and environmental data collection
is not the norm. Nonetheless, we are developing processes, and
identifying technologies, by which we can accurately begin to
measure our impact.
Prudential plc Annual Report 2010
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The UK Government is committed to reducing national carbon
emissions by 80 per cent from 1990 levels by 2050. A central
part of its strategy is the introduction of a mandatory climate
change and energy savings scheme, the Carbon Reduction
Commitment Energy Efficiency Scheme. In 2010, we registered
as a participant in this scheme. We will be reporting our footprint
data in July 2011.
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 usage and efficiency of a building, enabling property
investors and prospective occupiers to consider energy
efficiency ratings and levels of carbon emissions. EPCs for our
occupied and commercial properties have been introduced in
the UK. In 2010, we retained our ISO 14001 environmental
management certification for all our UK occupied properties.
A number of our customer-focused initiatives also deliver wider
benefits in support of our CR agenda. For example, in the US,
Jackson’s green delivery programme offers customers the
option to receive some of their correspondence electronically.
This has helped Jackson to reduce its paper consumption and
generate cost savings for the business. Jackson has also
provided funding to the US non-profit organisation Green
Forests to plant 100,000 trees.
Reducing our impact from our property
investment portfolio
PRUPIM manages more than £16 billion (at 31 December 2010)
worth of property assets, making it one of the largest real estate
investment managers in the UK and Europe.
PRUPIM’s vision as a leading real estate fund manager is to
deliver superior investment performance through further
integrating sustainability into its business culture, activities
and decision making. It seeks to address its own impact,
and influence the property sector, through innovation and
thought-leadership.
PRUPIM was recertified during 2010 to ISO 14001 for the
management of its real estate investment portfolio. PRUPIM
also maintained ISO 14001 certification at 26 managed office
investment properties and PAS99, the world’s first integrated
management system which includes ISO 14001, at 10 managed
shopping centres.
In 2010, the business developed a Sustainability Education
Programme for its employees. This included more than
22 hours of workshops, seminars and discussion groups,
enabling colleagues to improve their understanding of
sustainability issues.
Part of PRUPIM’s strategy is to incorporate sustainability
considerations into its investment appraisal and decision-making
process. This includes a sustainability questionnaire as part of
the appraisal system which determines the value of the assets.
PRUPIM is a signatory of the UN’s Principles for Responsible
Investment and continues to lead the property industry’s
developments in sustainability through its 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 Better
Buildings Partnership.
PRUPIM’s approach and progress can be found in its annual
Sustainability Report. For more details please visit www.
PRUPIM.com
Supporting local communities
Prudential has a long history of supporting the community,
from our earliest days of Victorian philanthropy. All our
businesses implement community investment programmes
and we encourage our operations to establish partnerships
focused on education (particularly financial education) and
social welfare.
Our approach to community investment is to support charitable
organisations and appropriate NGOs, not only through funding,
but also through the experience and expertise of our employees.
Employee volunteering
In 2010, almost 25 per cent of employees volunteered in their
community on a wide range of projects. These varied from
fundraising for local charities such as Cancer Research and the
Muscular Dystrophy Campaign in the UK, to employees giving
up their time to distribute food to the homeless in the US and
delivering financial education seminars in Asia.
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Financial education
As a provider of financial services we believe that encouraging
and supporting financial literacy helps to underpin overall
economic development and success.
In addition to the financial education projects included in the
Chairman’s Challenge, we support a number of other initiatives
that aim to improve financial knowledge.
In 2010, our financial capability strategy in Asia continued to gain
strength. This year more than 4,400 women in China, Indonesia
and Vietnam, participated in our financial training seminars
– ‘Investing in Your Future’. These events, first launched in China
in 2004, directly support women who, while often responsible
for planning the family’s financial needs, have traditionally had
limited financial training. In the past six years, more than 27,500
women have attended our financial training seminars in Asia.
Since 2007, Prudential has 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. The programme has reached more than 6,000 students
from 26 schools in seven provinces.
In the UK, we partner with a range of organisations such as
Citizens Advice, the Personal Finance Education Group (pfeg),
and the Specialist Schools and Academies Trust. As a result of
these partnerships, thousands of adults and children are learning
essential financial literacy skills. Our partnership with Citizens
Advice is also helping people to make decisions that will have a
profound effect on their financial welfare.
Chairman’s Challenge
“Over the last five years, since the Chairman’s
Challenge was launched, 108 annual projects
have been supported.”
Many of our employees volunteer through our Group-wide
flagship programme, the Chairman’s Challenge.
Over the last five years, since the Chairman’s Challenge was
launched, 108 annual projects have been supported by our
employees in partnership with charities including Help Age
International, Plan International and Junior Achievement.
All of the projects included in the Chairman’s Challenge receive
a financial donation from the Group for each employee who
signs up as a volunteer, and the five short-listed projects receive
additional funding. Each year, employees across the Group are
invited to vote for the shortlisted project they believe has made
the greatest impact.
The winning project
In 2010, the winning project was the Goal for Youth programme
in Hong Kong, where more than 1,800 secondary school
students benefited from attending financial management
workshops run by more than 188 Prudential volunteers, in
partnership with Junior Achievement.
Shortlisted projects included:
• Prestasi Junior Indonesia working with more than
120 Prudential volunteers, who gave up four weekends to run
a variety of educational projects for children at a safe house
in Jakarta
• Junior Achievement in the US, where 163 Jackson employees
dedicated 463 hours to teaching young people financial skills
in 105 classrooms, benefiting 2,500 students
• Plan International Thailand, working with 316 Prudential
employees who helped to build financial skills in seven schools
reaching 1,500 students
• Prudential UK employees dedicated 660 hours to Age UK’s
Call in Time programme, helping 370 isolated older people
re-engage with the community.
Prudential plc Annual Report 2010
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Disaster relief
The Group maintains a fund which can be activated to support
relief efforts following disasters in the countries where we
operate.
Our commitment to disaster relief often goes beyond financial
aid, providing on-the-ground support to address the most
critical needs. Following the earthquake that struck Western
Sumatra in Indonesia, near the city of Padang, at the end of
2009, we contributed approximately £1 million, and many of our
employees worked as volunteers. Funding was used to support
initial emergency relief efforts and subsequent reconstruction
work. We have continued to monitor progress and, during 2010,
Prudential leaders in Asia attended a ceremony in Padang,
celebrating the completion of 220 new houses, a children's library
and a play centre. These buildings were constructed by Padang
Kapas villagers and our charity partner, Posko Jenggala.
In 2010, Save the Children became a new charity partner
through the Group’s support for its Children’s Emergency Fund.
Donations
In 2010, the Group spent £7.5 million supporting community
activities. Direct donations to charitable organisations amounted
to £5.7 million, of which approximately £3.5 million came from
EU operations.
This is broken down as follows: education £862,000; social
and welfare £1,804,000; environment and regeneration
£19,000; cultural £61,000 and staff volunteering £727,000.
The aggregate figure for direct charitable donations from
Prudential's non-EU subsidiaries (Jackson National Life
Insurance Company and Prudential Corporation Asia)
amounted to £2.2 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 2010.
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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 integrated in our Code of Business Conduct. Our
code is reviewed by the Board on an annual basis. Refer to
page 120 for more information.
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 have signed up to the Prompt Payment Code,
launched in December 2008 by the UK Department for
Business, Enterprise and Regulatory Reform. In 2010, our trade
creditor days, based on the ratio of amounts that were owed to
trade creditors at the year-end to the aggregate of the amounts
invoiced by trade creditors during the year, were 23 days.
The Prompt Payment Code and its signatories can be found
at www.promptpaymentcode.org.uk
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
values and standards are aligned with our Group Code of
Business Conduct.
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.
“ In 2010, Save the Children
became a new charity partner
through the Group's support for
its Children's Emergency Fund.”
£7.5m
In 2010, the Group spent
£7.5 million supporting
community activities
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BUSINESS REVIEW > CORPORATE RESPONSIBILITY REVIEW > CONTINUED
CORPORATE
RESPONSIBILITY REVIEW
GOVERNANCE STRUCTURE
RESPONSIBILITIES
PRUDENTIAL PLC BOARD
GROUP RESPONSIBILITY
COMMITTEE
• Approves strategy
• Approves CR Report
• Monitors progress
• Identifies and develops CR policies
GROUP CR TEAM
• Collates data for internal and external reporting
• Publishes annual CR Report
• Oversees CR risks and issues management
• Collates and shares CR practices across the Group
• Develops and drives initiatives related to
functional responsibilities
• Tracks, reviews and assesses ongoing initiatives
• Provides data/information for internal and
external reporting
BRAND COUNCIL
HR DIRECTORS
COMMUNITY FORUM
ENVIRONMENT,
HEALTH & SAFETY
COUNCIL &
PRUPIM OPSCO
Prudential plc Annual Report 2010
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
BOARD OF DIRECTORS
CHAIRMAN
EXECUTIVE DIRECTORS
HARVEY MCGRATH
CHAIRMAN
TIDJANE THIAM
GROUP CHIEF EXECUTIVE
NIC NICANDROU ACA
CHIEF FINANCIAL OFFICER
ROB DEVEY
EXECUTIVE DIRECTOR
JOHN FOLEY
EXECUTIVE DIRECTOR
MICHAEL MCLINTOCK
EXECUTIVE DIRECTOR
BARRY STOWE
EXECUTIVE DIRECTOR
MIKE WELLS
EXECUTIVE DIRECTOR
NON-EXECUTIVE DIRECTORS
KEKI DADISETH FCA
NON-EXECUTIVE DIRECTOR
SIR HOWARD DAVIES
NON-EXECUTIVE DIRECTOR
MICHAEL GARRETT
NON-EXECUTIVE DIRECTOR
ANN GODBEHERE FCGA
NON-EXECUTIVE DIRECTOR
BRIDGET MACASKILL
NON-EXECUTIVE DIRECTOR
PAUL MANDUCA
SENIOR INDEPENDENT
NON-EXECUTIVE DIRECTOR
KATHLEEN O’DONOVAN ACA
NON-EXECUTIVE DIRECTOR
JAMES ROSS OBE
NON-EXECUTIVE DIRECTOR
LORD TURNBULL KCB CVO
NON-EXECUTIVE DIRECTOR
Prudential plc Annual Report 2010
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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 in September 2008 and
became the Chairman and Chairman
of the Nomination Committee in
January 2009. Harvey has a long and
distinguished career in the international
financial services industry, having
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 is 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.
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. Age 59.
EXECUTIVE DIRECTORS
TIDJANE THIAM
GROUP CHIEF EXECUTIVE
Tidjane Thiam has been an executive
director of Prudential since March 2008.
He was the Chief Financial Officer until
September 2009 and became Group
Chief Executive in October 2009. Tidjane
was previously Chief Executive Officer,
Europe at Aviva where he worked from
2002 to 2008 and 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 later 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. He is a member of the Board of
the Association of British Insurers (ABI),
a member of the International Business
Council (IBC) of the World Economic
Forum (WEF) and a member of the
Council of the Overseas Development
Institute (ODI) in London. In January 2011,
he was appointed to chair the G20 High
Level Panel for Infrastructure Investment
until the November 2011 G20 Summit.
Tidjane sits on the Africa Progress Panel
chaired by Kofi Annan and is a sponsor
of Opportunity International. Age 48.
NIC NICANDROU ACA
CHIEF FINANCIAL OFFICER
Nicolaos Nicandrou (Nic) has been an
executive director of Prudential and Chief
Financial Officer since 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 PriceWaterhouseCoopers
where he worked in both London and
Paris. Age 45.
ROB DEVEY
EXECUTIVE DIRECTOR
Robert Devey (Rob) has been an
executive director of Prudential and Chief
Executive, Prudential UK and Europe
since November 2009. Rob joined
Prudential from Lloyds Banking Group
where he worked since 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. Age 42.
JOHN FOLEY
EXECUTIVE DIRECTOR
John Foley was appointed an executive
director of Prudential and Group Chief
Risk Officer in January 2011. He joined
Prudential as Deputy Group Treasurer in
2000 before being appointed Managing
Director, Prudential Capital (formerly
Prudential Finance (UK)) and Group
Treasurer in 2001. He was appointed
Chief Executive of Prudential Capital
and to the Group Executive Committee
in 2007. Prior to joining Prudential, John
spent three years with National Australia
Bank as General Manager, Global Capital
Markets. John began his career at Hill
Samuel & Co Limited where, over a 20
year period, he worked in every division
of the bank, culminating in senior roles
in risk, capital markets and treasury of
the combined TSB and Hill Samuel Bank.
Age 54.
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
from 2000 to 2008. Since October 2008,
he has been a Trustee of the Grosvenor
Estate. Age 50.
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
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BOARD OF DIRECTORS
and CEO of Nisus, a subsidiary of
Pan-American Life, from 1992 to 1995.
Before joining Nisus, Barry spent 12 years
at Willis Corroon in the US. Age 53.
MIKE WELLS
EXECUTIVE DIRECTOR
Michael Wells (Mike) has been an
executive director of Prudential since
January 2011 when he succeeded
Clark Manning as President and CEO of
Jackson National Life Insurance Company
(Jackson). Mike has served in a variety of
senior and strategic positions at Jackson
over the last 15 years, including President
of Jackson National Life Distributors.
Mike has been Vice Chairman and
Chief Operating Officer of Jackson for
the last nine years. During this period
he has led the development of Jackson’s
highly profitable variable annuity business
and been responsible for IT, strategy,
operations, communications, distributions,
Curian and the retail broker dealers.
Age 50.
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. Keki is a member of
the Remuneration Committee and was
a member of the Audit Committee
from 2005 to 2007. 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. He serves
as Chairman of Sony India Pvt Ltd and is
a 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
Prudential plc Annual Report 2010
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. Age 65.
SIR HOWARD DAVIES
INDEPENDENT NON-EXECUTIVE
DIRECTOR, CHAIRMAN OF THE
RISK COMMITTEE AND MEMBER
OF THE AUDIT COMMITTEE
Sir Howard has been an independent
non-executive director of Prudential
and Chairman of the Risk Committee
since October 2010. He joined the
Audit Committee in November 2010.
Sir Howard remains the Director of the
London School of Economics and Political
Science (LSE) and, although he has
resigned, will continue in the post until
such time as a suitable successor is found.
Prior to joining the LSE in September
2003, he was Chairman of the Financial
Services Authority, the UK’s financial
regulator. He is also a director of Morgan
Stanley Inc. Age 60.
MICHAEL GARRETT
INDEPENDENT NON-EXECUTIVE
DIRECTOR AND MEMBER OF THE
REMUNERATION COMMITTEE
Michael Garrett has been an independent
non-executive director of Prudential and a
member of the Remuneration Committee
since September 2004. He worked for
Nestlé from 1961 becoming Head of Japan
from 1990 to 1993 and then Zone Director
and Member of the Executive Board,
responsible for Asia and Oceania. 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.
Age 68.
ANN GODBEHERE FCGA
INDEPENDENT NON-EXECUTIVE
DIRECTOR, CHAIRMAN OF THE AUDIT
COMMITTEE AND MEMBER OF THE
RISK 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 becoming its Chairman in October
2009 and joined the Risk Committee in
November 2010. 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. From its nationalisation in 2008
until January 2009, Ann was Interim Chief
Financial Officer and Executive Director
of Northern Rock. Age 55.
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
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James is Chairman of the Board of
Trustees of the Liverpool School of
Tropical Medicine. He was previously
a non-executive director of Schneider
Electric in France, Chairman of the
Leadership Foundation for Higher
Education, and a non-executive director
of McGraw-Hill and Datacard Inc in
the United States. Prior to that he was
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.
Age 72.
LORD TURNBULL KCB CVO
INDEPENDENT NON-EXECUTIVE
DIRECTOR AND MEMBER OF THE RISK
AND REMUNERATION COMMITTEES
Lord Turnbull has been an independent
non-executive director of Prudential since
May 2006. He joined the Risk Committee
and the Remuneration Committee in
November 2010. From January 2007 to
November 2010 he was a member of the
Audit Committee. 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 from 2006 to 2007. He also
worked part-time as a Senior Adviser to
the London partners of Booz and Co (UK)
until February 2011. Age 66.
rejoined the Board of Prudential having
resigned in 2001 as a result of a potential
conflict of interest. She has been a
member of the Remuneration Committee
since 2003 and became its Chairman in
May 2006. Bridget has also been a
member of the Nomination Committee
since March 2004.
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 and became Chief
Executive Officer in February 2010.
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 from 2005 to
2008, Scottish & Newcastle PLC from
2004 to 2008 and J Sainsbury Plc from
2002 to 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. Age 62.
PAUL MANDUCA
SENIOR INDEPENDENT DIRECTOR
AND MEMBER OF THE AUDIT,
REMUNERATION AND NOMINATION
COMMITTEES
Paul Manduca has been an independent
non-executive director of Prudential
since October 2010 and succeeded
James Ross as the Board’s Senior
Independent Director in January 2011.
He joined the Audit and Remuneration
Committees in November 2010 and
became a member of the Nomination
Committee in January 2011.
Paul was appointed as a non-executive
director of Wm Morrison Supermarkets
Plc (Morrisons) in September 2005.
He is currently the Senior Independent
Director, a member of the Nomination
Committee and Chairman of the
Remuneration Committee of Morrisons.
He has previously chaired the Audit
Committee and is stepping down from
the Board of Morrisons in March 2011.
He is also Chairman of Aon Limited,
a non-executive director and Chairman
of the Audit Committee of KazmunaiGas
Exploration & Production Plc, Chairman
of Henderson Diversified Income Limited
and a director of JPM European Smaller
Companies Investment Trust Plc. Paul
was a director of Development Securities
plc until March 2010, Chairman of
Bridgewell Group plc until 2007
and a director of Henderson Smaller
Companies Investment Trust plc until
2006. Paul was European CEO of
Deutsche Asset Management from
2002 to 2005, global CEO of Rothschild
Asset Management from 1999 to 2002
and founding CEO of Threadneedle Asset
Management Limited from 1994 to 1999
when he was also a director of Eagle Star
and Allied Dunbar. Paul is a member of the
Securities Institute. Age 59.
KATHLEEN O’DONOVAN ACA
INDEPENDENT NON-EXECUTIVE
DIRECTOR AND MEMBER OF
THE AUDIT AND NOMINATION
COMMITTEES
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 September 2009. Kathleen
joined the Nomination Committee in
November 2010. Kathleen is also a
director and Chairman of the Audit
Committee of Trinity Mirror plc, the
Senior Independent Director and
Chairman of the Audit Committee
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. Age 53.
JAMES ROSS OBE
INDEPENDENT NON-EXECUTIVE
DIRECTOR AND MEMBER OF THE RISK
AND NOMINATION COMMITTEES
James Ross has been an independent
non-executive director of Prudential since
May 2004 and the Senior Independent
Director from May 2006 to December
2010. He was succeeded by Paul
Manduca as Senior Independent Director
in January 2011 and will retire from the
Board at the conclusion of the AGM on
19 May 2011. He became a member of
the Risk Committee in November 2010
and was a member of the Remuneration
Committee from 2004 to 2006 and from
2008 to November 2010. He was also a
member of the Audit Committee from
2005 to 2007.
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CORPORATE GOVERNANCE
Compliance with Corporate Governance Codes
As a UK company with primary listings on the London Stock
Exchange and on the Stock Exchange of Hong Kong, Prudential
is subject to the governance rules set out in the Combined Code
2008 (for reporting periods commencing prior to 29 June 2010)
and the Code on Corporate Governance Practices in Appendix
14 to the Rules Governing the Listing of Securities on the Stock
Exchange of Hong Kong Limited (together the Corporate
Governance Codes).
The Combined Code is issued by the Financial
Reporting Council and can be viewed on their website:
www.frc.org.uk/corporate/
The Code on Corporate Governance Practices is issued by the
Stock Exchange of Hong Kong and can be viewed on their
website: www.hkex.com.hk/eng/rulesreg/listrules/
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 Corporate Governance Codes and
confirms that it has complied with the provisions set out in the
Combined Code 2008 throughout the financial year ended
31 December 2010.
The Board further confirms that it has complied with the Code
on Corporate Governance Practices in Appendix 14 to the Rules
Governing the Listing of Securities on the Stock Exchange of
Hong Kong Limited from the date of listing on the exchange,
except that it has deviated in respect of the Terms of Reference
of the Remuneration Committee. The remit of the Remuneration
Committee is limited to considering the remuneration of the
Chairman and executive directors and does not extend to
making recommendations to the Board in respect of the
remuneration of the non-executive directors. The reason for the
deviation is that it would be inconsistent with the principles of
the Combined Code 2008 (and the provisions of the new UK
Corporate Governance Code) for the Remuneration Committee
to be involved in setting the fees of non-executive directors.
The principles of the Corporate Governance Codes have been
applied as set out below and in the Directors’ Remuneration
Report.
Board of directors
Role of the Board
The Board is collectively responsible for the success of the
Group and provides leadership within a framework of effective
controls which enables suitable risk management. The executive
directors are responsible for running the business operations
and the non-executive directors for bringing independent
judgement and scrutiny to decisions taken by the Board.
The directors are responsible for setting strategic objectives
and for ensuring the Group is adequately placed and resourced
to achieve those objectives and for ensuring obligations to its
shareholders, and wider stakeholders, are met in a manner
consistent with their statutory duties.
In performing its duties, the Board has direct access to the
services of the Company Secretary who advises on corporate
governance matters, Board procedures and compliance with
applicable rules and regulations.
Directors have the right to seek independent professional
advice at the Company’s expense and copies of such advice are
circulated to other directors where applicable and appropriate.
In the ordinary course of business, Board and Committee papers
are provided to the directors approximately one week in
advance of each meeting.
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 businesses. 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 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 the limitations set
out 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.
In order to ensure that it exercises control over the Group’s
affairs, the Board’s terms of reference are regularly reviewed
and set out those matters specifically reserved to it for decision.
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 its internal governance framework all business units are
required to seek approval from the Board for matters above
pre-determined authority limits.
Composition
At 31 December 2010 the Board comprised the Chairman,
six executive directors and nine independent non-executive
directors. From 1 January 2011 the number of executive
directors increased to seven with the appointment of John Foley,
Group Chief Risk Officer, becoming effective. The biographies
of all current directors are set out on pages 100 to 103.
On 15 October 2010, Howard Davies and Paul Manduca
were appointed as independent non-executive directors.
From 1 January 2011, Paul Manduca succeeded James Ross
as the Board’s Senior Independent Director. James will retire
from the Board at the conclusion of Prudential’s Annual
General Meeting to be held on 19 May 2011. On 1 January 2011,
Mike Wells replaced Clark Manning as an executive director
and as President and Chief Executive Officer of Jackson National
Life Insurance Company. In addition, John Foley was appointed
an executive director and Group Chief Risk Officer with effect
from 1 January 2011.
Prudential plc Annual Report 2010
105
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. The removal
and resignation of the Company’s directors is governed by the
relevant provisions of the Companies Act 2006, the Corporate
Governance Codes and the Company’s Articles of Association.
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
by the Board. 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. Directors serving a third term are subject to rigorous
annual review.
Directors appointed to the Board since the 2010 Annual
General Meeting will stand for election for the first time
and in accordance with the provisions of the UK Corporate
Governance Code all other directors, with the exception of
James Ross who has announced his intention to retire, will offer
themselves for re-election at the Annual General Meeting to be
held on 19 May 2011.
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 also through the work of the Nomination
Committee as described more fully on page 112. The Board
considers annually the outcome of the review 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.
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Chairman and Chief Executive
The roles of Chairman and Group Chief Executive are separate
and clearly defined. The scope of these roles is approved and
kept under regular review by the Board so that no individual has
unfettered decision-making powers.
The Chairman is responsible for the leadership and governance
of the Board 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 which comprises all the business unit
heads and a Group Head Office team of functional specialists.
Independence
The independence of the non-executive directors is determined
with reference to the Corporate Governance Codes. Prudential
is required to affirm annually the independence of the non-
executive directors under the rules of the Hong Kong Stock
Exchange and also the independence of its Audit Committee
members under the Sarbanes-Oxley legislation. The Board has
appropriate processes in place to manage any potential conflicts
of interest.
Throughout the year the non-executive directors were
considered by the Board to be independent in character and
judgement and met the provisions for independence as set
out in the Corporate Governance Codes. The Company has
received confirmation of independence from each of the
non-executive directors as required by the Hong Kong Listing
Rules. As the test of independence is not appropriate in relation
to the Chairman under the Combined Code 2008, and to ensure
a consistent approach in how the Chairman is described in all
corporate communications, the Chairman has not been asked to
provide confirmation of his independence for the purposes of
the Hong Kong Listing Rules and will not be asked to do so in
future. Accordingly, the Chairman will no longer be listed as an
independent non-executive director in Hong Kong corporate
communications.
Paul Manduca is the Senior Independent Director and concerns
may be conveyed to him by shareholders if they are unable to
resolve them through the existing mechanisms for investor
communications or where such channels are inappropriate.
Keki Dadiseth and Barry Stowe serve as non-executive directors
of ICICI Prudential Life Insurance Company Limited, an Indian
company which is owned 26% by Prudential. In addition, Keki
serves at Prudential’s request as a non-executive director of
ICICI Prudential Trust Limited, an Indian company which is
owned 49% by Prudential. The Board does not consider that
these appointments in any way affect Keki’s status as an
independent director of Prudential.
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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 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.
Induction and Development
The Company Secretary supports the Chairman in providing
tailored induction programmes for new directors and on-going
development for all directors. On 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 the directors’ obligations under the different listing
regimes, legal issues affecting directors of financial services
companies, the Group’s governance arrangements, its investor
relations programme as well as its remuneration policies.
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. In order to enhance their knowledge and
effectiveness throughout their term in office, non-executive
directors serving on key committees are updated regularly
on matters specific to the relevant committee and receive
presentations from senior executives on topics of interest to them.
A programme of on-going professional development was
undertaken by all directors during 2010 which included a
number of sector-specific and business issues as well as legal,
accounting and regulatory changes and developments.
A number of business unit chief executive officers, together
with relevant senior executives, 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 and
directors received regular briefings on Solvency II. 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 evaluation of the
performance of the Board and its Committees in respect of 2010,
in line with the requirements of the Combined Code 2008. The
aim is to continue to improve the effectiveness of the Board and
its Committees and enhance the Group’s performance.
Following an internal performance review for 2009, Prudential
once again made the decision to use an external adviser to
facilitate the evaluation for 2010. The review was carried out by
Egon Zehnder International in consultation with the Chairman,
the Senior Independent Director and the Group Chief Executive.
A key element of the evaluation process was the use of individual
meetings with each of the directors. This proved an effective and
informative mechanism for capturing feedback.
The report on the findings of the review was discussed by the
Board at its meeting in February 2011 and an action plan will be
implemented during the year.
In addition, the performance of the non-executive directors
and the Group Chief Executive is evaluated by the Chairman in
individual meetings. The Chairman also leads the non-executive
directors in a performance assessment of the executive directors
and the Senior Independent Director leads the non-executive
directors in a performance evaluation of the Chairman.
Executive directors are subject to regular review and the Group
Chief Executive individually appraises the performance of each
of the executive directors as part of the annual Group-wide
performance evaluation of all staff.
The Group also uses Egon Zehnder International as executive
search consultants, but does not believe there is a conflict of
interest, particularly as the Group has relationships with other
search firms.
Meetings
During 2010 the Board held ten scheduled meetings and met
on a further fifteen occasions to discuss extraordinary business.
One separate strategy event was held during the year. A detailed
forward agenda has been in operation for a number of years.
This 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 Board meeting is held at a Group
business operation in order to facilitate a fuller understanding of
that business. In November 2010 a Board meeting was held in
Jakarta, Indonesia where the directors met with senior members
of the Asia management team and attended a series of
presentations on the business.
Prudential plc Annual Report 2010
107
Meeting attendance for 2010
Scheduled
Board
Meetings
Unscheduled
Board
Meetings
Audit
Committee
Meetings
Remuneration
Committee
Meetings
Nomination
Committee
Meetings
Number of meetings in year
10
15
171
CHAIRMAN
Harvey McGrath
EXECUTIVE DIRECTORS
Tidjane Thiam
Nic Nicandrou
Rob Devey
Clark Manning 2
Michael McLintock
Barry Stowe
NON-EXECUTIVE DIRECTORS
Keki Dadiseth
Howard Davies3, 8
Michael Garrett
Ann Godbehere
Bridget Macaskill
Paul Manduca4, 8
Kathleen O’Donovan 5
James Ross6
Lord Turnbull7
10 (10)
15 (15)
10 (10)
10 (10)
10 (10)
10 (10)
10 (10)
9 (10)
7 (10)
1 (2)
10 (10)
10 (10)
10 (10)
2 (2)
10 (10)
10 (10)
10 (10)
15 (15)
15 (15)
14 (15)
14 (15)
15 (15)
13 (15)
13 (15)
–
12 (15)
13 (15)
14 (15)
–
15 (15)
14 (15)
14 (15)
–
–
–
–
–
–
–
–
1 (1)
–
17 (17)
–
0 (1)
16 (17)
–
13 (16)
7
–
–
–
–
–
–
–
6 (7)
–
6 (7)
–
7 (7)
0 (1)
–
6 (6)
1 (1)
G
O
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E
R
N
A
N
C
E
6
6 (6)
–
–
–
–
–
–
–
–
–
–
6 (6)
–
1 (1)
6 (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.
The Audit Committee held eight scheduled meetings during the year and nine unscheduled meetings to discuss extraordinary business.
Ceased to be a director with effect from 1 January 2011.
Notes
1
2
3 Appointed as a director and Chairman of Risk Committee on 15 October 2010 and member of the Audit Committee on 9 November 2010.
4 Appointed as a director on 15 October 2010, as a member of the Audit and Remuneration Committee on 9 November 2010 and as a member
of the Nomination Committee on 1 January 2011.
Ceased to be a member of the Remuneration Committee on 9 November 2010.
5 Appointed as a member of the Nomination Committee on 9 November 2010.
6
7 Ceased to be a member of the Audit Committee and joined the Remuneration Committee on 9 November 2010.
8 Were unable to attend certain of the scheduled meetings due to pre-existing commitments at the time of appointment to the Board.
The table above 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 ten
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 approvals of periodic financial
reports and corporate transactions.
The Chairman met with the non-executive directors without the
executive directors being present seven times during the year.
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 Group as well as other situations which could result in
conflicts or could give rise to a potential conflict. The Nomination
Committee, or the Board where appropriate, evaluates and
approves each such situation individually where applicable.
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PRUDENTIAL PLC
• Chairman
• Nine non-executive
directors
• Six executive directors
at 31 December 2010
(seven from
1 January 2011)
AUDIT
COMMITTEE
REMUNERATION
COMMITTEE
NOMINATION
COMMITTEE
RISK
COMMITTEE
• Four non-executive
• Five non-executive
directors
directors
• Four non-executive
directors and the
Chairman
• Four non-executive
directors
Directors’ interests
Individual directors’ interests are set out on page 135 of the
Directors’ Remuneration Report.
External appointments
The Board was satisfied that during 2010 the Chairman’s other
commitments did not hinder 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. The major commitments of the Chairman,
including changes during the year where applicable, are
detailed in his biography on page 101.
Directors may hold directorships or other significant interests
with companies outside of the 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 2008, executive directors would be expected to
hold no more than one non-executive directorship of a FTSE 100
company. Some of our 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 135 and major commitments of our executive
directors are detailed in their biographies on pages 100 to 103.
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 pages 100 to 103.
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 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 2010 and remain in force.
Committees
The Board has established Audit, Remuneration and Nomination
Committees as principal standing committees of the Board with
written terms of reference which are kept under regular review.
In November 2010 the Board established a further committee,
the Risk Committee, to assist the Board in carrying out its duties
in respect of monitoring and overseeing Group-wide risk. These
committees are key elements of the Group’s corporate governance
framework and reports on each committee are included below.
Prudential plc Annual Report 2010
109
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.
Role of the Committee
The Committee’s principal responsibilities for 2010 consisted
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.
With the establishment of the Risk Committee, the oversight
of risk management has transferred to that Committee with
effect from 2011.
In performing its duties, the Audit 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 (Chairman)
Kathleen O’Donovan
Lord Turnbull (to 9 November 2010)
Paul Manduca (from 9 November 2010)
Howard Davies (from 9 November 2010)
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 both Ann Godbehere and
Kathleen O’Donovan have recent and relevant financial
experience for the purposes of the Combined Code 2008 and
the Hong Kong Listing Rules. In June 2010 the Board designated
Ann Godbehere as its Audit Committee financial expert for
Sarbanes-Oxley Act purposes. This will be reviewed during
2011 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 on pages
100 to 103.
G
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Meetings
The Committee held eight scheduled meetings during the year
and met on a further nine occasions to discuss extraordinary
business. Individual attendance for the meetings is given in the
table on page 107. By invitation, the Chairman of the Board, the
Group Chief Executive, 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 as well as the lead partner of the external
auditor, attended meetings. Other partners and staff of the
external auditor also attended some of the meetings to contribute
to the discussions relating to their area of expertise.
A detailed forward agenda has been in operation for a number
of years and is reviewed and updated continually to ensure that 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 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.
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In addition, the Committee received in-depth presentations on
a range of topics. Throughout the year, the Committee received
the minutes of the Disclosure Committee and the Group
Operational Risk Committee and noted their activities. From
November, the Committee further noted the minutes and
activities of the Assumptions Approvals Committee. Further
information on the Disclosure Committee and on risk governance
appears on pages 119 and 115 to 116 respectively.
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
with the external and internal auditors in February and October
2010. At all other times management and auditors have open
access to the Chairman.
the external auditor. During the year the business unit audit
committees reviewed 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.
Pursuant to the requirements of Section 404 of the Sarbanes-
Oxley Act, the Group undertakes an annual assessment of the
effectiveness of internal control over financial reporting.
Further details are provided below.
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
applicable laws, regulations and governance codes.
In addition, the Committee is regularly briefed by 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 the use of the confidential reporting procedures,
which are available to employees to enable them to communicate
confidentially, and anonymously if they so wish, on matters of
concern and actions taken in response to these communications.
No material control implications were raised through these
procedures during the year.
Business unit audit committees
Each business unit has its own audit committee whose members
and chairmen comprise primarily senior management and are
independent of the respective business unit. The minutes of
these committees are reported 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 Group-wide internal audit.
Business unit audit committees have adopted standard terms
of reference across the Group with 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, recommendations for approval of the
business unit internal audit plans and overseeing the adequacy
of internal audit resources. Also included are presentations from
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 Corporate
Governance Codes 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 2010. 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 the business unit audit
committees. Total internal audit headcount across the Group
stands at 108. 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 which are carried
out by external advisers, and through ongoing dialogue with
the Group-wide Internal Audit Director. External reviews of
Group-wide 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 concluded that the function was operating
effectively. An internal assessment of the internal audit function
was performed by the Group-wide Internal Audit Director in
Prudential plc Annual Report 2010
111
subsequent years 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 last assessment were reported in detail to the Committee
in February 2011. An external review of internal audit
arrangements and standards in UKIO was conducted in 2010
to ensure that the activities and resources of internal audit were
effectively organised to support the oversight responsibilities
of the Business Unit Audit Committee in the UK. This review,
performed by PwC, confirmed that the internal audit function
for UKIO complies with the Institute of Internal Auditors'
international standards for the professional practice of internal
auditing and was operating effectively. The next external review
of Group-wide internal audit arrangements and standards is
scheduled for 2011.
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 under 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 2010 the Committee approved
fees of £10.4 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
£7.3 million to KPMG for services not related to audit work
which accounted for 42 per cent of total fees paid to the external
auditor in the year. Excluding services relating to the AIA
transaction, this amounted to £1.8 million for services not related
to audit work which in turn amounted to only 10 per cent of fees
paid to the external auditor. 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 2010. A summary of audit fees is
provided in Note I6 of the Group Financial Statements.
Auditor performance and independence
As part of its work during 2010, 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, 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. 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.
G
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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 February 2011 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 will be put to a shareholder vote at the
Annual General Meeting on 19 May 2011.
Review of Committee effectiveness
As part of the performance evaluation of the Board, the
Committee undertook an externally facilitated performance
assessment of the qualitative aspects of its performance during
the year. The results of this assessment were reported to the
Board in February 2011. In addition, an internal evaluation was
carried out addressing compliance with various regulations and
codes of conduct applicable to the Committee, and the results
of that assessment were reported to the Committee in February
2011. The Committee is satisfied, based on the findings of both
the internal and external review, that it had been operating as an
effective audit committee throughout the year. Further reviews
of the effectiveness of the Committee will be undertaken
regularly and will, from time to time, be conducted by external
consultants.
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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 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 2008. The Directors’
Remuneration Report prepared by the Board is set out in full
on pages 123 to 148. In preparing the report, the Board has
followed the provisions of the Combined Code 2008, the Code
of Corporate Governance Practices in Appendix 14 of the Rules
Governing the Listing of Securities on the Stock Exchange of
Hong Kong, 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 the Company adopts a remuneration policy which rewards
executive directors for their contribution to sustainably and
responsibly enhancing shareholder value.
Membership
The Committee is comprised exclusively of independent
non-executive directors of the Company as set out below.
Bridget Macaskill (Chairman)
Keki Dadiseth
Michael Garrett
James Ross (to 9 November 2010)
Lord Turnbull (from 9 November 2010)
Paul Manduca (from 9 November 2010)
Full biographical details of the members of the Committee,
including their relevant experience are set out on pages
100 to 103.
Meetings
The Committee normally has scheduled meetings at least four
times a year and a number of additional meetings, as required,
to review remuneration policy and the application of that
policy. While the Chairman and Group Chief Executive are not
members, they attend meetings unless they have a conflict of
interest. During 2010 a total of seven Committee meetings were
held. Details of Committee members’ attendance is set out
on page 107. Full details of the activities of the Remuneration
Committee are set out in the Directors’ Remuneration Report
on page 123 to 148.
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 roles and capabilities
required at any given time taking into account the Group’s
business and with due regard for the benefits of diversity on the
Board, including gender. 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.
During 2010 the Committee met six times and recommended
to the Board that Howard Davies and Paul Manduca, who
were both appointed with the assistance of external search
consultants, be appointed as non-executive directors. The
Committee further recommended the appointment of Mike
Wells and John Foley as executive directors with effect from
January 2011. Full biographical details of the directors are set
out on pages 100 to 103.
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.
Prudential plc Annual Report 2010
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Membership
The Committee is comprised of independent non-executive
directors and the Chairman, as set out below:
Harvey McGrath (Chairman)
Bridget Macaskill
James Ross
Kathleen O’Donovan (from 9 November 2010)
Paul Manduca (from 1 January 2011)
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.
Details of Committee members’ attendance at meetings are set
out on page 107.
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.
Risk Committee Report
Role of the Committee
The Risk Committee was established in November 2010 and has
responsibility for providing leadership, direction and oversight
with regard to the Group’s overall risk appetite and tolerance
and risk management framework, including risk policies and
processes and controls, and to providing oversight in respect
of the Group Chief Risk Officer’s responsibilities.
The Committee has terms of reference which are set by the Board
and will be kept under regular review. The terms are available on
our website at www.prudential.co.uk/prudential-plc/aboutpru/
corporategovernance/ Alternatively, copies may be obtained
from the Company Secretary at the Registered Office.
Membership
The Committee is comprised of independent non-executive
directors as set out below:
Howard Davies (Chairman)
Ann Godbehere
James Ross
Lord Turnbull
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The Committee expects to hold at least four scheduled meetings
a year. The Committee will report on its activities in the Annual
Report 2011 after it has completed its first year of business.
Internal control and risk management
The Board has overall responsibility for the system of internal
control and risk management and for reviewing its effectiveness.
The framework setting out the Group’s approach to internal
control, risk management and corporate responsibility comprises
the following:
• Group governance framework: Documents the Group’s
internal control policies and processes in an online manual,
including the Group’s risk framework, code of business
conduct and detailed policies on key operational and financial
risks. Business units are also required to follow any additional
processes necessary to comply with local statutory and
regulatory requirements.
• 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 on pages 80 to 86 and corporate
responsibility activities on pages 91 to 98.
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CORPORATE GOVERNANCE
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 115 to 116.
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
Corporate Governance Codes. In complying with the
Combined Code 2008, the Group follows the 2005 Turnbull
Guidance relating to the sections of the Code dealing with risk
management and internal control. The Board reviewed the
effectiveness of the system of internal control in February 2011,
covering all material controls, including financial, operational
and compliance controls, risk management systems and the
adequacy of the resources, qualifications and experience of staff
of the issuer’s accounting and financial reporting function. 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 and
up to the date of this report.
The chief executive and chief financial officer of each business
unit annually certifies 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.
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 page
115 and the Group Audit Committee on page 109, cover the
Company’s financial reporting process and the Group’s process
for the preparation of consolidated financial statements.
Prudential plc Annual Report 2010
GOVERNANCE > RISK GOVERNANCE
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RISK GOVERNANCE
Group-level framework
BOARD
BOARD
NOMINATION
COMMITTEE
REMUNERATION
COMMITTEE
GROUP RISK
COMMITTEE
GROUP AUDIT
COMMITTEE
1st Line of Defence
2nd Line of Defence
3rd Line of Defence
EXECUTIVES
GEC
BSCMC
MANAGEMENT
GROUP CEO
CFO
GERC
GROUP CRO
GCRC
GORC
STOC
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SECURITY
GROUP
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GROUP
RISK
GROUP-WIDE
INTERNAL AUDIT
KEY
Board-level Committees
Executive personnel
Exec/Management Committee
GHO Functions
Direct Reporting Line
Regular Communication
and Escalation
Group Executive Committee
GEC:
BSCMC: Balance Sheet & Capital Management Committee
GERC: Group Executive Risk Committee
GCRC: Group Credit Risk Committee
GORC: Group Operational Risk Committee
STOC:
Solvency II Technical Oversight Committee (permanent
successor to Technical Assurance Committee)
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’ (LoD): risk management, risk oversight and
independent assurance.
The diagram above outlines the Group-level framework.
Risk management (1st LoD): As described in the corporate
governance report, primary responsibility for strategy,
performance management and risk control lies with the Board,
which has established the Risk Committee to assist in providing
leadership, direction and oversight, and with the Group Chief
Executive and the chief executives of each business unit.
Balance Sheet and Capital Management Committee:
Meets monthly to monitor the Group’s liquidity and oversee
the activities of Prudential Capital.
Risk oversight (2nd LoD): 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 to monitor capital.
Group Operational Risk Committee: Reports to the Group
Executive Risk Committee and meets quarterly to oversee the
Group’s non-financial (operational, business environment and
strategic) risk exposures.
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RISK GOVERNANCE
Group Credit Risk Committee: Reports to the Group Executive
Risk Committee and meets monthly to review the Group’s
investment and counterparty credit risk positions.
Solvency II Technical Oversight Committee: Will be created
when the Solvency II programme is complete, to provide ongoing
technical oversight and advice to the executive and the Board in
carrying out their duties with regard to the Group’s Internal Model.
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 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, 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 and its philosophy towards
risk-taking, that is:
The Group has five objectives for risk and capital management:
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.
Monitoring: Establish a ‘no surprises’ risk management culture by
identifying the risk landscape, assessing and monitoring risk
exposures and understanding change drivers.
Control: Implement risk mitigation strategies and remedial actions
where exposures are deemed inappropriate and manage the
response to extreme events.
Communication: Communicate the Group risk, capital and
profitability position to internal and external stakeholders and
rating agencies.
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's economic capital position and overall position
against risk limits is reviewed regularly by the Group Executive
Risk Committee. Key economic capital metrics, as well as RAP
information, are included in business plans, which are reviewed
by the Group Executive Committee and approved by the Board.
The Group Audit Committee and Group Risk Committee are
provided with regular reports on the activities of Group Risk.
These reports include information on the activities of the Group
Operational Risk Committee and Group Credit Risk Committee.
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).
• 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.
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.
Prudential plc Annual Report 2010
GOVERNANCE > RELATIONS WITH SHAREHOLDERS
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RELATIONS WITH SHAREHOLDERS
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Company constitution
The Company is governed by the Companies Act 2006, other
applicable legislation and regulation as well as by provisions
of 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 2006.
Share capital
On 31 December 2010, the Company’s issued share
capital, which is set out in Note H11 on page 321, consisted of
2,545,594,506 (2009: 2,532,227,471) ordinary shares of 5 pence
each, all fully paid up and listed on the London Stock Exchange
and the Stock Exchange of Hong Kong. The number of accounts
on the share register at 31 December 2010 was 66,048
(2009: 71,700). The Company maintains secondary listings
on the New York Stock Exchange in the form of American
Depositary Shares which are referenced to its ordinary shares,
under a depositary agreement with J.P. Morgan, and on the
Singapore Stock Exchange.
In compliance with the Rules Governing the Listing of
Securities on the Stock Exchange of Hong Kong, the Company
has maintained a public float of at least 25 per cent of the issued
share capital from the date of listing on 25 May 2010 to the date
of this report.
A number of dividend waivers are in place and these relate to
shares issued, but not allocated, under the Group’s employee
share plan. These shares are held by the Trustees and will, in
due course, be used to satisfy requirements under the Group’s
employee share plans.
Communication with shareholders
As a major institutional investor, the Company is very
aware of the importance of maintaining good relations with
its shareholders. Discussions are held regularly with major
shareholders and a programme of meetings took place during
2010. In addition, Prudential also held an investor day in
December 2010 and plans to make this an annual event.
A perception survey into the views of the Company’s major
investors is undertaken regularly 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 relevant information for private and
institutional investors, including the Group’s financial calendar.
The shareholder information section on pages 443 to 444
contains further details which may be of interest to shareholders.
Annual General Meeting
The Annual General Meeting will be held in the Churchill
Auditorium at The Queen Elizabeth II Conference Centre,
Broad Sanctuary, Westminster, London SW1P 3EE on
19 May 2011 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 the 2010 Annual General Meeting, the Company continued
its practice of calling a poll on all resolutions. The voting results
and all proxies lodged prior to the meeting were displayed at the
meeting and published on the Company's website. This practice
provides shareholders present with sufficient information
regarding the level of support and opposition to each resolution
and ensures that all votes cast, either at the meeting or through
proxies, are included in the result.
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GOVERNANCE > RELATIONS WITH SHAREHOLDERS > CONTINUED
RELATIONS WITH SHAREHOLDERS
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 2011, Trustees held 0.19 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 I4 on page 345.
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 both the Financial Services
Authority and the Stock Exchange of Hong Kong, as well as
Prudential’s own share dealing rules, whereby directors and
certain employees of the Company require the approval of the
Company to deal in the Company’s ordinary shares.
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. Executive
directors are also required to build up their shareholding in
the Company.
Significant shareholdings
As at 8 March 2011, 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., Norges Bank and
Legal and General Group plc that they held 11.65 per cent,
5.01 per cent, 4.01 per cent and 3.99 per cent respectively
of the Company’s issued ordinary share capital at the time
of notification.
Authority 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 2011.
Details of shares issued during 2009 and 2010 are given in note
H11 on page 321.
In accordance with the terms of a waiver granted by the Hong
Kong Stock Exchange, the Company confirms that it complies
with the applicable law and regulation in the UK in relation to
the holding of shares in treasury and with the conditions of the
waiver in connection with the purchase of own shares and any
treasury shares it may hold.
Prudential plc Annual Report 2010
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Authority to purchase own shares
The directors also require authority from shareholders in relation
to the purchase of own 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 2010. 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 2011.
• 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 evaluates whether or not
a particular matter requires disclosure to the market, taking into
account relevant regulations.
Model Code for Securities Transactions by Directors
Prudential has adopted share dealing rules which incorporate
the UK Model Code on share dealing and the Hong Kong Model
Code for Securities Transactions by Directors. Prudential
operates various employee share plans and has obtained a
number of waivers from the Stock Exchange of Hong Kong in
order to facilitate the normal operation of those plans.
Following specific enquiry, the directors have confirmed their
compliance with these rules.
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;
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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, the 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.
Prudential plc Annual Report 2010
GOVERNANCE > ADDITIONAL DISCLOSURES
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ADDITIONAL DISCLOSURES
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The following additional disclosures are made in compliance with
the Companies Act 2006, the Disclosure and Transparency Rules
and the Corporate Governance Codes.
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 153
to 352 and pages 375 to 386 and the supplementary information
on pages 389 to 433. It is the responsibility of the auditor to
form independent opinions, based on its audit of the financial
statements and its audit 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 388 and 435.
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 387.
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 387.
The Chief Financial Officer's Review includes, on pages 80 to 86,
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
page 203. 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.
sensitivities are referred to in the Chief Financial Officer’s
Review. Specifically, the Group’s borrowings are detailed in
Note H13 on pages 324 to 326, the market risk and liquidity
analysis associated with the Group’s assets and liabilities can
be found in Note G2 on pages 300 to 304, policyholder liability
maturity profile by business units in Notes D2, D3, D4 on
pages 232, 253 and 261 respectively, cash flow details 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.
Post-balance sheet events
Important events affecting the Company after the end of the
financial year are detailed in Note I12 on page 352.
Change of control
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.
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.
Compensation for loss of office
None of the terms of employment of the Company's directors
includes 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.
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 17 to 98. The
risks facing the Group’s capital and liquidity positions and their
Customers
The five largest customers of the Group constituted in aggregate
less than 30 per cent of its total sales for each of 2010 and 2009.
For the year ended 31 December 2010, none of the directors
of the Company, their associates or any shareholders of the
Company (which have, to the knowledge of the directors of the
Company, owned more than 5 per cent of the Company’s issued
share capital) had any interest in the Group's major customers.
122
GOVERNANCE > INDEX TO PRINCIPAL DIRECTORS’ REPORT DISCLOSURES
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
Essential contracts or arrangements
Disclosure of information to auditor
Directors in office during the year
Principal activities
Dividend recommended for the year
Section in Annual Report
Page number(s)
Overview and business review
Additional disclosures
Corporate governance
Board of directors
Business review
Group Chief Executive’s report/
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 I12 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
1-98
121
121
100-103; 104
4-5; 87-89
13; 25
108
97
79
352
14
93-94
97
117-119
105
117
104
121
121
In addition, the risk factors set out on pages 438 to 442 and the additional unaudited financial information set out on pages 353 to 374
are incorporated by reference into this directors' report.
Signed on behalf of the Board of directors
MARGARET COLTMAN
COMPANY SECRETARY
8 March 2011
Prudential plc Annual Report 2010
DIRECTORS’
REMUNERATION
REPORT
124
Directors’ remuneration report
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DIRECTORS’ REMUNERATION REPORT
DIRECTORS’
REMUNERATION
REPORT
Dear Shareholder
I am pleased to present the Remuneration Committee’s report
on directors’ remuneration for the year to 31 December 2010.
Firstly, I would like to welcome Lord Turnbull and Paul Manduca
to the Committee. I would also like to thank James Ross, who
has stepped down from the Committee after six years, for his
contribution.
In May 2010, we listed our shares in Hong Kong and Singapore.
As a result, you will find that some additional information is
provided in this year’s Directors’ Remuneration Report and that
the format used to present some data has been revised to comply
with these new listing requirements.
The primary objective of our remuneration policy remains
unchanged: to attract high calibre executives, to encourage
them to contribute to the success of Prudential by achieving
our business plans, generating 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 markets where the Group operates.
2010 was another successful year for the Group. As you will
see from our results, we have delivered outstanding business
performance, achieving strong sales and profits. This
demonstrates 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. We have significantly
out-performed our international peer group over the last three
years, which resulted in full vesting under the Group
Performance Share Plan.
In considering the 2010 Annual Bonus payments for executive
directors, the Committee sought to balance the appropriate level
of reward for the achievement of results which exceeded all
performance targets with the costs associated with the proposed
AIA transaction. After careful consideration, the Committee
used its discretion to take the cost of the AIA transaction (which
is excluded from the Group’s reported IFRS and EEV operating
profit) fully into account in determining the results to be used
for bonus purposes. Bonuses for all executive directors were
therefore based on the results after all AIA transaction costs.
For 2010, it was agreed with the Group Chief Executive that the
portion of his bonus (50%) which would normally be payable
immediately in cash would be converted into shares and
deferred for three years.
In the Group Chief Executive's Report, Tidjane Thiam set out
three Group-wide operating principles which have underpinned
the sound management of the Group. These principles are
reflected in the reward policies operated by the Group and in
the way that the Remuneration Committee makes its decisions,
as set out below:
Balanced approach to performance management
The Group believes that sustainable growth requires new
business profitability, IFRS profitability and cash generation to
develop in parallel; no one of these measures should be achieved
at the expense of the others. The basket of annual bonus plan
measures rewards the simultaneous delivery of these key
indicators. Bonuses are also determined by the achievement
of personal measures which assess executives’ individual
non-financial contributions to the development of the Group
and to the execution of our strategy.
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 2011.
This 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, the UK Listing
Authority Listing Rules and the Code on Corporate
Governance Practices in Appendix 14 of the Rules
Governing the Listing of Securities on the Stock Exchange
of Hong Kong. KPMG Audit Plc has audited the sections
contained on pages 138 to 148.
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.
Prudential plc Annual Report 2010
125
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Disciplined capital allocation
The Group has a rigorous focus on allocating capital to the
geographies and products with the best returns and shortest
payback opportunities. Our objective is to create the highest
possible sustainable returns for shareholders, as reflected in
our share price and dividends. To align the interests of our
executives with those of our shareholders and to reward them
for delivering these returns, the Group Performance Share
Plan is based on total shareholder return and only rewards
participants if the Group’s share price growth and dividends
are superior to those provided by other international insurance
organisations over a three-year period.
Proactive risk management
Effectively managing risk across our operations is essential if the
growth which we create is to provide shareholders with lasting
value. The Remuneration Committee is therefore mindful of the
need for pay to reward the delivery of strong business results
without encouraging inappropriate risk taking. Given the
longevity of the products which we offer, an important aspect 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 and substantial shareholding
guidelines for executives.
The Committee has and will continue to review the implications
of emerging guidelines and regulations on our remuneration
governance structures, policies and practices, and will
implement any changes where appropriate.
I trust that you will endorse the policies outlined in our report.
BRIDGET MACASKILL
CHAIRMAN, REMUNERATION COMMITTEE
8 March 2011
126
DIRECTORS’ REMUNERATION REPORT > CONTINUED
DIRECTORS’
REMUNERATION
REPORT
The Remuneration Committee
The Committee is responsible for:
• Determining the remuneration policy for the Chairman
and the executive directors of the Company;
• Monitoring the remuneration of a defined leadership
population and 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 2010 are listed below.
All are independent non-executive directors:
Bridget Macaskill (Chairman)
Keki Dadiseth FCA
Michael Garrett
James Ross (until 9 November 2010)
Lord Turnbull KCB CVO (from 9 November 2010)
Paul Manduca (from 9 November 2010)
In 2010, the Committee met seven times. Some key activities
during the year included:
• Reviewing the requirements of the latest governance
guidelines and consultations, including the FSA’s revised
Remuneration Code;
• Considering how remuneration arrangements should support
the implementation of the Solvency II framework, due to be
implemented in 2012;
• Considering the package to be offered to Mike Wells upon
his appointment as President and CEO of Jackson and the
payments to be made to Clark Manning as he transitioned
out of this role;
• Agreeing the package to be offered to John Foley as he
joined the Board as Group Chief Risk Officer;
• Establishing the performance measures and targets for the
annual and long-term incentive plans, and considering the
appropriate level of payments to be made; and
• Overseeing the remuneration of the Group Leadership Team
(comprising around 100 senior individuals including the Group
Executive Committee) and of employees with remuneration
over £1 million per annum.
The Chairman and the Group Chief Executive attend meetings
by invitation. The Committee also had the benefit of advice from
the Chief Financial Officer, Group Chief Risk Officer, Group
Human Resources Director and Director of Group Reward and
Employee Relations. Individuals are never present when their
own remuneration is discussed.
In making its decisions, the Committee called on advice from
Deloitte LLP and PricewaterhouseCoopers LLP. Market data
was sourced from Deloitte LLP, Towers Watson and McLagan
Partners. Linklaters and Slaughter & May provided legal counsel,
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 taxation and other
financial matters, Towers Watson in relation to actuarial advice
and Slaughter & May in relation to commercial, corporate and
general legal advice.
Prudential plc Annual Report 2010
Remuneration principles
In determining remuneration policy, the Committee applies
the following principles:
• A substantial portion of total remuneration is delivered
through performance-related reward with the highest levels of
reward only being paid for the highest levels of achievement;
• A significant element of performance-related reward is
provided in the form of shares;
• The total remuneration package for each executive director
is set with reference to the relevant employment market;
• The performance of business unit executive directors is
measured at both a business unit and Group level;
• Performance measures include absolute financial measures
and relative measures, as appropriate, to provide alignment
between achieving results for shareholders and the rewards
for executives;
• Reward structures are designed to deliver fair and equitable
remuneration for all employees; and
• Reward arrangements are designed to minimise regulatory
and operational risk.
These principles shape remuneration policies and practices
which are aligned with our business model. They are designed
to ensure that a strong governance approach is adopted and
applied across all business units. The Committee continues
to review these principles regularly.
127
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DIRECTORS’ REMUNERATION REPORT > CONTINUED
DIRECTORS’
REMUNERATION
REPORT
Summary of main components of remuneration and related requirements
The table below summarises the Company’s policies as they were applied during 2010. The Committee intends to adopt the same
approach in 2011:
ELEMENT
PURPOSE
APPROACH
Total compensation
Adopts appropriate compensation
structures and reward payouts to attract
high calibre executive directors.
Base salary
Along with benefits, provides the
guaranteed element of remuneration
necessary to recruit and retain the best
people to lead our business.
Annual bonus
Rewards the achievement of business
results and individual objectives in
a given year.
Deferred bonus
Reinforces the need for annual results to
be grounded in business performance
which is sustained over the longer term.
Long-term incentive
Rewards executive directors for delivering
sustainable long-term returns for
shareholders.
Benchmarked against the relevant
market for the role, taking into account the
individual’s contribution and experience.
Market position is compared with
companies of similar size and complexity
to Prudential in the relevant market for
the role.
Consideration is also given to
remuneration arrangements and levels
offered to other Prudential employees.
Based on scope of role and market
position, as well as the individual’s
contribution and experience, taking
into account total remuneration, market
movement of salaries in comparator
organisations and salary increases for
employees generally.
The Committee reviews salaries annually.
Any changes in base salaries are effective
from 1 January.
Executive directors have annual bonus
plans based on the achievement of Group
and business unit financial performance
measures and individual contribution.
2010 Group and business unit targets
focused on profitability, cash flow and
capital preservation.
Bonuses are not pensionable.
Executive directors are required to defer
between 30 per cent and 50 per cent of
annual bonus (for Michael McLintock,
50 per cent of bonus over £500,000
is deferred) into Prudential shares for
three years.
All executive directors participate in the
Group Performance Share Plan under
which awards vest based on relative
TSR performance against a peer group
of international insurers.
Business unit Chief Executives also
participate in business unit plans which
focus on financial measures which
contribute to the long-term success of the
business unit and, therefore, the Group.
Prudential plc Annual Report 2010
129
ELEMENT
PURPOSE
APPROACH
All-employee share plans
Offer all employees an opportunity to
participate in the success of the Company.
Benefits
Provide health and security benefits as
part of the fixed element of remuneration.
Set at an appropriate level compared
with peers.
Pension and long-term savings
Provide opportunities for executive
directors to save for an income in
retirement in a cost efficient manner.
Shareholding guidelines
Encourage executives to build an interest
in the Company’s shares and support
alignment with shareholder interests.
The structure of plans is determined
by market practice and local legislation.
Executive directors are eligible to
participate in all-employee plans on
the same basis as other employees in
their location.
Executive directors receive 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 M&G investment products
on the same terms as other employees.
It is the Company’s policy to provide
efficient pension and other long-term
savings vehicles to allow executive
directors to save for their retirement.
The Company’s policy for all external
appointments since June 2003 has
been to provide a pension contribution
as a fixed percentage of salary.
The level of Company contribution
is related to competitive practice in the
executive directors’ employment markets.
The Group Chief Executive and Chief
Executive of M&G are required to hold
shares equal to 200 per cent of base
salary. A policy of 100 per cent of base
salary applies for other executive director
roles. Executive directors have five years
in which to build their shareholding.
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DIRECTORS’ REMUNERATION REPORT > CONTINUED
DIRECTORS’
REMUNERATION
REPORT
On a policy basis, the package for 2011 will offer the following
proportions of fixed and variable and short- and long-term
reward for our executive directors:
Group Chief Executive
Chief Financial Officer
President and Chief Executive Officer, JNL
Chief Executive, M&G
Chief Executive, Prudential UK & Europe
Chief Executive PCA
Group Chief Risk Officer
Performance
Superior
Good
Superior
Good
Superior
Good
Superior
Good
Superior
Good
Superior
Good
Superior
Good
0
20
40
60
80
100
%
Base salary
Cash bonus
2010 deferred bonus
Long-term incentive plan
Annual bonus
The 2010 annual bonus plans for the majority of executive
directors included Group and business unit performance
measures based on:
• IFRS operating profit
• EEV operating profit
• Holding company cash flow; and
• Insurance Group Directive (IGD) Capital Surplus.
These performance measures have been selected because they
recognise the importance of generating profit while maintaining
cash flow and capital coverage. Please see the Financial
Statements and the Risk and Capital Management section
of the Business Review for full definitions of these measures.
Michael McLintock’s annual bonus plan incorporated Business
Unit measures including growth in third party funds, M&G
investment performance and M&G IFRS operating profit
(excluding PruCap). The performance measures for Jackson
are IFRS pre-tax operating income (with the target and result
adjusted to reflect the revised presentation of operating profit)
and EEV new business profit.
A portion of the annual bonus for each executive director is
based on the achievement of personal objectives. These include
the executive’s contribution to Group strategy as a member of
the Board and specific goals related to their functional and/or
business unit role (for instance, project measures relating to
the implementation of the Solvency II requirement). In addition,
all employees are required to comply with the regulatory,
governance and risk management practices and policies as
these relate to their role and business area. Specifically, all
business units must act within the Group’s risk appetite.
In this chart, ‘Good’ performance results in the payment of plan annual bonuses
and threshold vesting of long-term incentive awards while ‘Superior’ performance
generates maximum payment of annual bonuses and maximum vesting of
long-term incentive awards.
Executive directors’ bonus opportunities, the weighting of
performance measures for 2010 and the proportion of annual
bonuses deferred are set out opposite.
Components of remuneration
Base salary
The limited increases to executive directors’ base salaries
effective on 1 January 2010 were detailed in the 2009
Remuneration Report. No executive director has been
awarded a salary increase effective on 1 January 2011.
Mike Wells’s salary on his appointment as Chief Executive of
Jackson is $1,000,000. John Foley’s salary on his appointment
as Group Chief Risk Officer is £550,000. Mike Wells’s and
John Foley’s salaries will next be reviewed with effect from
1 January 2012.
The table opposite sets out the proportion of each executive
director’s annual bonus which must be deferred. This portion is
deferred for three years in the form of the Company’s shares and
is used to reinforce executive directors’ focus on the sustained
success of the Company.
Despite continued turbulence in the financial markets,
Prudential’s leadership team has remained focused on delivery.
The Group achieved exceptional results against all of the
financial annual incentive plan measures leading to attainment
of bonus payments at close to the maximum level, even after
offsetting all of the costs associated with the proposed AIA
transaction. This was reflected in the value delivered to
shareholders by the rising share price and the dividends
paid. On the basis of this performance, the Committee
approved the 2010 bonus payments set out on page 138.
Prudential plc Annual Report 2010
131
Executive directors’ bonus opportunities, the weighting of performance measures for 2010 and the proportion
of annual bonuses deferred
Rob Devey
Clark Manning
Michael McLintock
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Maximum
bonus
opportunity
(% of salary)
160%
c 320% (note 1)
(note 2)
160%
160%
180%
Weighting of measures
Deferral
requirement
Financial measures
Group
Business unit
Personal
objectives
40% of total bonus
30% of total bonus
50% of bonus above £500,000
40% of total bonus
40% of total bonus
50% of total bonus3
20%
25%
10%
80%
20%
80%
60%
65%
75%
–
60%
–
20%
10%
15%
20%
20%
20%
Notes
1
Clark Manning’s annual bonus figures and the weighting of measures shown include 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 opportunities are based on M&G’s performance both in absolute terms and
relative to its peers. His 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 which requires that his total remuneration must not be greater than 3 per cent
of M&G’s annual IFRS profit.
For 2010, it was agreed with the Group Chief Executive that the portion of his bonus (50%) which would normally be payable in cash would
be converted into shares and deferred for three years.
3
During the first quarter of 2010, the vesting of deferred share
awards for UK employees (including UK-based executive
directors) was accelerated in light of the impending changes to UK
taxation. Some of the shares were sold to meet the resulting tax
liabilities while the remaining shares were immediately converted
into restricted share awards. These will vest on the same terms and
timescale as the original deferred share awards. The Committee
believed that it was appropriate for executive directors to pay tax
on these awards at the rate in force when the annual bonuses were
originally calculated and when the deferral was made. Please see
the Other Share Awards table on page 144 for details.
Long-term incentives
All executive directors participate in the Group Performance
Share Plan (GPSP). Awards vest on the basis of the Group’s
relative Total Shareholder Return (TSR) performance against
a peer group of international insurers. Those executive directors
with responsibility for a business unit also participate in plans
linked to the long-term success of the relevant unit. The
Committee will continue to keep the performance measures
used in the long-term incentive plans under review to ensure
their continued relevance.
Details of the awards made under these plans in 2010 can be
found on pages 142 and 143.
Group Performance Share Plan (GPSP)
All executive directors participate in the GPSP. This plan delivers
shares to participants subject to Prudential’s Total Shareholder
Return (TSR) performance over a three year period.
Prudential’s TSR performance over the performance period
is compared with the TSR performance of an index composed
of 10 international insurers (see box below). This performance
measure was selected because it focuses on the value delivered
to shareholders. TSR is measured on a local currency basis since
this has the benefits of simplicity and directness of comparison.
The peer group used for the 2008 and 2009 GPSP awards was
comprised of the organisations listed below plus Friends
Provident (Friends Provident was removed from the comparator
group for outstanding and future awards in November 2009
when it delisted). The organisations listed will also comprise the
peer group used for 2011 GPSP awards.
The vesting schedule for GPSP awards is set out below:
% of award vesting
100
75
50
25
0
Performance achieved by Prudential (percentage of index)
100%
110%
120%
Peer Companies within the Index used for 2010 GPSP awards
Aegon, Allianz, Aviva, Axa, Generali, ING, Legal & General, Manulife, Old Mutual
and Standard Life
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DIRECTORS’ REMUNERATION REPORT > CONTINUED
DIRECTORS’
REMUNERATION
REPORT
For any GPSP award to vest, the Committee must be satisfied
that the quality of the Company’s underlying financial
performance justifies the level of reward delivered at the end
of the performance period. 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 ultimately vest. If performance measures are not
achieved in full, the unvested portion of any award lapses and
is not available for retesting.
On 31 December 2010, the performance period for the 2008
GPSP award (which began on 1 January 2008) came to an end.
Prudential’s TSR performance over this period was equal to
133.7 per cent of the peer index. The Committee, having
satisfied itself about the quality of the Company’s underlying
financial performance, confirmed vesting of 100 per cent of the
2008 GPSP award (in 2009, 100 per cent of the 2007 GPSP
award vested).
The line chart below compares Prudential’s Total Shareholder
Return (TSR) during the five years from 1 January 2005 to
31 December 2010 with that of the peer group against which
TSR is measured for the purposes of the Group Performance
Share Plan. Our performance is also shown relative to the FTSE
100 since Prudential is a major company within this Index.
Prudential TSR v FTSE 100 and peer group
total returns index %
160
140
120
100
80
60
40
20
0
2005
2006
2007
2008
2009
2010
Prudential
FTSE 100
Peer index
TSR represents the growth in the value of a share plus the value of dividends
paid, assuming that the dividends are reinvested in the Company’s shares on the
ex-divided date.
Prudential plc Annual Report 2010
Business Unit Performance Plans (BUPP)
For executives with regional responsibilities, the Business
Unit Performance Plans (BUPPs) deliver shares subject to
performance over a three-year period.
For the Asia and Jackson BUPPs, the performance measure
applied to all outstanding awards is the increase in the relevant
region’s Shareholder Capital Value (SCV) over the performance
period. SCV represents shareholders’ capital and reserves on
a European Embedded Value (EEV) basis for each business unit,
and was selected as a performance measure since it reflects the
value contributed to the Group and its shareholders by each
business unit.
The levels of SCV growth required for vesting of outstanding
BUPP awards are set out in the table below. The SCV growth
rates required in Prudential’s business regions vary to reflect
the relative maturity of each market and business environment.
Compound annual growth
in SCV over three years
Percentage of BUPP award which vests
Jackson
0%
30%
75%
100%
< 8%
8%
10%
12%
Asia
< 15%
15%
22.5%
30%
Vesting occurs between these performance levels on a straight
line basis.
In the past, BUPP awards for executives in the UK business unit
were also assessed on the basis of SCV growth. During 2009,
the Committee decided that future BUPP awards for the UK
Business Unit would be based on the same relative TSR measure
applied to GPSP awards. As a result, 2010 awards made under
the UK BUPP reflect those TSR conditions applied to 2010
GPSP awards.
On his appointment in November 2009, Rob Devey was granted
a 2009 BUPP award with a performance measure of growth in
Shareholder Capital Value (SCV) of Prudential UK. Shortly after
his appointment the strategy for the UK business was redefined
and the Committee concluded that the TSR performance target
used for the GPSP in 2009 provided a better alignment with the
cash-generative priorities of the UK Business Unit than SCV,
and therefore the target was amended accordingly.
133
For any BUPP award to vest, the Committee must be satisfied
that the quality of underlying financial performance of the
relevant business unit justifies the level of reward delivered at
the end of the performance period. 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 ultimately vest. If the performance
conditions are not achieved in full, the unvested portion
of any award lapses and is not available for retesting.
On 31 December 2010, the performance periods for the 2008
BUPP awards (which began on 1 January 2008) came to an end.
Over the period, the SCV of the Asia and Jackson business units
grew by 15 per cent per annum and 3.9 per cent per annum
respectively (on a compound basis). The Committee, having
satisfied itself about the quality of the Asia business unit’s
underlying financial performance, confirmed vesting of 30 per
cent of the 2008 Asia BUPP award. No part of the Jackson 2008
BUPP award vested (in 2009, 63.6 per cent of 2007 Asia BUPP
award vested while no part of the 2007 UK and Jackson BUPP
awards vested). Please see page 143 for details.
The rules of the GPSP and BUPP set a limit on the value of
shares which may be awarded to an executive in a financial year.
The combined value of shares awarded under the two plans
may not exceed 350 per cent of salary (550 per cent of salary
for executives based in the US). The awards made in a
particular year are often below this limit. On a change in
control of Prudential, vesting of awards made under these
arrangements would be prorated for performance and to
reflect the elapsed portion of the performance period.
M&G Executive Long-Term Incentive Plan
Under the M&G Executive Long-Term Incentive Plan, an annual
award of phantom shares is made with a notional starting share
price of £1. The phantom share price at vesting is determined
by the increase or decrease in M&G’s profitability over the
three-year performance period with a profit and investment
performance adjustment also applied. The adjustments are
described below.
Profit growth
The value of phantom shares vesting will be adjusted by a profit
measure as follows:
• No adjustment will be made if profits in the third year of the
performance period are at least equal to the average annual
profit generated over the performance period;
• A loss or zero profit will result in the value of the award being
reduced to zero, irrespective of fund performance;
• Between these points, the value of phantom shares will be
reduced on a straight line basis from no reduction to the
complete elimination of the value of the award.
Investment performance
The value of phantom shares vesting will be adjusted by an
investment performance measure as follows:
• Where the investment performance of M&G’s funds is in the
top two quartiles during the three-year performance period,
the value of phantom shares vesting will be enhanced. The
value of phantom shares may be doubled if performance
is in the top quartile;
• Investment performance in the third quartile will not
change the value of phantom shares vesting;
• Investment performance in the bottom quartile will result
in awards being forfeited, irrespective of any profit growth.
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 awarded depends on the
performance of M&G and Michael McLintock’s individual
contribution in the financial year prior to the year in which the
award is made. Therefore, the number of phantom shares to
be awarded in 2011 relates to M&G’s performance in 2010
and is calculated on the basis of its expected value. The
expected value of the award is determined by a third party
(PricewaterhouseCoopers LLP). Based on 2010 performance,
an award of 1,318,148 phantom shares with an anticipated
value of £1,779,500 will be made in 2011. The ultimate value
of the award will be determined with reference to the profit
and investment performance of M&G over the three years
from 1 January 2011 to 31 December 2013. Based on 2009
performance, an award of 987,179 phantom shares with
an anticipated value of £1,925,000 was made in 2010.
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134
DIRECTORS’ REMUNERATION REPORT > CONTINUED
DIRECTORS’
REMUNERATION
REPORT
On 31 December 2010, the performance period for the 2008
awards under the M&G Executive Long-Term Incentive Plan
(which began on 1 January 2008) came to an end. M&G’s profit
grew by 52 per cent over the period and M&G’s investment
performance was in the second quartile. The Committee, having
satisfied itself about the quality of M&G’s underlying financial
performance, confirmed vesting of the 2008 award with a value
of £2.62 per share (in 2009, the 2007 award vested with a value
of £1.68 per share).
All-employee share plans
It is important that all employees are offered the opportunity to
own shares in Prudential, connecting them both to the success
of the Company and to the interests of other shareholders.
Executive directors are invited to participate in these plans on
the same basis as other staff.
Save As You Earn (SAYE) schemes
UK-based executive directors are eligible to participate in the
Prudential HM Revenue and Customs (HMRC) approved UK
SAYE scheme and Barry Stowe is invited to participate in the
equivalent International SAYE scheme. These schemes allow
employees to save towards the exercise of options over
Prudential plc shares with the option price set at the beginning
of the savings period at a discount of up to 20 per cent of the
market price.
Participants elect to enter into savings contracts of up to
£250 per month for a period of three or five years. At the end
of this term, participants may exercise their options within six
months and purchase 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 those options which 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 any other 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 Share Incentive Plan (SIP).
This allows all UK based employees to purchase Prudential plc
shares up to a value of £125 per month from their gross salary
(partnership shares). 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 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 forfeited.
No directors or other employees are provided with loans to
enable them to buy shares.
Pensions and long-term savings
For executive directors in the UK and Asia hired externally after
30 June 2003, it is the Company’s policy to provide a supplement
in lieu of pension of 25 per cent of base salary. This includes,
where relevant, any Company contributions to the staff defined
contribution pension, 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, and
these executives are provided with life assurance cover of up to
four times salary. All these executive directors, except Barry
Stowe, have opted to become members of the staff defined
contribution pension plan.
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 6 per cent of base
salary (Clark Manning's salary for pension purposes is limited to
$245,000). He is also eligible to participate in the profit sharing
element of the plan which provides eligible participants with an
annual profit sharing contribution, depending on the financial
results of Jackson for the plan year, to a maximum of an additional
6 per cent of pensionable salary. An annual profit sharing
contribution equivalent to 5 per cent of pensionable salary
was made in 2010 (6 per cent of pensionable salary in 2009).
Clark Manning is provided with life assurance cover of two
times salary.
Prudential plc Annual Report 2010
135
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 for an
employee with 30 years or more potential service, for which his
contribution is four per cent of basic salary. Michael McLintock
participates on the same basis as other employees who joined
M&G at the same date. Benefits under the plan are subject to
a notional scheme earnings cap (set at £123,600 for both the
2009/10 and 2010/11 tax years) which replicates the HMRC
earnings cap in force before A-Day (6 April 2006).
Michael McLintock is entitled to supplements based on his
salary above the notional earnings cap and he is provided
with life assurance cover of four times salary.
In 2010, the Long Term Savings Plan (LTSP) and the Alternative
Retirement Benefit Scheme (ARBS) were established to provide
long-term savings vehicles for executive directors and other
employees. The LTSP was established under ordinary UK tax
legislation for Employee Benefit Trusts and the ARBS was
established under specific UK tax legislation relating to Employer
Financed Retirement Benefit 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. No further payments will be made into
these plans.
Service Contracts
Chairman’s letter of appointment and benefits
Harvey McGrath was appointed as a non-executive director on
1 September 2008 and became Chairman on 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 McGrath is provided with life assurance cover
of four times his annual fees 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 McGrath is also entitled to
medical insurance coverage but he has not taken up this benefit.
Executive directors’ service contracts and letters
of appointment
The normal notice of termination that the Company is required
to give executive directors is 12 months. Accordingly, in normal
circumstances, a director whose contract is terminated would
be entitled to one year’s salary and benefits in respect of their
notice period. 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 the termination of any service contract, the
Remuneration Committee will have regard to the specific
circumstances of each case, including the director’s obligation
to mitigate his loss. Payments are 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. During 2010, Michael
McLintock earned £42,500 as a trustee of another organisation.
Other directors served as non-executive directors on the boards
of educational and cultural organisations without receiving a fee
for such services.
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136
DIRECTORS’ REMUNERATION REPORT > CONTINUED
DIRECTORS’
REMUNERATION
REPORT
Executive director
Rob Devey
John Foley
Clark Manning(note 1)
Michael McLintock
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells(note 1)
Date of contract
1 July 2009
8 December 2010
7 May 2002
21 November 2001
26 April 2009
18 October 2006
2 September 2007
15 October 2010
Notice period
to the
Company
Notice period
from the
Company
12 months
12 months
12 months
6 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
12 months
Note
1
The contracts for Clark Manning and Mike Wells are renewable one year fixed term contracts. The contract is renewable automatically upon
the same terms and conditions unless the Company or the director gives at least 90 days’ notice prior to the end of the relevant term.
Non-executive director
Keki Dadiseth
Howard Davies
Michael Garrett
Ann Godbehere
Bridget Macaskill
Paul Manduca
Kathleen O’Donovan
James Ross2
Lord Turnbull
Notes
1
2
Subject to re-election
James Ross will retire from the Board at the AGM on 19 May 2011.
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.
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.
They 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. Their
appointment is subject to continued performance and
re-election by shareholders.
Non-executive directors’ fees
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 chairmanship and
membership of any committees. The Board reviews fees
annually and the last fees changes were effective on 1 July 2008.
Prudential plc Annual Report 2010
Appointment by the Board
at AGM Notice period
Initial
election by
shareholders
Expiration of
current term
of appointment1
1 April 2005
15 October 2010
1 September 2004
2 August 2007
1 September 2003
15 October 2010
8 May 2003
6 May 2004
18 May 2006
AGM 2005
AGM 2011
AGM 2005
AGM 2008
AGM 2004
AGM 2011
AGM 2004
AGM 2005
AGM 2006
6 months
6 months
6 months
6 months
6 months
6 months
6 months
6 months
6 months
AGM 2011
AGM 2014
AGM 2011
AGM 2011
AGM 2013
AGM 2014
AGM 2013
AGM 2011
AGM 2012
The structure of the annual fees paid is detailed below:
Basic fee
Audit Committee Chairman – additional fee
Audit Committee member – additional fee
Remuneration Committee Chairman
– additional fee
Remuneration Committee member
– additional fee
Risk Committee Chairman – additional fee2
Risk Committee member – additional fee2
Senior Independent Director – additional fee
From
1 July 2008
(£)1
66,500
50,000
20,000
22,500
10,000
50,000
20,000
30,000
Notes
1
2
Or date on which the Committee was established, if later.
The Risk Committee was established on 9 November 2010.
Please see the table on page 138 for details of the fees received
by individual non-executive directors during 2010.
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.
137
Shareholding
guideline after
five years as %
of base salary
Shareholding
at 8 March 2011
as % of base
salary
(note 1)
100%
100%
100%
200%
100%
100%
200%
100%
95%
650%
–
1,154%
162%
265%
203%
303%
Date by which
shareholding
guideline must be/
has been met
1 July 2014
31 December 2015
7 May 2007
21 November 2006
26 April 2014
18 October 2011
20 September 2012
15 October 2015
Shareholding guidelines
Rob Devey
John Foley
Clark Manning(note 3)
Michael McLintock
Nic Nicandrou
Barry Stowe(note 2)
Tidjane Thiam
Mike Wells(note 2)
Notes
1
Based on the share price as at 31 December 2010 (£6.68). Calculated using base salaries on 31 December 2010 or on the date of appointment,
if later.
Shareholdings for Barry Stowe and Mike Wells include American Depositary Receipts (ADRs). One ADR is equivalent to two
Prudential plc shares.
Clark Manning ceased to be an executive director on 31 December 2010.
2
3
Shareholding guidelines
As a condition of serving, all executive and non-executive
directors are required to have beneficial ownership of a minimum
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 to
maximise the community of interest between them and other
shareholders. This may be built up over a period of five years.
Shares earned and deferred under the annual incentive plan
are included in calculating the executive director’s shareholding.
Until the guideline is met, at least half of the shares released from
the long-term incentive plans (after tax) should be retained by
the executive director.
Directors’ shareholdings
The interests of directors in ordinary shares of the Company
are set out opposite. This includes shares acquired under the
Share Incentive Plan (detailed in the table on page 147), deferred
annual incentive awards and interests in shares awarded on
appointment (detailed in the ‘Other Share Awards’ table on
page 144). All interests are beneficial.
1 January
2010
31 December
2010
8 March
2011
Keki Dadiseth
Howard Davies(note 1)
Rob Devey
John Foley(note 2)
Michael Garrett
Ann Godbehere
Bridget Macaskill
Paul Manduca(note 1)
Clark Manning(note 3)
Harvey McGrath
Michael McLintock
Nic Nicandrou(note 4)
Kathleen O’Donovan
James Ross
Barry Stowe(note 5)
Tidjane Thiam
Lord Turnbull
Mike Wells(note 6)
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
–
30,655
575
78,261
–
36,972
14,628
44,006
1,260
473,069
299,540
604,390
133,555
23,484
21,190
264,437
273,025
15,589
–
30,655
575
78,261
535,386
36,972
14,628
44,006
1,260
–
299,540
604,390
133,621
23,484
21,190
264,437
273,025
15,589
293,842
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Notes
1
2
3
Howard Davies and Paul Manduca were appointed on
15 October 2010.
John Foley became an executive director on 1 January 2011.
Part of Clark Manning’s interest in shares is made up of 30,935
ADRs (representing 61,870 ordinary shares). Clark ceased to be
an executive director on 31 December 2011.
4 Nic Nicandrou’s interest in shares on 8 March 2011 includes his
5
6
monthly purchases made under the SIP plan in January, February
and March 2011.
Part of Barry Stowe’s interest in shares is made up of 48,847 ADRs
(representing 97,694 ordinary shares. 8,513.73 of these ADRs are
held within an investment account which secures premium
financing for a life assurance policy).
Part of Mike Wells’s interest in shares is made up of 146,921 ADRs
(representing 293,842 ordinary shares). Mike became an executive
director on 1 January 2011.
138
DIRECTORS’ REMUNERATION REPORT > CONTINUED
DIRECTORS’
REMUNERATION
REPORT
DIRECTORS’ REMUNERATION FOR 2010 (AUDITED INFORMATION)
Salary/
fees
2010
Cash
bonus
2010
Deferred
bonus
Total
2010
bonus
Benefits*
Total
emoluments
2009
including
cash
supple-
ments
for
pension
purposes
Value of
anticipated
releases
from LTIPs
in respect
of per-
formance
periods
ending 31
December
2010‡
Cash
supple-
ments
for
pension
purposes†
Total
emolu-
ments
2010
–
–
–
43
–
543
542
–
£000
CHAIRMAN
Harvey McGrath
EXECUTIVE DIRECTORS
Rob Devey(note 1)
Clark Manning(note 2)
Michael McLintock
Nic Nicandrou(note 3)
Barry Stowe(note 4)
Tidjane Thiam
500
550
679
350
550
666
900
496
1,462
1,052
512
625
–
331
626
552
341
417
1,570
827
2,088
1,604
853
1,042
1,570
TOTAL EXECUTIVE DIRECTORS
3,695
4,147
3,837
7,984
NON-EXECUTIVE DIRECTORS
Keki Dadiseth(note 5)
Howard Davies
Michael Garrett
Ann Godbehere
Bridget Macaskill
Paul Manduca
Kathleen O’Donovan
James Ross
Lord Turnbull
TOTAL NON-EXECUTIVE DIRECTORS
87
27
77
119
89
18
87
108
88
700
43
21
53
43
285
64
509
154
–
87
161
167
225
1,574
2,788
2,094
1,607
2,160
2,759
794 12,982
87
27
77
119
89
18
87
108
88
700
–
1,218
3,312
–
937
2,099
7,566
808
2,753
2,129
654
1,688
1,955
9,987
86
–
77
94
89
–
109
107
87
649
OVERALL TOTAL
4,895
4,147
3,837
7,984
552
794 14,225
11,178
7,566
* 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 and contributions to the LTSP and/or the ARBS are included in the table. The policy on pensions is
described in the section on ‘Pensions and long-term savings’ on page 134.
‡ Value of anticipated long-term incentive plan 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 2010. All executive directors participate in long-term incentive plans and the details of share releases from awards
with a performance period ending 31 December 2010 are provided in the footnote to the tables on share awards on pages 142 to 146. Executive
directors’ participation in all-employee plans are detailed on page 147.
Notes
1
2
Rob Devey elected not to receive his cash supplement for pension purposes in full during 2010. The Company made a request to the Trustees
of the Alternative Retirement Benefit Scheme to accept a contribution equivalent to this supplement. The value of this contribution is
included in the table above.
Clark Manning's bonus figure excludes a contribution of $12,250 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 147.
3 Nic Nicandrou elected not to receive his cash supplement for pension purposes in full during 2010. The Company made a request to the
Trustees of the Long Term Savings Plan to accept a contribution equivalent to this supplement. The value of this contribution is included in
the table above.
Barry Stowe's benefits relate primarily to his expatriate status, including costs of £153,384 for housing, £47,639 for children’s education and
£42,509 for home leave.
4
5 Keki Dadiseth was paid allowances totalling £10,083 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.
Prudential plc Annual Report 2010
Summary of remuneration provided for 2010
This chart summarises the remuneration received by executive
directors in 2010. This includes actual base salary paid during
the year, total annual bonus awards for 2010 performance
(including deferrals into shares) and the long-term incentives
plan releases in respect of awards made in 2008. Since
Rob Devey and Nic Nicandrou joined the Group in 2009,
they did not have long-term incentive awards for 2008.
139
Remuneration received by executive directors in 2010
Rob Devey
Clark Manning
Michael McLintock
Nic Nicandrou
Barry Stowe
Tidjane Thiam
0
1,000
2,000
3,000
4,000
5,000
6,000
£000
Base salary
2010 cash bonus
2010 deferred bonus
Value of 2008 long-term incentive plan release
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140
DIRECTORS’ REMUNERATION REPORT > CONTINUED
DIRECTORS’
REMUNERATION
REPORT
DIRECTORS’ REMUNERATION FOR 2009
£000
CHAIRMAN
Harvey McGrath
EXECUTIVE DIRECTORS
Rob Devey
(from 16 November 2009) (note 1)
Clark Manning(note 2)
Michael McLintock
Nic Nicandrou
(from 28 October 2009)(note 3)
Barry Stowe(note 4)
Tidjane Thiam(note 5)
Salary/
fees
2009
Cash
bonus
2009
Deferred
bonus
Total
2009
bonus
Benefits*
500
–
–
–
42
69
696
320
98
646
763
360
1,724
1,125
330
432
528
240
304
625
220
185
528
600
2,028
1,750
550
618
1,056
138
29
53
5
262
49
536
TOTAL EXECUTIVE DIRECTORS
2,592
4,499
2,103
6,602
NON-EXECUTIVE DIRECTORS
Keki Dadiseth(note 6)
Michael Garrett
Ann Godbehere
Bridget Macaskill
Harvey McGrath
(until 31 December 2008)
Kathleen O’Donovan
James Ross
Lord Turnbull
TOTAL NON-EXECUTIVE DIRECTORS
86
77
94
89
109
107
87
649
Total
emoluments
2008
including
cash
supple-
ments
for
pension
purposes
Value of
anticipated
releases
from LTIPs
in respect
of per-
formance
periods
ending 31
December
2009‡
Cash
supple-
ments
for
pension
purposes†
Total
emolu-
ments
2009
–
1
–
6
1
162
87
257
542
–
–
–
1,223
2,572
–
1,098
–
4,893
808
2,753
2,129
654
1,688
1,955
9,987
86
77
94
89
109
107
87
649
–
1,768
2,154
–
1,207
1,244
6,373
73
73
81
86
167
108
101
81
770
OVERALL TOTAL
3,741
4,499
2,103
6,602
578
257
11,178
7,143
4,893
* 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’ on page 134.
‡ Value of anticipated long-term incentive plan 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 tables on share awards on pages 142 to 146. Executive directors’
participation in all-employee plans are detailed on page 147.
Notes
1
As part of Rob Devey's appointment terms, it was agreed that any bonus award would be assessed as if he had been in employment for the
whole of 2009. Rob Devey elected not to receive his cash supplement for pension purposes in full during 2009. In March 2010, the Company
made a request to the Trustees of the Alternative Retirement Benefit Scheme to accept a contribution equivalent to this supplement. This
amount is included in the remuneration table for 2010.
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.
2
3 As part of Nic Nicandrou's appointment terms, it was agreed that any bonus award would be assessed as if he had been in employment for
the whole of 2009. Nic Nicandrou elected not to receive his cash supplement for pension purposes in full during 2009. In March 2010, the
Company made a request to the Trustees of the Long Term Savings Plan to accept a contribution equivalent to this supplement. This amount
is included in the remuneration table for 2010.
Barry Stowe's benefits relate primarily 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.
4
5
6 Keki Dadiseth was paid allowances totalling £5,398 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.
Prudential plc Annual Report 2010
141
Clark Manning
Clark Manning stepped down from his role as President and
Chief Executive of Jackson and as an executive director on
31 December 2010. Clark Manning remains Chairman of
Jackson until 30 April 2011 and will act in an advisory role
until 31 December 2011. Clark Manning will receive the
following payments:
• Salary and benefits will continue to be paid to Clark Manning
until 31 December 2011;
• A prorated 2011 annual bonus opportunity (4/12ths) based on
his length of service during 2011 with any payment to be made
in cash in March 2012;
• The deferred portion of the bonus awarded to Clark Manning
in respect of performance in 2007 will be released to him in
March 2011. The deferred portions of the bonuses awarded
to Clark Manning in respect of performance in 2009 and 2010
will be released in March 2012;
• Outstanding awards made under the GPSP and BUPP will vest
(subject to the achievement of performance conditions) on the
same schedule as awards made to other executive directors.
These awards will be prorated to reflect the portion of the
performance periods which had elapsed on 31 December
2011. No further awards will be made to Clark under any long
term incentive plan during 2011 or in any subsequent year.
No other amounts were paid during the financial year or were
receivable by directors (or past directors) in connection with
leaving the organisation. No amounts were paid to Mike Wells,
John Foley or to any other executive directors in connection with
their appointment.
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Payments in 2010 to past and newly appointed
executive directors
Mark Tucker
The 2008 Directors’ Remuneration Report provided details of
the remuneration arrangements which applied to Mark Tucker
following his resignation as Group Chief Executive. These
arrangements were implemented as intended by the Committee.
In January 2010, a final payment in respect of salary and benefits
(£307,938) was made to Mark Tucker relating to restrictions on
his employment. Outstanding deferred share awards were
released during the year in accordance with the scheme rules.
On 31 December 2010, the performance period for Mark
Tucker’s 2008 Group Performance Share Plan award came to an
end. His GPSP award was prorated for service (21/36ths) and
its vesting remained dependent on TSR performance achieved
over the three-year performance period. Since this condition
was met in full, Mark Tucker’s prorated 2008 GPSP award will
vest and will be released at the same time as those of other
participants in the plan. This award was the last that Mark Tucker
had outstanding under a Prudential long-term incentive plan.
Nick Prettejohn
The 2009 Directors’ Remuneration Report provided
details of the remuneration arrangements that would
apply to Nick Prettejohn after he resigned from the position
of Chief Executive UK & Europe. These arrangements were
implemented as intended by the Committee. As a result,
Nick Prettejohn received:
• A final payment in respect of salary and benefits (£303,375)
in January 2010, relating to restrictions on his employment
up to 1 April 2010;
• Prorated 2009 annual bonus (9/12ths) based on his length
of service during the year and paid in cash in March 2010
(£505,271);
• Outstanding deferred share awards were released in
accordance with the scheme rules; and
• The long-term incentive plan awards for 2007, 2008 and 2009
have vested or will vest at the end of each relevant three year
performance period prorated based on service, i.e. 33/36ths,
21/36ths and 9/36ths respectively. Vesting remains
dependent on performance achieved over the relevant
performance periods and any shares releases will occur at the
same time as for all other participants in the GPSP and BUPP.
142
DIRECTORS’ REMUNERATION REPORT > CONTINUED
DIRECTORS’
REMUNERATION
REPORT
Directors’ outstanding long-term incentive awards
Share-based long-term incentive awards
The table below sets out the outstanding share awards under the Group Performance Share Plan and Business Unit
Performance Plans.
Plan name
ROB DEVEY
GPSP
BUPP
GPSP
BUPP
CLARK MANNING
GPSP
BUPP
GPSP
BUPP
GPSP
BUPP
GPSP
BUPP
MICHAEL MCLINTOCK
GPSP
GPSP
GPSP
GPSP
Year of
initial
award
2009
2009
2010
2010
2007
2007
2008
2008
2009
2009
2010
2010
2007
2008
2009
2010
Conditional
share
awards
outstand-
ing at
1 January
2010
(Number
of shares)
120,898
120,897
Con-
ditional
awards
in 2010
(Number
of shares)
104,089
104,089
241,795
208,178
191,140
95,570
182,262
91,131
468,476
468,476
302,442
302,442
Market
price at
date of
original
award
(pence)
639
639
568.5
568.5
745
745
674.5
674.5
455.5
455.5
568.5
568.5
Scrip
dividend
equivalents
on vested
shares
(Number
of shares
released)
Rights
exercised
in 2010
Rights
lapsed
in 2010
20,269
191,140
95,570
Conditional
share
awards
outstanding
at 31
December
2010
(Number
of shares)
120,898
120,897
104,0892
104,0892
449,973
Date of
end of
per-
formance
period
31 Dec 11
31 Dec 11
31 Dec 12
31 Dec 12
0
31 Dec 09
0
31 Dec 09
182,2623
31 Dec 10
91,1314
31 Dec 10
468,4761
31 Dec 11
468,4761
31 Dec 11
302,4421,2 31 Dec 12
302,4421,2 31 Dec 12
1,497,055
604,884
20,269
191,140
95,570 1,815,229
52,040
48,330
92,022
745
674.5
455.5
568.5
66,238
5,517
52,040
0
48,3303
92,022
66,2382
31 Dec 09
31 Dec 10
31 Dec 11
31 Dec 12
192,392
66,238
5,517
52,040
206,590
NIC NICANDROU
GPSP
GPSP
BARRY STOWE
GPSP
BUPP
GPSP
BUPP
GPSP
BUPP
GPSP
BUPP
TIDJANE THIAM
GPSP
GPSP
GPSP
316,328
2009
2010
208,179
639
568.5
316,328
208,179
316,328
208,1792
31 Dec 11
31 Dec 12
524,507
0
31 Dec 09
0
31 Dec 09
107,9883
31 Dec 10
53,9944
31 Dec 10
196,5961
31 Dec 11
196,5961
31 Dec 11
129,0761,2 31 Dec 12
129,0761,2 31 Dec 12
2007
2007
2008
2008
2009
2009
2010
2010
2008
2009
2010
11,207
3,562
105,706
33,614
19,239
105,706
52,853
107,988
53,994
196,596
196,596
129,076
129,076
745
745
674.5
674.5
455.5
455.5
568.5
568.5
713,733
258,152
14,769
139,320
19,239
813,326
314,147
299,074
510,986
613,221
510,986
674.5
455.5
568.5
314,1473
299,074
510,9862
31 Dec 10
31 Dec 11
31 Dec 12
1,124,207
Prudential plc Annual Report 2010
143
Face value
of conditional
awards
outstanding
at 31 December
2010
£000
0
652
652
0
358
358
Date of end of
performance
period
31 Dec 09
31 Dec 10
31 Dec 09
31 Dec 10
Face value
of conditional
awards
outstanding
at 1 January
2010
£000
Conditionally
awarded
in 2010
£000
Payments
made
in 2010
£000
Cash rights granted under the Business Unit Performance Plan
CLARK MANNING
BARRY STOWE
Year of
initial
award
2007
2008
2007
2008
Plan
name
BUPP
BUPP
Total
BUPP
BUPP
Total
624
652(note 4)
1,276
325
358(note 4)
683
Cash right
lapsed
in 2010
£000
624
624
118.3
206.7
206.7
118.3
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Notes
1
2
The awards in 2009 and 2010 for Clark Manning and Barry Stowe were made in ADRs (1 ADR = 2 Prudential plc shares). The figures in the
table are represented in terms of Prudential shares.
2010 awards made under the GPSP and the BUPP have a performance period from 1 January 2010 to 31 December 2012. In determining the
2010 conditional share awards the shares were valued at the average share price for the 30 days immediately following the announcement
of Prudential’s 2009 results, and the price used to determine the number of shares was 528.39 pence. The awards for Clark Manning and
Barry Stowe were made in ADRs (one ADR = 2 Prudential plc shares or $15.97). The figures in the table are represented in terms of Prudential
shares.
3 At 31 December 2010 Prudential’s TSR performance was 133.7 per cent of the TSR performance of the index. Hence it is anticipated that
awards granted under this scheme in 2008 will vest in full. This will result in 182,262 shares vesting for Clark Manning; 48,330 shares for
Michael McLintock; 107,988 shares for Barry Stowe and 314,147 shares for Tidjane Thiam plus, in each case, scrip dividend equivalents on
these vested shares.
4 At 31 December 2010, Shareholder Capital Value performance under the 2008 BUPPs was as follows:
Jackson
Asia
Anticipated
number of
shares released
from 2008
BUPP share
award
(note 5)
% compound
annual growth
in SCV
3.9%
15.0%
Nil
16,198
Anticipated
value of
2008 BUPP
cash award
release
£000
Nil
107
5
Scrip dividend equivalents will be released on these vested shares.
Business-specific cash-based long-term incentive plans
Details of all outstanding awards under cash-based long-term incentive plans up to and including 2010 are set out in the table below.
The performance period for all awards is three years.
MICHAEL MCLINTOCK
Phantom M&G shares
M&G Executive LTIP
M&G Executive LTIP
M&G Executive LTIP
TOTAL CASH PAYMENTS MADE IN 2010
Face value
of conditional
awards
outstanding
at 1 January
2010
£000
1,333
1,141
1,830
Year of
initial
award
2007
2008
2009
2010
Conditionally
awarded
in 2010
£000
1,925
Face value
of conditional
awards
outstanding
at 31 December
2010
£000
1,141
1,830
1,925
Payments
made
in 2010
£000
2,239
2,239
Date of end of
performance
period
31 Dec 09
31 Dec 10
31 Dec 11
31 Dec 12
Note
Michael McLintock’s 2007 long-term incentive awards were under the M&G Chief Executive Long-Term Incentive Plan. 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 the 2007 award of 1,333,000 units, the option price at the end of the
performance period was £1.68. This resulted in a payment of £2,239,440 to Michael McLintock. For the 2008 award of 1,141,176 units, the option
price at the end of the performance period was £2.62. This will result in a payment of £2,989,881 to Michael McLintock.
144
DIRECTORS’ REMUNERATION REPORT > CONTINUED
DIRECTORS’
REMUNERATION
REPORT
Other share awards
The table below sets out the share deferred annual incentive awards and interests in shares awarded on appointment. The values
of the deferred share awards are included in the deferred bonus figures in the table on page 138. 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 2009 annual bonuses, made in 2010, the average share price was
528.92 pence. Please see the table on page 147 for details of shares acquired under the Share Incentive Plan.
Conditional
share
awards
outstanding
at 1 January
2010
(Number
of shares)
Year
of initial
grant
Con-
ditionally
awarded
in 2010
(Number
of shares)
Scrip
dividends
accumu-
lated
(Number
of shares)
Shares
released
in 2010
(Number
of shares)
Conditional
share
awards
outstanding
at 31
December
2010
(Number
of shares)
Date of
end of
restricted
period
Shares
released
in 2010
(Number
of shares)
Market
price at
original
date of
award
(pence)
Market
price at
date of
vesting
or release
(pence)
Date of
release
ROB DEVEY
Awards under
appointment
terms
Restricted share
award based
on deferred
2009 annual
incentive
award(note 2)
CLARK
MANNING
Deferred
2006 annual
incentive
award
Deferred
2007 annual
incentive
award
Deferred
2009 annual
incentive
award
2009
50,575
50,575 31 Mar 12
639
2010
45,375
953 18,642
27,686 31 Dec 12
18,642 12 Mar 10
552.5
552.5
2007
10,064
10,064
0 31 Dec 09
10,064
9 Mar 10
723
519.5
2008
17,825
635
18,460 31 Dec 10
635
2010
59,792
2,078
61,870 31 Dec 12
552.5
Prudential plc Annual Report 2010
145
Conditional
share
awards
outstanding
at 1 January
2010
(Number
of shares)
Year
of initial
grant
Con-
ditionally
awarded
in 2010
(Number
of shares)
Scrip
dividends
accumu-
lated
(Number
of shares)
Shares
released
in 2010
(Number
of shares)
Conditional
share
awards
outstanding
at 31
December
2010
(Number
of shares)
Date of
end of
restricted
period
Shares
released
in 2010
(Number
of shares)
Market
price at
original
date of
award
(pence)
Market
price at
date of
vesting
or release
(pence)
Date of
release
MICHAEL
MCLINTOCK
Deferred
2006 annual
incentive
award
Deferred
2007 annual
incentive
award(note 1)
Deferred
2008 annual
incentive
award(note 1)
Restricted share
award based
on deferred
2007 annual
incentive
award(note 1)
Restricted share
award based
on deferred
2008 annual
incentive
award(note 1)
Restricted share
award based
on deferred
2009 annual
incentive
award(note 2)
2007
90,090
90,090
0 31 Dec 09
90,090
9 Mar 10
723
519.5
2008
112,071
112,071
0 31 Dec 10 112,071
9 Mar 10
635
519.5
2009
217,410
217,410
0 31 Dec 11 217,410
9 Mar 10
349.5
519.5
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2010
66,029
2,356
68,385 31 Dec 10
519.5
2010
128,093
4,571
132,664 31 Dec 11
519.5
2010
118,165
2,484 48,545
72,104 31 Dec 12
48,545 12 Mar 10
552.5
552.5
NIC NICANDROU
Awards under
appointment
terms
2009
10,616
5,889
13,898
16,059
68,191
10,616
5,889
0 31 Mar 10
0 31 Mar 10
13,898 31 Mar 11
16,059 31 Mar 11
68,191 31 Mar 12
10,616
5,889
9 Mar 10
9 Mar 10
519.5
519.5
639
639
639
639
639
Restricted share
award based
on deferred
2009 annual
incentive
award(note 2)
2010
41,594
874 17,088
25,380 31 Dec 12
17,088 12 Mar 10
552.5
552.5
146
DIRECTORS’ REMUNERATION REPORT > CONTINUED
DIRECTORS’
REMUNERATION
REPORT
Other share awards continued
Conditional
share
awards
outstanding
at 1 January
2010
(Number
of shares)
Year
of initial
grant
Con-
ditionally
awarded
in 2010
(Number
of shares)
Scrip
dividends
accumu-
lated
(Number
of shares)
Shares
released
in 2010
(Number
of shares)
Conditional
share
awards
outstanding
at 31
December
2010
(Number
of shares)
Date of
end of
restricted
period
Shares
released
in 2010
(Number
of shares)
Market
price at
original
date of
award
(pence)
Market
price at
date of
vesting
or release
(pence)
Date of
release
2006
7,088
2,110
7,088
2,110
0
0
1 Jan 10
1 May 10
7,088
2,110
9 Mar 10
8 Jun 10
702
702
519.5
525.5
2008
43,777
1,562
45,339 31 Dec 10
635
2009
21,064
751
21,815 31 Dec 11
349.5
2010
36,386
1,264
37,650 31 Dec 12
552.5
2008
48,362
41,135
49,131
48,362
41,135
0
0
49,131
31 Mar 10
31 Mar 10
31 Mar 11
48,362
41,135
9 Mar 10
9 Mar 10
519.5
519.5
662
662
662
2009
110,403
110,403
0 31 Dec 11 110,403
9 Mar 10
349.5
519.5
2010
65,046
2,321
67,367 31 Dec 11
552.5
2010
99,851
2,099 41,022
60,928 31 Dec 12
41,022 12 Mar 10
552.5
552.5
BARRY STOWE
Awards under
appointment
terms
Deferred
2007 annual
incentive
award
Deferred
2008 annual
incentive
award
Deferred
2009 annual
incentive
award
TIDJANE
THIAM
Awards under
appointment
terms
Deferred
2008 annual
incentive
award(note 1)
Restricted share
award based
on deferred
2008 annual
incentive
award(note 1)
Restricted share
award based
on deferred
2009 annual
incentive
award(note 2)
Notes
1
2
3
These awards replaced the 2007, 2008 and 2009 deferred share awards which vested during the year.
These 2010 awards are a net deferred share award.
The Deferred Share Awards in 2010 for Clark Manning and Barry Stowe were made in ADRs (1 ADR = 2 Prudential plc shares).
The figures in the table are represented in terms of Prudential shares.
Prudential plc Annual Report 2010
147
Shares acquired under the Share Incentive Plan
NIC NICANDROU
Shares held in Trust
Share
Incentive
Plan awards
held in
Trust at
1 January
2010
(Number
of shares)
Year
of initial
grant
Partnership
shares
accumu-
lated in
2010
(Number
of shares)
Matching
shares
accumu-
lated in
2010
(Number
of shares)
Dividend
shares
accumu-
lated in
2010
(Number
of shares)
Share
Incentive
Plan awards
held in
Trust at
31 December
2010
(Number
of shares)
2010
0
240
60
3
303
Note
1
Nic Nicandrou participated in the Share Incentive Plan (SIP) for the first time in 2010. The table above provides information about shares
purchased under the SIP together with Matching Shares (awarded on a 1:4 basis) and dividend shares. The total number of shares will only
be released if Nic Nicandrou remains in employment for five years.
Outstanding share options
The following table sets out the share options held by Tidjane Thiam in the UK Savings Related Share Option Scheme (SAYE) as at
the end of 2010. No other directors hold shares in any other option scheme.
Date of
initial grant
Exercise period
Beginning
Start
End
of period Granted Exercised Cancelled Forfeited
Lapsed
Number of options
End of
period
Exercise
price (p)
Market
price at 31
December
2010 (p)
TIDJANE
THIAM
25 Apr 08
1 Jun 11 30 Nov 11
1,705
–
–
–
–
–
1,705
551
668
No gains were made by directors in 2010 on the exercise of share options (2009: £0).
Notes
1
2 No price was paid for the award of any option.
3
The highest and lowest share prices during 2010 were 681 pence and 487.5 pence respectively.
Dilution
Releases from Prudential’s GPSP and BUPP are satisfied using new issue shares rather than by 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 2010 was 0.2 per cent 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 Company’s pension policy is set out on page 134. Details of directors’ pension entitlements under HMRC approved defined
benefit schemes and supplements in the form of contributions to pension arrangements paid by the Company are set out in the
following table.
Age at
31 December
2010
Years of
pensionable
service at
31 December
2010
Accrued
benefit at
31 December
2010
£000
Additional pension earned
during year ended
31 December 2010
Ignoring
inflation on
pension
earned to
31 December
20091
£000
Allowing
for inflation
on pension
earned to
31 December
20092
£000
Transfer value of accrued
benefit at 31 December3
2010
A
£000
2009
B
£000
Amount
of (B – A)
less
contri-
butions
made by
directors
during 2010
£000
Contri-
butions to
pension
and life
assurance
arrange-
ments4
£000
Rob Devey
Clark Manning
Michael McLintock
Nic Nicandrou
Barry Stowe
Tidjane Thiam
42
52
49
45
53
48
18
50
3
1
856
755
87
0
20
20
0
5
0
As required by the Companies Act remuneration regulations.
Notes
1
2 As required by Stock Exchange Listing rules.
3
4
The transfer value equivalent has been calculated in accordance with the M&G Group Pension Scheme’s transfer basis.
Supplements in the form of cash are included in the table on page 138.
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148
DIRECTORS’ REMUNERATION REPORT > CONTINUED
DIRECTORS’
REMUNERATION
REPORT
No enhancements to retirement benefits were paid to or
receivable by directors or former directors other than the
discretionary pension increases awarded to all pensioners which
have been made during the year.
Total contributions to directors’ pension arrangements in 2010,
including cash supplements for pension purposes, were
£624,921 (2009: £876,466) of which £44,608 (2009: £298,586)
related to money purchase schemes.
Five highest paid individuals (unaudited information)
Of the five individuals with the highest emoluments in 2010, one
was a director whose emoluments are disclosed in this report
(2009: two; 2008: two). The aggregate of the emoluments of the
other four individuals for 2010 (2009: three; 2008: three) were
as follows:
2008
2009
2010
Base salaries, allowances
and benefits in kind
Pension contributions*
Bonuses paid or
receivable
Share based payments
and other cash
payments
TOTAL
1
–
10
2
13
1
–
12
4
17
1
–
18
6
25
* Pension contributions payable in the period were less than £150,000 in
each period.
Their emoluments were within the following bands:
£2,600,001 – £2,700,000
£4,700,001 – £4,800,000
£5,000,001 – £5,100,000
£5,200,001 – £5,300,000
£5,300,001 – £5,400,000
£5,400,001 – £5,500,000
£6,000,001 – £6,100,000
£6,600,001 – £6,700,000
£8,300,001 – £8,400,000
2008
2009
2010
1
1
1
1
1
1
1
1
1
1
Signed on behalf of the Board of directors
BRIDGET MACASKILL
CHAIRMAN, REMUNERATION COMMITTEE
8 March 2011
HARVEY MCGRATH
CHAIRMAN
8 March 2011
Prudential plc Annual Report 2010
FINANCIAL
STATEMENTS
AND EUROPEAN
EMBEDDED VALUE
(EEV) BASIS
SUPPLEMENTARY
INFORMATION
150
Summary of statutory and supplementary IFRS
and EEV basis results
Consolidated statement of comprehensive income
152 Index to Group financial statements
153 Consolidated income statement
154
155 Consolidated statement of changes in equity
157 Consolidated statement of financial position
159 Consolidated statement of cash flows
160 Notes on the Group financial statements
354 Additional unaudited financial information
375 Balance sheet of the parent company
376
387
Notes on the parent company financial statements
Statement of directors’ responsibilities in respect of
the Annual Report and the financial statements
388 Independent auditor’s report to the members of
Prudential plc
389 EEV basis supplementary information
395
434
Notes on the EEV basis supplementary 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
435
149
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150
FINANCIAL STATEMENTS > PRIMARY STATEMENTS
SUMMARY OF STATUTORY AND SUPPLEMENTARY
IFRS AND EEV BASIS RESULTS
YEAR ENDED 31 DECEMBER 2010
The following tables and referenced disclosure notes show the results reported in the statutory financial statements on pages 153 to 352 and
375 to 386 and supplementary EEV basis results on pages 389 to 433. This page does not form part of the statutory financial statements.
International Financial Reporting Standards (IFRS) basis results
Statutory IFRS basis results
Primary statement or note reference
Page
2010
2009
Profit after tax attributable to equity
holders of the Company
Basic earnings per share
Dividends per share declared and paid in reporting period
Shareholders’ equity, excluding non-controlling interest
IFRS income statement
IFRS income statement
IFRS note B3
IFRS statement of financial position
Supplementary IFRS basis information
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
Costs of terminated AIA transaction
Gain on dilution of holding in PruHealth
Loss on sale and results for Taiwan agency business
Profit from continuing operations before tax attributable
to shareholders (including actual investment returns)
Operating earnings per share after related tax and non-
controlling interests (excluding exceptional tax credit)
Operating earnings per share after related tax and non-
controlling interests (including exceptional tax credit)
Dividends per share in respect of the reporting period
(including interim dividend of 6.61p (2009: 6.29p) and
final dividend of 17.24p (2009: second interim dividend
of 13.56p) declared after the end of the reporting period)
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
Costs of terminated AIA transaction
Gain on dilution of holding in PruHealth
Profit on sale and results for Taiwan agency business
Profit from continuing operations before tax (including
actual investment returns)
Operating earnings per share after related tax and non-
controlling interests (excluding exceptional tax credit)
Operating earnings per share after related tax and
Primary statement or note reference
IFRS note B1
153
153
188
158
Page
182
182
182
182
182
182
£1,431m
56.7p
20.17p
£8,031m
£676m
27.0p
19.20p
£6,271m
2010
2009 i
£1,941m
£(123)m
£1,564m
£(123)m
£(10)m
£(377)m
£30m
–
£(74)m
–
–
£(621)m
IFRS note B1
182
£1,461m
£746m
IFRS note B2
IFRS note B2
186
186
62.0p
68.3p
47.5p
47.5p
IFRS note B3
188
23.85p
19.85p
Page
389
391
391
391
391
391
391
391
2010
2009
£3,696m
£(30)m
£(164)m
£(11)m
£(10)m
£(377)m
£3m
–
£3,090m
£351m
£(795)m
£(84)m
£(910)m
–
–
£91m
391
£3,107m
£1,743m
EEV income
statement
EEV note 12
417
106.9p
88.8p
Supplementary European Embedded Value (EEV) basis results
Primary statement or note reference
non-controlling interests (including exceptional tax credit)
Basic earnings per share
Shareholders’ equity, excluding non-controlling interests
EEV note 12
EEV earnings per share
EEV statement of financial position
113.2p
417
101.9p
392
394 £18,207m
88.8p
49.8p
£15,273m
Note
i
The Company has amended the presentation of IFRS operating profit for its US operations to remove the net equity hedge accounting effect (incorporating
related amortisation of deferred acquisition costs) and include it in the supplementary analysis of profit in short-term fluctuations in investment returns.
The 2009 amounts have been amended accordingly.
Prudential plc Annual Report 2010
151
Notes
Basis of preparation
Results bases
With the exception of the adoption of IFRS 3 (Revised) on business combinations and associated amendments to other standards and the altered
basis of presentation of Jackson’s IFRS operating profit based on longer-term investment returns referred to below, the basis of preparation of the
statutory IFRS basis results and supplementary IFRS basis information is consistent with that applied for the 2009 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. 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 Group’s in-force long-term businesses
and is a valuable supplement to statutory accounts. With the exception of the presentation of the new business results of the Japan life operation
which ceased writing new business in February 2010 there has been no other change to the basis of presentation of the EEV results from the 2009
results and financial statements.
Operating profit based on longer-term investment returns
Consistent with previous reporting practice, the Group provides supplementary analysis of IFRS profit before tax attributable to shareholders
and analyses its EEV basis results, so as to distinguish operating profit based on longer-term investment 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 non-controlling 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. The operating profit based on longer-term investment returns for 2010 also excludes the costs associated with the terminated
AIA transaction and the gain arising upon the dilution of the Group’s holding in PruHealth. Consistent with prior presentation, the effect of disposal and
the results of the Taiwan agency business are shown separately from operating profit based on longer-term investment returns for 2009.
In 2010 the Company amended its presentation of IFRS operating profit for its US insurance operations to exclude the net equity hedge
accounting effect of negative £367 million (2009: negative £159 million) relating principally to its variable annuity business and reclassified it in
the supplementary analysis of profit as a short-term fluctuation in investment returns. Prior year comparatives have been amended accordingly.
This is a presentational change and it has no impact on the IFRS profit before tax or the IFRS shareholders’ funds. The change also has no impact
on the Group’s EEV financial statements.
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.
After adjusting for related tax and non-controlling interests, the amounts excluded from operating profit based on longer-term investment
returns are included in the calculation of basic earnings per share.
F
F
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N
N
A
A
N
N
C
C
I
I
A
A
L
L
S
S
T
T
A
A
T
T
E
E
M
M
E
E
N
N
T
T
S
S
I
P
R
M
A
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Y
S
T
A
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E
M
E
N
T
S
152
FINANCIAL STATEMENTS > PRIMARY STATEMENTS
INDEX TO GROUP
FINANCIAL STATEMENTS
Primary statements
153 Consolidated income statement
154 Consolidated statement of comprehensive income
155 Consolidated statement of changes in equity
157 Consolidated statement of financial position
159 Consolidated statement of cash flows
Notes on the Group financial statements
Section A: Background and accounting policies
160 A1: Nature of operations
160 A2: Basis of preparation
160 A3: Critical accounting policies, estimates and judgements
166 A4: Significant accounting policies
179 A5: New accounting pronouncements
Section B: Summary of results
182 B1: Segment disclosure – income statement
186 B2: Earnings per share
188 B3: Dividends
189 B4: Exchange translation
189 B5: New business
192 B6: Group statement of financial position
Section C: Group risk management
203 C: Group risk management
Section D: Life assurance businesses
208 D1: Group overview
215 D2: UK insurance operations
234 D3: US insurance operations
254 D4: Asian insurance operations
262 D5:
Capital position statement for life
assurance businesses
Section E: Asset management (including
US broker dealer) and other operations
271 E1:
273 E2:
Income statement for asset management operations
Statement of financial position for asset management
operations
274 E3: Regulatory and other surplus
275 E4:
Sensitivity of profit and equity to market
and other financial risk
275 E5: Other operations
Section F: Income statement notes
276 F1: Segmental information
278 F2: Revenue
280 F3: Acquisition costs and other expenditure
281 F4:
Finance costs: Interest on core structural borrowings
of shareholder-financed operations
281 F5: Tax
288 F6:
290 F7:
Allocation of investment return between policyholders
and shareholders
Benefits and claims and movements in unallocated
surplus of with-profits funds, net of reinsurance
Section G: Financial assets and liabilities
291 G1: Financial instruments – designation and fair values
300 G2: Market risk
304 G3: Derivatives and hedging
306 G4: Derecognition and collateral
307 G5: Impairment of financial assets
Prudential plc Annual Report 2010
Section H: Other information on statement of
financial position items
Intangible assets attributable to shareholders
308 H1:
312 H2: Intangible assets attributable to with-profits funds
313 H3: Reinsurers’ share of insurance contract liabilities
314 H4: Tax assets and liabilities
315 H5: Accrued investment income and other debtors
316 H6: Property, plant and equipment
317 H7:
318 H8: Investments in associates and joint ventures
320 H9: Properties held for sale
321 H10: Cash and cash equivalents
321 H11:
Investment properties
Shareholders’ equity: Share capital, share premium
and reserves
323 H12: Insurance contract liabilities and unallocated surplus
of with-profits funds
324 H13: Borrowings
326 H14: Provisions and contingencies
330 H15: Other liabilities
Section I: Other notes
I1:
331
332
I2:
Acquisition of United Overseas Bank Life
Assurance Limited
Dilution of the Group’s holding in PruHealth in 2010
and sale of Taiwan agency business in 2009
332
345
349
349
350
350
352
352
352
352
I3: Staff and pension plans
I4: Share-based payments
I5: Key management remuneration
I6: Fees payable to auditor
I7: Related party transactions
I8: Subsidiary undertakings
I9: Commitments
I10: Discontinued operations
I11: Cash flows
I12:
Post balance sheet events
Additional unaudited financial information
354 Additional unaudited financial information
Parent company financial statements
375 Balance sheet of the parent company
376 Notes on the parent company financial statements
Statement of directors’ responsibilities and
independent auditor’s report
387 Statement of directors’ responsibilities in respect
of the Annual Report and the financial statements
Independent auditor’s report to the members of
Prudential plc
388
European Embedded Value (EEV) basis
supplementary information
389 Operating profit based on longer-term investment returns
391 Summarised consolidated income statement – EEV basis
392 Earnings per share – EEV basis
392 Dividends per share
392 Movement in shareholders’ equity (excluding
non-controlling interests) – EEV basis
394 Net asset value per share
394 Summary statement of financial position – EEV basis
395 Notes on the EEV basis supplementary information
434 Statement of directors’ responsibilities in respect
435
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
CONSOLIDATED
INCOME STATEMENT
Year ended 31 December 2010
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 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 before tax (being tax attributable to shareholders’ and policyholders’ returns)*
Tax charge attributable to policyholders’ returns
Profit before tax attributable to shareholders
Tax charge
Less: tax attributable to policyholders’ returns
Tax charge attributable to shareholders’ returns‡
Profit from continuing operations after tax
Discontinued operations (net of tax)†
PROFIT FOR THE YEAR
Attributable to:
Equity holders of the Company
Non-controlling interests
PROFIT FOR THE YEAR
EARNINGS PER SHARE (IN PENCE)
Basic:
Based on profit from continuing operations attributable to the equity holders of the Company
Based on loss from discontinued operations attributable to the equity holders of the Company
Diluted:
Based on profit from continuing operations attributable to the equity holders of the Company
Based on loss from discontinued operations attributable to the equity holders of the Company
153
Note
2010 £m
2009 £m
F2
F2
F2
F1,F2
H12
F3
F4
I2
F1
B1
F5
F5
I10
B2
B2
B2
B2
24,568
(357)
24,211
21,769
1,666
47,646
(40,608)
335
(245)
20,299
(323)
19,976
26,889
1,234
48,099
(39,901)
265
(1,559)
(40,518)
(4,799)
(41,195)
(4,572)
(257)
–
(209)
(559)
(45,574)
(46,535)
2,072
(611)
1,461
(636)
611
(25)
1,436
–
1,436
1,431
5
1,436
56.7p
–
56.7p
56.6p
–
56.6p
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
* This measure is the formal profit before tax measure under IFRS but is not the result attributable to shareholders and is stated after £377 million
of pre-tax costs of the terminated AIA transaction. See note B1.
†The 2009 charge of £14 million which was net of £nil tax, reflected completion adjustments for a previously disposed business.
‡ The 2010 tax charge attributable to shareholders’ return includes an exceptional tax credit of £158 million which primarily relates to the impact
of a settlement agreed with the UK tax authorities.
F
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N
C
I
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L
S
T
A
T
E
M
E
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T
S
I
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M
A
R
Y
S
T
A
T
E
M
E
N
T
S
154
FINANCIAL STATEMENTS > PRIMARY STATEMENTS
CONSOLIDATED STATEMENT
OF COMPREHENSIVE INCOME
Year ended 31 December 2010
PROFIT FOR THE YEAR
Other comprehensive income:
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 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
2010 £m
2009 £m
1,436
677
B4
D3(a)
H1
217
34
251
(206)
11
(195)
1,170
51
1,221
(496)
(247)
478
2,249
420
2,669
(1,069)
(557)
1,043
OTHER COMPREHENSIVE INCOME FOR THE YEAR, NET OF RELATED TAX
729
848
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
Attributable to:
Equity holders of the Company
Non-controlling interests
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
2,165
1,525
2,160
5
2,165
1,524
1
1,525
Prudential plc Annual Report 2010
CONSOLIDATED STATEMENT
OF CHANGES IN EQUITY
155
Year ended 31 December 2010
RESERVES
Profit for the year
Other comprehensive income:
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
Total comprehensive income for the year
Dividends
Reserve movements in respect of share-
based payments
Change in non-controlling 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 (including
shares issued in lieu of cash dividends)
Reserve movements 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
B3
H11
H11
Note
Share
capital
Share
premium
Retained
earnings
2010 £m
Trans-
lation
reserve
Available-
for-sale
securities
reserve
Share-
holders’
equity
Non-
controlling
interests
Total
equity
–
–
1,431
–
–
1,431
5
1,436
–
–
–
251
–
251
–
251
–
–
–
–
–
–
–
–
–
–
–
–
1,431
(511)
–
251
251
–
478
478
478
–
478
729
2,160
(511)
37
–
–
37
–
–
5
–
–
478
729
2,165
(511)
37
–
–
–
–
–
–
7
7
–
–
–
–
75
(62)
–
–
–
62
(4)
3
–
–
–
–
–
–
–
–
75
–
(4)
3
–
–
–
–
12
32
44
75
–
(4)
3
1,772
6,303
8,075
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
I
P
R
M
A
R
Y
S
T
A
T
E
M
E
N
T
S
Net increase in equity
At beginning of year
AT END OF YEAR
–
127
13
1,843
1,018
3,964
H11
127
1,856
4,982
251
203
454
478
134
1,760
6,271
612
8,031
156
FINANCIAL STATEMENTS > PRIMARY STATEMENTS
CONSOLIDATED STATEMENT
OF CHANGES IN EQUITY
CONTINUED
Note
Share
capital
Share
premium
Retained
earnings
2009 £m
Trans-
lation
reserve
Available-
for-sale
securities
reserve
Share-
holders’
equity
Non-
controlling
interests
676
–
(195)
–
–
676
(195)
–
1,043
1,043
(195)
1,043
848
(195)
–
1,043
–
1,524
(481)
29
Total
equity
677
(195)
1,043
848
1,525
(481)
29
1
–
–
–
1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(24)
(24)
141
–
3
(3)
–
–
–
–
141
–
3
(3)
–
–
–
–
–
–
–
–
2
–
–
–
–
–
–
–
–
–
–
–
139
–
–
–
676
(481)
29
–
–
(136)
136
–
–
3
(3)
2
125
127
3
1,840
360
3,604
1,843
3,964
(195)
398
203
1,043
(909)
1,213
5,058
(23)
55
1,190
5,113
134
6,271
32
6,303
RESERVES
Profit for the year
Other comprehensive income:
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
Total comprehensive income for the year
Dividends
Reserve movements in respect of share-
based payments
Change in non-controlling 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 (including
shares issued in lieu of cash dividends)
Reserve movements 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
B3
H11
H11
AT END OF YEAR
H11
Prudential plc Annual Report 2010
CONSOLIDATED STATEMENT
OF FINANCIAL POSITION
ASSETS
157
31 December 2010
Note
2010 £m
2009 £m
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
H1(a)
H1(b)
H2(a)
H2(b)
H6
H3
H4
H4
G1,H5
G1,H5
H7
H8
G1
1,466
4,609
6,075
166
110
276
1,310
4,049
5,359
124
106
230
6,351
5,589
612
1,344
2,188
555
2,668
903
8,270
11,247
71
9,261
86,635
116,352
5,779
9,952
367
1,187
2,708
636
2,473
762
8,133
10,905
6
8,754
69,354
101,751
5,132
12,820
239,297
208,722
H9
G1,H10
257
6,631
3
5,307
B6
260,806
227,754
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
* Included within financial investments are £8,708 million (2009: £10,501 million) of lent securities. See note G4.
I
P
R
M
A
R
Y
S
T
A
T
E
M
E
N
T
S
158
FINANCIAL STATEMENTS > PRIMARY STATEMENTS
CONSOLIDATED STATEMENT
OF FINANCIAL POSITION
EQUITY AND LIABILITIES
31 December 2010
EQUITY
Shareholders’ equity
Non-controlling 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
2010 £m
2009 £m
H11
H12
G1
G1
H12
H13
H13
G1,H13
G1,H13
G1,H13
G1
G1
H4
H4
G1
H14
G1,G3
G1,H15
8,031
44
8,075
6,271
32
6,303
171,291
25,732
17,704
10,253
145,713
24,880
15,805
10,019
224,980
196,417
2,718
958
3,676
3,004
1,522
4,199
3,372
4,224
831
707
2,321
729
2,037
1,129
2,691
703
3,394
2,751
1,284
3,482
3,809
3,872
1,215
594
1,612
643
1,501
877
19,549
17,605
B6
252,731
221,451
260,806
227,754
The consolidated financial statements on pages 153 to 352 were approved by the Board of directors on 8 March 2011 and signed
on its behalf.
HARVEY MCGRATH
CHAIRMAN
TIDJANE THIAM
GROUP CHIEF EXECUTIVE
NIC NICANDROU
CHIEF FINANCIAL OFFICER
Prudential plc Annual Report 2010
CONSOLIDATED STATEMENT
OF CASH FLOWS
159
Year ended 31 December 2010
Note
2010 £m
2009 £m
CASH FLOWS FROM OPERATING ACTIVITIES
Profit before tax (being tax attributable to shareholders’ and policyholders’ returns)note (i)
Loss before tax from discontinued operations
I10
Total profit 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
Acquisition of subsidiaries, net of cash balancenote (ii)
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
Bank loan
Interest paid
With-profits operations:
Interest paid
Equity capital:note (iii)
Issues of ordinary share capital
Dividends paid
Net cash flows from financing activities
Net increase (decrease) 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
I10
I2(b)
I1
I11
H11
B3
H10
2,072
–
2,072
(24,594)
(1,161)
24,287
1,332
(7,514)
1,564
(14)
1,550
(26,388)
(384)
24,932
(299)
(7,267)
139
650
6,277
1,412
(302)
1,948
(93)
4
–
–
(145)
(234)
–
–
250
(251)
(9)
13
(449)
(446)
1,268
5,307
56
6,631
5,734
1,780
(200)
108
(91)
54
(20)
(497)
–
(554)
822
(249)
–
(207)
(9)
3
(344)
16
(430)
5,955
(218)
5,307
Notes
(i) This measure is the formal profit before tax measure under IFRS but it is not the result attributable to shareholders.
(ii) The acquisition of United Overseas Bank Life Assurance Limited (UOB) resulted in an outflow of cash for investing activities of £133 million.
The remaining outflow of £12 million relates to the PAC with-profits fund purchase of Meterserve.
(iii) Cash movements in respect of equity capital exclude scrip dividends.
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FINANCIAL STATEMENTS > 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. In Asia these policies are usually sold with insurance riders, such as health cover. 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 issued by the International Accounting Standards Board (IASB) and as endorsed by the European Union
(EU) as required by EU law (IAS regulation EC 1606/2032). 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 375 to 386. A reconciliation to
IFRS has also been provided for shareholders’ equity and profit for the year of the parent company.
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 2010. Further details on the new accounting pronouncements and accounting policy changes are provided in note A5.
The Group has applied the same accounting policies in preparing the 2010 results as for 2009 except for the adoption of IFRS 3
(Revised) on business combinations and associated amendments to other standards. However, as discussed in note A4 (d)(ii), the
measurement of the segment measure of IFRS operating profit based on longer-term investment returns for US insurance operations
has altered. Comparative segment results have been adjusted accordingly.
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 as issued by the IASB and as endorsed by the EU. EU-endorsed IFRS
may differ from IFRS as issued by the IASB if, at any point in time, new or amended IFRSs have not been endorsed by the EU. As at
31 December 2010, there were no unendorsed standards effective for the two years ended 31 December 2010 affecting the
consolidated financial information of Prudential and there were no differences between IFRSs endorsed by the EU and IFRSs issued by
the IASB in terms of their application to Prudential. Accordingly, Prudential’s financial information for the two years ended 31 December
2010 is prepared in accordance with IFRS as issued by the IASB. It is Prudential’s policy to adopt mandatory requirements of new or
altered EU-adopted IFRS standards where required, with earlier adoption applied where permitted and appropriate in the
circumstances.
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.
Prudential plc Annual Report 2010
161
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 as a liability. 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.
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 2010 and 2009 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(g)(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. As previously discussed the Group has chosen to change its presentation of
operating profit for its US insurance operations as explained further in note A4(d)(ii). Derivative value movements in respect of equity
risk within variable annuity business and other equity related hedging activities are now included outside operating profit as part of
short-term fluctuations in investment returns. Accordingly, the value movements on all 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.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
A: BACKGROUND AND
ACCOUNTING POLICIES
CONTINUED
A3: CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGEMENTS > CONTINUED
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.
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.
Prudential plc Annual Report 2010
163
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 2010, £4,573 million (2009: £5,557 million) of the financial investments (net of derivative liabilities) valued at fair
value were classified as level 3. Of these £866 million (2009: £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 cash flows and any additional market-price-driven temporary
reductions in values.
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, is 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.
Certain mortgage loans of the UK insurance operations have been designated at fair value through profit and loss as this loan portfolio is
managed and evaluated on a fair value basis and these are included within loans in the balance sheet. 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.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
A: BACKGROUND AND
ACCOUNTING POLICIES
CONTINUED
A3: CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGEMENTS > CONTINUED
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. A detailed explanation of the basis
of liability measurement is contained in note D2(g)(ii).
The Group’s other with-profits contracts are written in with-profits funds that operate in some of the Group’s Asian operations.
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.
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.
Prudential plc Annual Report 2010
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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. 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 2010 and 2009 was 8.4 per cent per annum (after deduction of external 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(g).
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.
The remaining non-participating business in Asia has some limited sensitivity to interest rates. Further details are provided in D4(j).
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(g) and H1.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
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ACCOUNTING POLICIES
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A3: CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGEMENTS > CONTINUED
Asian operations
For those territories applying US GAAP, principles similar to those set out in the Jackson paragraph above are applied to the deferral and
amortisation of acquisition costs. For other Asian territories, except where the underlying reserving basis makes implicit allowance for
the future fees that cover acquisition costs, the deferral and amortisation of acquisition costs is consistent with Modified Statutory Basis
where costs associated with the production of new business are amortised in line with the emergence of margins.
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
defined 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 2010 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
approximately 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.
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 2010. 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.
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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. Available-for-sale financial assets are initially recognised at fair value plus attributable transaction costs.
For available-for-sale debt securities, the difference between their cost and par value is amortised to the income statement using the
effective interest rate. Available-for-sale financial assets are subsequently measured 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 initially recognised at fair value plus transaction
costs. Subsequently, 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
the majority of 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
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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.
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.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
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A4: SIGNIFICANT ACCOUNTING POLICIES > CONTINUED
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 2010 and 2009, 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. Embedded derivatives
meeting the definition of an insurance contract are accounted for under IFRS 4. 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(g).
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.
The Group derecognises financial liabilities only when the obligation specified in the contract is discharged, cancelled or has expired.
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.
Prudential plc Annual Report 2010
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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
UK premium taxes and similar duties where Prudential collects and settles taxes borne by the customer.
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.
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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.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
A: BACKGROUND AND
ACCOUNTING POLICIES
CONTINUED
A4: SIGNIFICANT ACCOUNTING POLICIES > CONTINUED
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 include 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.
Prudential plc Annual Report 2010
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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 2010 and 2009, was 8.4 per cent per annum,
implemented using a mean reversion methodology. These returns affect the level of future expected profits through their effects
on 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. More precisely, shadow DAC
adjustments reflect the change in DAC that would have arisen if the assets held in the statement of financial position had been sold,
crystallising unrealised gains or losses, and the proceeds reinvested at the yields currently available in the market.
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(i).
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.
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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 treatment of any gains or losses arising on the purchase of reinsurance contracts is dependent on the underlying accounting
basis of the entity concerned amongst other things.
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.
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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.
Where the Group exercises significant influence or has the power to exercise significant influence over an entity, generally through
ownership of 20 per cent or more of the entity’s voting rights, but does not control the entity, then this is considered to be an investment
in an associate. With the exception of those referred to below, the Group’s investments in associates are recorded at the Group’s share
of the associates’ net assets including any goodwill and intangibles arising upon initial acquisition. The carrying value of investments in
associates is adjusted each year for the Group’s share of the entities’ profit or loss. This does not apply to investments in associates held
by the Group’s insurance or investment funds including the venture capital business or mutual funds and unit trusts, which as permitted
by IAS 28 are carried at fair value through profit and loss.
The Group’s investments in joint ventures are recognised using proportional consolidation whereby the Group’s share of an entity’s
individual balances are combined line-by-line with similar items into the Group financial statements.
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 2010 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 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.
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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.
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.
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.
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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.
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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 acquisition consideration over the fair value of the assets and liabilities of
the acquired entity is recorded as goodwill. Expenses related to acquiring new subsidiaries are expensed in the period in which they are
incurred. Should the fair value of the identifiable assets and liabilities of the entity exceed the acquisition consideration 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.
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.
Prudential plc Annual Report 2010
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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, 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 in accordance with IFRS 8, are as follows:
Insurance operations
• Asia
• US (Jackson)
• UK
Asset management operations
• M&G
• Asian asset management
• US broker dealer and asset management (including Curian)
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Prudential Capital has been incorporated into the M&G operating segment for the purposes of segment reporting. The Group’s
operating segments are also its reportable segments.
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 2010 this
measure excluded costs associated with the terminated AIA transaction and gain arising upon the dilution of the Group’s holding in
PruHealth. For 2009 it excluded the non-recurrent cost of hedging the Group IGD capital surplus included within short-term fluctuations
in investment returns and the loss on sale and the results of the Taiwan agency business during the period of ownership. In 2010 the
Company amended its presentation of operating profit for its US insurance operations to exclude the net equity hedge accounting effect
previously included relating principally to its variable annuity business as explained below in note A4(d). These amounts are included in
short-term fluctuations in investment returns. Prior year comparatives have been amended accordingly. There is no change to total
profit for continuing operations before tax attributable to shareholders arising from this altered treatment. Operating earnings per
share is based on operating profit based on longer-term investment returns, after tax and non-controlling interests. 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
Interim dividends are recorded in the period in which they are paid. Final dividends are recorded in the period in which they are
approved by shareholders.
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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.
The approach to determining profit on this basis was altered in 2010 from that previously applied in 2009 in respect of the net equity
hedge accounting effect for variable and fixed index annuity US life business. Comparative results have been adjusted accordingly.
The approach to determining operating profit based on longer-term investment returns reflected in segment results shown in note B1
is as follows:
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 RMR
charge is most significant is Jackson National Life.
For 2010 and 2009 Jackson has used the ratings resulting from the regulatory ratings detail issued by the National Association of
Insurance Commissioners (NAIC) for residential mortgage-backed securities (RMBS) to determine the average annual RMR. In addition,
in 2010, NAIC extended the new ratings framework to commercial mortgage-backed securities (CMBS), which Jackson has used for
2010. These were developed by external third parties; PIMCO (for RMBS) and BlackRock Solutions (for CMBS), and are considered by
management more relevant information for the MBS securities concerned than using ratings by Nationally Recognised Statistical Rating
Organisations (NRSRO). For other securities Jackson uses ratings by NRSRO.
ii US variable and fixed index annuity business
(i) Current treatment
The following value movements for Jackson’s variable and fixed index annuity business are excluded from operating profit based on
longer-term investment returns:
• Fair value movements for equity-based derivatives;
• Fair value movements for embedded derivatives for Guaranteed Minimum Withdrawal Benefit (GMWB) ‘not for life’ and fixed index
annuity business, and Guaranteed Minimum Income Benefit (GMIB) reinsurance;
• Movements in accounts carrying value of GMDB and GMWB ‘for life’ liabilities;
• Fee assessment, and claim payments, in respect of guarantee liabilities; and
• Related changes to amortisation of deferred acquisition costs for each of the above items.
Prudential plc Annual Report 2010
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(ii) Change of treatment in 2010
For previous reporting of the 2009 results, all of the above items were included in operating profit based on longer-term investment
returns with the intention of broadly matching the impacts with two exceptions. The exceptions were for the effect of GMIB reinsurance
and movements in carrying values of free standing derivatives and embedded derivatives arising from changes in the level of observed
implied equity volatility and changes in the discount rate applied from year to year. Both of these items remain in short-term fluctuations
in investment returns in 2010.
Previously, for the purposes of determining operating profit based on longer-term investment returns, the charge for these
features was determined using historical longer-term equity volatility levels and long-term average AA corporate bond rate curves with
the movement relating to the change in difference in long-term and current rates being included in short-term fluctuations (as shown in
note B1).
However, despite this use of longer-term equity volatility assumption levels and AA corporate bond rate curves, accounting volatility
arose within the operating profit based on longer-term investment returns that was not representative of the underlying economic result.
This feature arose due to the movement in the change in the accounting values of the derivatives and Jackson’s liabilities for variable and
fixed indexed annuity guarantees included in the operating profit. Under IFRS, liabilities for GMDB and ‘for life’ GMWB are not fair
valued. Instead, they are accounted for under IFRS using ‘grandfathered’ US GAAP in accordance with FASB ASC Subtopic 944-80,
Financial Services – Insurance – Separate Accounts (formerly SOP 03-1). This accounting basis produces a distorting accounting effect
on the operating profit that is not representative of the true economics of Jackson’s hedging programme. Over the long term the impact
of this accounting distortion should cumulatively net out to a broadly neutral effect, but in the short term the operating profit can be
highly volatile. The recent growth in Jackson’s variable annuity business had resulted in this short-term effect having a greater impact
on the Group operating profit than in prior years. Further, these accounting mismatches are magnified in periods of significant market
movements. These factors have prompted a reassessment of the presentation of operating profit based on longer-term investment
returns.
The following items have been reclassified from operating profit to short-term fluctuations in investment returns:
• The fair value movement in free standing hedging derivatives, excluding the impact of the difference between longer-term and
current period implied equity volatility levels;
• The movement in liabilities for those embedded derivative liabilities which are fair valued in accordance with IFRS, primarily
GMWB ‘not for life’ and fixed index annuity business, excluding the impacts of the differences between longer-term and current
period equity volatility and incorporating 10-year average yield curves, in lieu of current period yield curves;
• Movements in IFRS basis guarantee liabilities for GMWB ‘for life’, being those policies where a minimum annual withdrawal
is permitted for the duration of the policyholders’ life subject to certain conditions, and GMDB business for which, under the
US GAAP rules applied under IFRS, the reserving methodology under US GAAP principles generally gives rise to a muted
impact of current period market movements;
• Fee assessment, and claims payments, in respect of guarantee liabilities; and
• Related changes to the amortisation of deferred acquisition costs for each of the above items.
The change reflects management’s IFRS 8 segment measure. Within the supplementary analysis of profit, the change is presentational
only. It has no impact on profit before tax or shareholders’ equity. The impact of this change is as follows:
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2010 £m
2009 £m
Previous basis
Change
Revised basis Previous basis
Change
Revised basis
Operating profit based on longer-term
investment returns
Jackson
Rest of Group
Total
Short-term fluctuations in investment returns on
466
1,108
1,574
367
–
367
shareholder-backed business
244
(367)
Shareholders’ share of actuarial and other gains
and loss on defined benefit pension schemes
Costs of terminated AIA transaction
Gain on dilution of holding in PruHealth
Loss on sale and results of Taiwan agency business
Profit from continuing operations before tax
attributable to shareholders
(10)
(377)
30
–
1,461
–
–
–
–
–
833
1,108
1,941
(123)
(10)
(377)
30
–
459
946
1,405
159
–
159
36
(159)
(74)
–
–
(621)
–
–
–
–
–
1,461
746
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946
1,564
(123)
(74)
–
–
(621)
746
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US operations – Embedded derivatives for variable annuity guarantee features
The Guaranteed Minimum Income Benefit (GMIB) liability, which is fully reinsured, subject to a deductible and annual claim limits, is
accounted for in accordance with FASB ASC Subtopic 944-80 Financial Services – Insurance – Separate Accounts (formerly SOP 03-1)
under IFRS using ‘grandfathered’ US GAAP. As the corresponding reinsurance asset is net settled, it is considered to be a derivative
under IAS 39 and the asset is therefore recognised at fair value. As the GMIB benefit is economically reinsured the mark to market
element of the reinsurance asset is included as a component of short-term fluctuations in investment returns.
iii Derivative value movements
Derivative value movements are excluded from operating results based on longer-term investment returns. Non-equity based
derivatives are primarily held by Jackson as part of a broadly-based hedging programme for features of Jackson’s bond portfolio (for
which value movements are booked in the statement of comprehensive income rather than the income statement) and product liabilities
(for which US GAAP accounting as grandfathered under IFRS 4 does not reflect the economic features being hedged).
Value movements for Jackson’s equity-based derivatives and variable and fixed index annuity product embedded derivatives were
in prior periods included in operating profits based on longer-term investment returns. In 2010 these value movements, which are
variable in nature, have been included in short-term fluctuations and 2009 comparatives have been adjusted accordingly.
There are two exceptions to the basis described above in sections (a) to (c) for determining operating results based on longer-term
investment returns. These are for:
• Unit-linked and US variable annuity business. For such business the policyholder unit 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. Variations between actual and best estimate expected
impairments are recorded as a component of short-term fluctuations in investment returns.
iv Other 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 is broadly equivalent in the income statement, and operating profit based on longer-term
investments returns is not distorted. In these circumstances, there is no need for the movement in the liability to be bifurcated between
the elements that relate to longer-term market conditions and short-term effects.
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 policyholders’ 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 supplementary 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.
Prudential plc Annual Report 2010
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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 FASB ASC Subtopic 944-80 Financial Services – Insurance – Separate Accounts (formerly
SOP 03-1), 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.
b 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 period. As this feature arises due to
short-term market conditions, the effect of downgrades, if any, in a particular period, on the overall provisions for credit risk 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 due to portfolio rebalancing to align more closely with management benchmark.
e 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
economic substance of the arrangements.
A5: NEW ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements
The following standards, interpretations and amendments have either been adopted for the first time in 2010 or have been issued but
are not yet effective in 2010, 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 2010
Revised IFRS 3, ‘Business combinations’ and Amendments to IAS 27, ‘Consolidated and separate financial statements’ and
IAS 31, ‘Interests in joint ventures’
The Group has applied the revised IFRS 3 and amended IAS 27 and IAS 31 from 1 January 2010. The revised IFRS 3 and amended IAS 27
and IAS 31 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 change in accounting policy as a result of the adoption of these standards has been applied prospectively.
No restatement to 2009 comparatives is required. The more significant changes from the revised IFRS 3 include:
• the immediate expensing of acquisition-related costs rather than inclusion in goodwill;
• recognition and measurement at fair value of contingent consideration classified as financial instruments at acquisition date with
subsequent changes to income; and
• additional items or adjustments to items recognised in the business combination are permitted to be applied retrospectively during
the measurement period to reflect new information obtained about facts and circumstances that existed as of the acquisition date.
The measurement period ends as soon as the acquirer receives the necessary information or learns that more information is not
obtainable but is subject to an overall limit for one year.
The amendments to IAS 27 reflect changes to the accounting for non-controlling interests (known as non-controlling interests prior to
the amendments). From 1 January 2010, transactions that increase or decrease non-controlling interests without a change of control are
accounted as equity transactions and therefore no goodwill is recognised. As a consequence any gains or losses are reported directly in
equity and not in the income statement.
The amendments to IAS 31 reflect changes to the accounting for changes in joint control over an entity. From 1 January 2010, when a
jointly controlled entity becomes an associate of an investor, the investor shall measure at fair value any investment the investor retains in
the former jointly controlled entity. The investor shall recognise in profit or loss any difference between:
(a) the fair value of any retained investment and any proceeds from disposing of the part interest in the jointly controlled entity; and
(b) the carrying amount of an investment at the date when joint control is lost.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
A: BACKGROUND AND
ACCOUNTING POLICIES
CONTINUED
A5: NEW ACCOUNTING PRONOUNCEMENTS > CONTINUED
Previously, no explicit guidance was provided.
The adoption of revised IFRS 3 and amended IAS 27 and IAS 31 has resulted in presentational and disclosure changes in the
Group’s financial statements, and affected the accounting for the acquisition of United Overseas Bank (UOB) Life Assurance Limited
in Singapore. The disclosure on this acquisition is provided in note I1. As a result of the adoption of the revised IFRS 3, the Group has
expensed the UOB Life acquisition-related costs incurred of £2 million which would otherwise have been included within goodwill.
The Group has also recognised a gain of £30 million related to the change of treatment of PruHealth from a joint venture to an associate,
in line with the revisions to IAS 31 set out above as described in note I2(a).
Improvements to IFRSs (2009)
The 2009 annual improvements include minor changes to 12 IFRSs. Amongst others, these include changes to IAS 17 ‘Leases’ on the
treatment of lease of land with an indefinite economic life and to IAS 36 ‘Impairment of assets’ on the largest unit to which goodwill
should be allocated being the operating segment level as defined by IFRS 8. The Group has reviewed and adopted these changes in
2010 with no significant impact on the Group’s results and financial position.
Amendments 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. There was no impact on the Group’s financial statements upon adoption
of this standard.
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. The adoption of this amendment had no impact on the Group’s designated
IAS 39 hedges.
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 2010 year end.
Amendments to IAS 24, ‘Related party disclosures’
The main revisions which will apply from 2011 relate to exemption for government-related entities and are therefore not applicable to the
Group. The amendment also clarifies and simplifies the definition of a related party albeit the nature of the change is minor. The adoption
of these revisions is not expected to have any impact on the Group’s related party disclosures.
Amendment to IFRIC, ‘14 Prepayment of a minimum funding requirement’
This amendment will apply from 2011 and removes an unintended consequence of IFRIC 14 relating to voluntary pension pre-payments
when there is a minimum funding requirement. IFRIC 14 was amended to require an asset to be recognised for any surplus arising from
voluntary pre-payment of minimum funding contributions in respect of future service. The adoption of this amendment is not expected
to have an impact on the Group’s financial statements.
Prudential plc Annual Report 2010
181
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 interpretation is effective for accounting periods beginning on or after 1 July 2010. This interpretation is not expected
to have a material effect on the Group’s financial statements.
Improvements to IFRSs (2010)
The changes from this annual improvement which were issued in May 2010 and mostly effective from 2011 include clarification of
financial instruments disclosures and of the statement of changes in equity. The Group is in the process of evaluating the implications
of these changes.
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.
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.
In October 2010, the IASB issued requirements on the accounting for financial liabilities. These requirements will be added to IFRS 9
and maintain the existing amortised cost measurement for most liabilities and will require changes in fair value due to changes in the
entity’s own credit risk to be recognised in the other comprehensive income (OCI) section of the comprehensive income statement,
rather than within profit or loss for liabilities measured at fair value.
IFRS 9 applies to financial statements for annual periods beginning on or after 1 January 2013. Entities are permitted to apply the
new requirements in earlier periods, however, if they do, they must also apply the requirements in IFRS 9 that relate to financial assets.
The standard is not mandatory until 1 January 2013 and is yet to be endorsed by the European Union. The Group is still assessing
the full impact of this standard.
Amendments to IFRS 7, ‘Financial instruments: Disclosures – Transfers of financial assets’
The amendments, which were issued in October 2010 and effective for annual periods beginning on or after 1 January 2012, introduce
new disclosure requirements about transfers of financial assets. These include disclosures for financial assets that are not derecognised
in their entirety and financial assets that are derecognised in their entity but for which the entity retains continuing involvement.
The Group is evaluating the implications of the amendments but they are not expected to have a significant impact on the Group’s
disclosures.
Amendments to IAS 12, ‘Income taxes’
On 20 December 2010, the IASB published amendments to IAS 12 Deferred Tax: Recovery of Underlying Assets following the exposure
draft issued on 10 September 2010. The amendments are effective for annual periods beginning on or after 1 January 2012.
The amendments require the measurement of deferred tax assets and liabilities arising from investment properties and plant, property
and equipment valued at fair value on the presumption that the carrying amount of the asset will be, normally, recovered through sale.
These amendments are not expected to have a material effect on the Group’s financial statements.
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FINANCIAL STATEMENTS > 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. Further segmentation of the income segment is provided in note F1 of these financial statements.
2010 £m
2009 £m
ASIAN OPERATIONS
Insurance operations:note ii
Underlying results before exceptional credit
Exceptional credit for Malaysia operationsD4(i)
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
Charge for share-based payments for Prudential schemesnote viii
Total
Solvency II implementation costs
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 schemes note vii
Costs of terminated AIA transactionnote x
Gain on dilution of holding in PruHealthI2(a)
Loss on sale and results for Taiwan agency businessnote iii
PROFIT FROM CONTINUING OPERATIONS BEFORE TAX ATTRIBUTABLE TO SHAREHOLDERS
536
–
536
(4)
532
72
604
833
22
855
673
46
719
284
1,003
2,462
30
(257)
(220)
(3)
(450)
(45)
(26)
1,941
(123)
(10)
(377)
30
–
1,461
353
63
416
(6)
410
55
465
618
4
622
606
51
657
238
895
1,982
22
(209)
(203)
(5)
(395)
–
(23)
1,564
(123)
(74)
–
–
(621)
746
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
Prudential plc Annual Report 2010
183
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. The
presentation of operating profit based on longer-term investment returns has been revised in 2010 and the 2009 comparatives have been
amended accordingly (see note (iv)).
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(i), D3(i) and D4(i).
ii
iii Sale of Taiwan agency business.
iv
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 segmental
analysis of profit for 2009.
Jackson operating results based on longer-term investment returns.
The Group has amended the presentation of operating profit for its US insurance operations to remove net equity hedge accounting effect
(incorporating related amortisation of deferred acquisition costs) and include it in short-term fluctuations. The 2009 comparatives have been
amended accordingly. The effect of this change is explained note A4(d)(ii).
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
2010 £m
2009 £m
63
(55)
(8)
47
(60)
69
The risk margin reserve (RMR) charge for longer-term credit related losses included in operating profit based on longer-term investment returns
for 2010 is based on an average annual RMR of 26 basis points (2009: 27 basis points) on average book values of US $44.2 billion for the year as
shown below.
Moody’s rating category (or equivalent under NAIC
ratings of MBS)
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
Average
book
value
(US $m)
20,622
20,785
1,935
500
321
44,163
2010
2009
Annual expected
losses
RMR
%
0.06
0.26
1.04
2.99
3.88
0.26
US $m
(12)
(53)
(20)
(15)
(13)
(113)
28
£m
(8)
(34)
(13)
(10)
(8)
(73)
18
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
Annual expected
losses
US $m
(5)
(47)
(23)
(17)
(27)
(119)
25
£m
(3)
(30)
(15)
(11)
(17)
(76)
16
(85)
(55)
(94)
(60)
For the period ended 31 December 2010, Jackson has continued the practice commenced in the second half of 2009 in relation to RMBS and for
2010 for CMBS to determine the risk margin charge included in operating profit based on longer-term investment returns using the regulatory
rating as determined by third parties; PIMCO (for RMBS) and BlackRock Solutions (for CMBS) on behalf of the National Association of Insurance
Commissioners (NAIC). See note A4(d) for further information.
The longer-term rates of return for equity-type investments are currently based on spreads over 10 year US treasury rates of 400 to 600 basis
points. The longer-term rates of return for equity-type investments ranged from 6.5 per cent to 7.9 per cent at 31 December 2010 and 6.7 per cent to
7.4 per cent at 31 December 2009 depending on the type of investments.
Consistent with the basis of measurement of insurance assets and liabilities for 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.
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FINANCIAL STATEMENTS > 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
2010 £m
2009 £m
114
(378)
116
–
25
25
(123)
31
(132)
108
(235)
105
(130)
(123)
General overview of defaults
The Group incurred defaults of £nil in 2010 (2009: £11 million) on its debt securities portfolio. The defaults of £11 million in 2009 were
experienced by the UK Shareholder-backed annuity business.
Asian insurance operations
The fluctuations for Asian insurance operations in 2010 of £114 million primarily reflect unrealised gains on the debt securities held by
shareholders’ funds, as well as a £30 million unrealised gain on the Group’s 8.66 per cent stake in China Life Insurance Company of Taiwan. For
2009, the gain of £31 million primarily relate to strong market performance in Taiwan and Japan partially offset by the fall in the Vietnamese
bond markets.
US insurance operations
The short-term fluctuations in investment returns for US insurance operations for the year comprise the following items:
2010 £m
2009 £m
Short-term fluctuations related to debt securities:
Charges in the year
Losses on sales of impaired and deteriorating bonds
Bond write downs
Recoveries/reversals
Total charges in the year*
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)†
Net equity hedge results based on longer-term equity volatility and interest rates (net of related change to
amortisation of deferred acquisition costs)‡
Equity related derivatives: volatility and interest rate normalisation (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)B1(iv)
Other items (net of related change to amortisation of deferred acquisition costs)
Total
(99)
(124)
10
(213)
73
(140)
224
(82)
142
(3)
(1)
(15)
(367)
2
3
–
(378)
(6)
(630)
5
(631)
76
(555)
125
(59)
66
75
(414)
385
(159)
85
(59)
30
(132)
Prudential plc Annual Report 2010
185
* The charges on debt securities of Jackson incurred in 2010 and 2009 of £213 million and £631 million respectively, comprise the following:
Residential mortgage-backed securities
Prime (including agency)
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
–
–
–
–
–
–
–
21
35
15
71
1
52
124
35
20
(2)
53
40
6
99
–
(1)
–
(1)
(4)
(5)
(10)
2010
Total
£m
56
54
13
123
37
53
213
2009
Total
£m
268
182
49
499
107
25
631
Within other bond write downs of £52 million (2009: £30 million), £40 million (2009: £30 million) relate to Piedmont securities. Piedmont
is an investment vehicle investing in certain asset-backed and mortgage-backed securities in the US.
† The loss of £15 million (2009: gain of £385 million) is for the value movement for non-equity 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.
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 Group has amended its presentation of equity-based derivatives and associated guarantee liabilities to remove the net equity hedge
accounting effect (incorporating related amortisation of deferred acquisition costs) from operating profit based on longer-term investment
returns and include it in short-term fluctuations. The 2009 comparatives have been amended accordingly. The effect of this change is
explained in note A4(d)(ii).
# Prior to the change in the presentation of operating profit of the US insurance operations as explained in note A4(d)(ii), the effect of the
difference in the value movements for freestanding derivatives and embedded derivatives arising from changes between longer-term
and actual levels of implied equity volatility and end of period AA corporate bond yield curves was reflected in short-term fluctuations in
investment return. This normalisation reflects the use of longer-term implied equity volatility levels, and also, for embedded derivatives
10 year average AA corporate bond yield curves, in the value movement included in net equity hedge accounting effect and is unaffected
by the change in the presentation of the net equity hedge accounting effect.
This volatility and interest rate normalisation of value movements for freestanding and embedded derivatives gave rise to a £2 million
gain (2009: £85 million). The net equity hedge accounting effect based on longer-term equity volatility and interest rate is as described
above in note ‡.
In addition to the items discussed above, for US insurance operations, included within the statement of comprehensive income, is an
increase in net unrealised gains on debt securities classified as available-for-sale of £1,221 million (2009: reduction in net unrealised losses
of £2,669 million). Temporary market value movements do not reflect defaults or impairments. Additional details on the movement in the
value of the Jackson portfolio are included in note D3.
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The short-term fluctuations gain for UK insurance operations of £116 million (2009: £108 million) reflected principally asset value movements,
principally for shareholder-backed annuity business.
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 expired in 2009 and have not been renewed.
Other
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
2010 £m
2009 £m
(25)
48
2
25
28
66
11
105
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FINANCIAL STATEMENTS > 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 (losses) gains on scheme liabilities
Losses 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
2010 £m
2009 £m
31
(5)
(41)
(15)
5
(10)
–
–
–
(10)
23
17
(147)
(107)
47
(60)
(48)
34
(14)
(74)
The actuarial gains and losses shown in the table above relate to the Scottish Amicable and M&G. 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 £41 million on change of assumptions comprise mainly the effect of a decrease in the risk discount rate partially offset by the
effect of decrease in inflation rates.
Other gains and losses in 2009 related to the change in the provision for deficit funding obligation for PSPS. There was no change in 2010.
Further details on the Group’s defined benefit pension schemes are shown in note I3.
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 (£26 million) and as part of central operations of £nil (EEV non-
x
covered business) (2009: £16 million and £7 million respectively).
The following costs were incurred in relation to the proposed, and subsequently terminated transaction, to purchase AIA Group Limited and
related rights issue.
AIG termination break fee
Underwriting fees
Costs associated with foreign exchange hedging
Adviser fees and other
TOTAL COSTS BEFORE TAX
Associated tax relief
Total costs after tax
2010 £m
153
58
100
66
377
(93)
284
Of the £377 million total costs before tax, the £100 million associated with foreign exchange hedging has been recorded within ‘Investment
return’ and the other £277 million has been recorded as ‘Other expenditure’ within ‘Acquisition costs and other expenditure’ in the consolidated
income statement.
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 and consolidated unit-trusts and OEICs,
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.
Earnings per share are calculated based on earnings attributable to ordinary shareholders, after related tax and non-controlling
interests.
Prudential plc Annual Report 2010
187
2010
Before tax
B1
£m
Tax
F5
£m
Non-
controlling
interests
£m
Net of tax
and non-
controlling
interests
£m
Basic
earnings
per share
Pence
Diluted
earnings
per share
Pence
Based on operating profit based on longer-term
investment returns, excluding exceptional tax
credit
Exceptional tax credit*
Based on operating profit based on longer-term
1,941
–
(371)
158
investment returns
1,941
(213)
Short-term fluctuations in investment returns on
shareholder-backed business
Shareholders’ share of actuarial and other gains
and losses on defined benefit pension
schemes
Costs of terminated AIA transaction
Gain on dilution of holding in PruHealth
Based on profit for the year from continuing
(123)
(10)
(377)
30
92
3
93
–
(5)
–
(5)
–
–
–
–
1,565
158
62.0p
6.3p
61.9p
6.3p
1,723
68.3p
68.2p
(31)
(1.2p)
(1.2p)
(7)
(284)
30
(0.3p)
(11.3p)
1.2p
(0.3p)
(11.3p)
1.2p
operations including exceptional tax credit
1,461
(25)
(5)
1,431
56.7p
56.6p
* The tax charge attributable to shareholders’ return includes an exceptional tax credit of £158 million which primarily relates to the impact of
settlement agreed with the UK tax authorities.
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
operations
Based on profit for the year
Before tax
B1
£m
1,564
(123)
(74)
(621)
746
(14)
732
Tax
F5
£m
(374)
280
21
18
(55)
–
(55)
2009(1)
Non-
controlling
interests
£m
Net of tax
and non-
controlling
interests
£m
Basic
earnings
per share
Pence
Diluted
earnings
per share
Pence
(2)
1,188
47.5p
47.4p
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
1
–
–
(1)
–
(1)
158
6.3p
6.3p
(53)
(2.1p)
(2.1p)
(603)
(24.1p)
(24.0p)
690
(14)
676
27.6p
27.6p
(0.6p)
27.0p
(0.6p)
27.0p
O
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Note
(1) The Group has amended the presentation of IFRS operating profit for its US operations to remove net equity hedge accounting effect
(incorporating related amortisation of deferred acquisition costs) and include it in short-term fluctuations. The 2009 comparatives have been
amended accordingly.
188
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
B: SUMMARY OF RESULTS
CONTINUED
B2: EARNINGS PER SHARE > CONTINUED
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
B3: DIVIDENDS
Dividends declared and paid in reporting period
Parent company:
Interim dividend (2010: 6.61p, 2009: 6.29p per share)
Second interim/Final dividend for prior period (2010: 13.56p, 2009: 12.91p per share)
Total
2010 £m
2009 £m
2,524
13
(8)
2,529
2,501
12
(7)
2,506
2010 £m
2009 £m
168
343
511
159
322
481
As a result of shares issued in lieu of dividends of £62 million (2009: £137 million), dividends paid in cash, as set out in the consolidated
cash flow statement, were £449 million (2009: £344 million).
Parent company dividends relating to reporting period:
Interim dividend (2010: 6.61p, 2009: 6.29p per share)
Final/second interim dividend (2010: 17.24p, 2009: 13.56p per share)
Total
2010 £m
2009 £m
168
439
607
159
343
502
Interim dividends are recorded in the period in which they are paid. Final dividends are recorded in the period in which they are
approved by shareholders. The second interim dividend of 13.56 pence per ordinary share for the year ended 31 December 2009
was paid to eligible shareholders on 27 May 2010 and the 2010 interim dividend of 6.61 pence per ordinary share was paid to eligible
shareholders on 23 September 2010.
Following the Board’s decision to rebase the dividend upwards and subject to shareholders’ approval, the 2010 final dividend of
17.24 pence per ordinary share will be paid on 26 May 2011 in sterling to shareholders on the principal and Irish branch registers at
6.00pm BST on Friday, 1 April 2011 (the ‘Record Date’), and in Hong Kong dollars to shareholders on the Hong Kong branch register at
4.30pm Hong Kong time on the Record Date (‘HK Shareholders’). Holders of US American Depositary Receipts (‘US Shareholders’) will
be paid their dividend in US dollars on or about five days after the payment date of the dividend to shareholders on the principal register.
The dividend will be paid on or about 2 June 2011 in Singapore dollars to shareholders with shares standing to the credit of their
securities accounts with The Central Depository (Pte.) Limited (‘CDP’) at 5.00pm Singapore time on the Record Date (‘SG Shareholders’).
The dividend payable to the HK Shareholders will be translated at the exchange rate ruling at the close of business on 8 March 2011.
The exchange rate at which the dividend payable to the SG Shareholders will be translated will be determined by CDP. The dividend
will distribute an estimated £439 million of shareholders’ funds.
The scrip dividend alternative is not being offered in respect of this dividend. In its place shareholders will be offered a Dividend
Reinvestment Plan (DRIP).
Prudential plc Annual Report 2010
B4: EXCHANGE TRANSLATION
Exchange movement recognised in other comprehensive income
Asian operations
US operations
Unallocated to a segment (central funds)
189
2010 £m
2009 £m
164
88
(35)
217
(189)
(244)
227
(206)
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
Malaysia
Singapore
India
Vietnam
US
Closing
rate at
31 Dec 2010
12.17
14,106.51
4.83
2.01
70.01
30,526.26
1.57
Average
for 2010
12.01
14,033.41
4.97
2.11
70.66
29,587.63
1.55
Closing
rate at
31 Dec 2009
12.52
15,171.52
5.53
2.27
75.15
29,832.74
1.61
Average
for 2009
12.14
16,173.28
5.51
2.27
75.70
27,892.39
1.57
Opening
rate at
1 Jan 2009
11.14
15,799.22
5.02
2.07
70.05
25,205.87
1.44
B5: NEW BUSINESS
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
2010 £m
2009 £m
2010 £m
2009 £m
2010 £m
2009 £m
2,514
11,439
5,910
19,863
2,019
8,909
5,014
80,597
–
26,372
71,176
6
24,875
83,111
11,439
32,282
73,195
8,915
29,889
15,942
106,969
96,057
126,832
111,999
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
O
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U
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190
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
B: SUMMARY OF RESULTS
CONTINUED
B5: NEW BUSINESS > CONTINUED
Insurance products – new business premiums and contributions note i
GROUP INSURANCE OPERATIONS
Asia – ex Japan
US
UK
GROUP TOTAL – EX JAPAN
Japan(iv)
GROUP TOTAL
ASIAN INSURANCE OPERATIONS
Hong Kong
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
SE ASIA OPERATIONS INC. HONG KONG
China (Group’s 50% interest)
India (Group’s 26% interest)
Korea
Taiwan(iii)
TOTAL ASIA OPERATIONS – EX JAPAN
US INSURANCE OPERATIONS
Fixed Annuities
Fixed Index Annuities
Life
Variable Annuities
TOTAL US INSURANCE OPERATIONS
UK & EUROPE INSURANCE OPERATIONS(vi)
Direct and Partnership Annuities
Intermediated Annuities
Internal Vesting Annuities
TOTAL INDIVIDUAL ANNUITIES
Corporate Pensions
On-shore Bonds
Other Products
Wholesale
TOTAL UK & EUROPE INSURANCE OPS
Single
Regular
Annual Equivalents
2010 £m
2009 £m
2010 £m
2009 £m
2010 £m
2009 £m
1,104
11,417
5,656
18,177
13
18,190
785
8,885
4,768
14,438
57
14,495
107
141
58
64
318
15
1
704
103
85
66
146
1,104
836
1,089
11
9,481
11,417
593
221
1,235
2,049
228
1,660
774
945
5,656
94
41
63
14
297
14
1
524
72
47
38
104
785
1,053
1,433
10
6,389
8,885
590
242
1,357
2,189
192
1,444
881
62
4,768
1,391
22
254
1,667
6
1,673
276
269
198
17
143
25
41
969
48
180
89
105
1,131
24
246
1,401
46
1,447
232
186
140
10
98
14
35
715
38
163
118
97
1,391
1,131
–
–
22
–
22
–
–
–
–
198
–
56
–
254
–
–
24
–
24
–
–
–
–
191
–
55
–
246
1,501
1,164
820
3,485
7
3,492
287
283
204
23
175
26
41
1,039
58
188
96
120
1,501
84
109
23
948
1,164
59
22
124
205
221
166
133
95
820
1,209
912
723
2,844
52
2,896
241
190
146
11
128
16
35
767
45
168
122
107
1,209
105
143
25
639
912
59
24
136
219
210
145
143
6
723
GROUP TOTAL – EX JAPAN
18,177
14,438
1,667
1,401
3,485
2,844
Prudential plc Annual Report 2010
191
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
2010 £m
1 Jan 2010
19,474
–
70,306
Market
gross
inflows
80,597
–
26,372
Redemptions
(80,812)
–
(17,267)
Market
exchange
translation
and other
movements
2,789
–
9,915
31 Dec 2010
22,048
–
89,326
89,780
106,969
(98,079)
12,704
111,374
2009 £m
Redemptions
(69,177)
(66)
(11,397)
Market
exchange
translation
and other
movements
2,243
10
9,831
(80,640)
12,084
Market
gross
inflows
71,176
6
24,875
96,057
31 Dec 2009
19,474
–
70,306
89,780
1 Jan 2009
15,232
50
46,997
62,279
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.
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
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 I2(b) is excluded from the tables.
iv New business sales for the Group’s Japanese insurance subsidiary, which ceased selling new business with effect from 15 February 2010, have
been presented separately from the remainder of the Group.
v 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.
vi The Prudential’s European operation is based in Ireland and sells products into Jersey, Guernsey, Isle of Man, Gibraltar, Cyprus, Malta, Belgium,
Spain and UK.
O
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192
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
B: SUMMARY OF RESULTS
CONTINUED
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 2010
2010 £m
Insurance operations
UK
D2
US
D3
Asia
D4
Total
insurance
opera-
tions
Asset
manage-
ment
opera-
tions
E2
Unallo-
cated to a
segment
(central
opera-
tions)
Intra-
group
elimina-
tions
31 Dec
2010
Group
total
–
–
236
236
1,230
118
3,543
939
4,600
9
118
3,543
1,175
4,836
1,239
166
13
179
–
–
–
–
166
97
97
110
276
–
–
–
297
3,543
1,272
5,112
1,239
–
–
–
–
–
–
–
–
–
–
–
–
–
–
214
4,633
1,391
1,241
98
811
1,703
6,685
123
999
362
4,159
–
(5,761)
1,466
4,609
6,075
166
110
276
6,351
2,188
6,082
11,212
69
26
–
9 11,247
2
71
–
–
2,302
4,201
1,340
7,843
1,418
40,519 31,501 14,464 86,484
74,304 26,366 14,108 114,778
5,579
9,872
1,199
212
3,998
9,022
382
638
151
1,574
59
80
254
2,839
3
232
–
1,601
257
4,672
–
1,436
–
–
–
–
–
141
–
141
–
523
–
–
–
11,247
71
9,261
–
86,635
– 116,352
5,779
–
9,952
–
– 239,297
–
–
257
6,631
149,663 69,915 34,725 254,303
7,079
5,185
(5,761) 260,806
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 d
Equity securities and portfolio holdings in
unit trusts
Debt securitiesnote d
Other investments
Deposits
Properties held for saleH9
Cash and cash equivalentsH10
TOTAL ASSETS
Note
(i) Further segmental analysis:
Total investmentsG1,H7,H8,note c
141,426 63,505 30,943 235,874
3,282
The non-current assets of the Group comprise goodwill, intangible assets other than DAC and present value of acquired in-force business and
property, plant and equipment included within ‘other non-investment and non-cash assets’. Items defined as financial instruments or related
to insurance contracts are excluded. Of the Group’s total non-current assets at 31 December 2010 of £2,454 million (2009: £1,965 million), £1,708
million (2009: £1,444 million) was held in the UK by the UK insurance operations, M&G and central operations, £131 million (2009: £112 million)
was held in the US and £615 million (2009: £409 million) was held in Asia.
No individual country in Asia held non-current assets at the end of the year which exceeded 10 per cent of the Group total.
Prudential plc Annual Report 2010
193
BY OPERATING SEGMENT
EQUITY AND LIABILITIES
Equity
Shareholders’ equityH11
Non-controlling interests
Total equity
2010 £m
Insurance operations
UK
D2
US
D3
Asia
D4
Total
insurance
opera-
tions
Asset
manage-
ment
opera-
tions
E2
Unallo-
cated to a
segment
(central
opera-
tions)
Intra-
group
elimina-
tions
31 Dec
2010
Group
total
2,148
35
3,815
–
2,149
5
8,112
40
1,787
4
(1,868)
–
2,183
3,815
2,154
8,152
1,791
(1,868)
–
–
–
8,031
44
8,075
Liabilities
Policyholder liabilities and unallocated surplus of
with-profits funds:
Insurance contract liabilitiesH12
Investment contract liabilities with discretionary
84,152 58,641 28,498 171,291
participation featuresG1
25,613
–
119 25,732
Investment contract liabilities without
discretionary participation featuresG1
Unallocated surplus of with-profits funds
(reflecting application of ‘realistic’ basis
provisions for UK regulated with-profits
funds) D2(g)ii,H12
15,765
1,882
57 17,704
10,187
–
66 10,253
Total policyholder liabilities and unallocated surplus
of with-profits fundsnote e
135,717 60,523 28,740 224,980
Core structural borrowings of shareholder-financed
–
–
–
–
–
–
–
–
–
–
operations:H13
Subordinated debt
Other
Total
–
–
–
–
159
159
–
–
–
–
159
159
–
250
2,718
549
250
3,267
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
162
1,522
90
–
189
–
441
1,522
sale and repurchase agreements
2,398
1,801
–
4,199
3
–
–
2,560
–
– 171,291
– 25,732
– 17,704
– 10,253
– 224,980
–
–
–
–
–
2,718
958
3,676
3,004
1,522
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
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
1,755
1,738
399
340
1,939
442
792
276
33
1,776
34
–
511
19
799
355
1,126
495
70
109
1,122
61
222
437
2,914
4,009
503
449
3,572
522
1,813
1,068
458
5
33
244
4,039
157
78
21
O
F
R
E
S
U
L
T
S
B
:
S
U
M
M
A
R
Y
–
–
4,199
–
210
295
14
471
50
146
40
–
–
–
–
(5,761)
–
–
–
3,372
4,224
831
707
2,321
729
2,037
1,129
10,079
5,328
3,642 19,049
5,035
1,226
(5,761) 19,549
147,480 66,100 32,571 246,151
5,288
7,053
(5,761) 252,731
TOTAL EQUITY AND LIABILITIES
149,663 69,915 34,725 254,303
7,079
5,185
(5,761) 260,806
194
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
B: SUMMARY OF RESULTS
CONTINUED
B6: GROUP STATEMENT OF FINANCIAL POSITION > CONTINUED
ii Position at 31 December 2009
2009 £m
Insurance operations
UK
D2
US
D3
Asia
D4
Total
insurance
opera-
tions
Asset
manage-
ment
opera-
tions
E2
Unallo-
cated to a
segment
(central
opera-
tions)
Intra-
group
elimina-
tions
31 Dec
2009
Group
total
80
822
902
–
97
97
999
132
880
80
1,230
4,041
8
4,121
1,238
124
106
230
–
–
–
4,351
1,238
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,368
5,358
132
718
208
4,393
–
(5,044)
1,310
4,049
5,359
124
106
230
5,589
2,708
5,425
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 d
Equity securities and portfolio holdings in
–
127
127
124
9
133
260
292
3,074
10,861
4
–
3,092
3,092
–
–
–
3,092
1,944
1,404
33
–
11
10,905
2
6
–
–
1,815
4,319
1,207
7,341
1,413
unit trusts
Debt securitiesnote d
Other investments
Deposits
37,051
67,772
3,630
11,557
20,984
22,831
955
454
11,182
69,217
9,984 100,587
4,843
12,757
258
746
137
1,164
113
63
Total investmentsG1,H7,H8,note c
132,690
49,576
23,390 205,656
2,890
–
–
–
–
–
176
–
176
–
895
–
–
–
10,905
6
8,754
–
69,354
– 101,751
5,132
–
12,820
–
– 208,722
–
–
3
5,307
–
2,265
3
340
–
837
3
3,442
–
970
138,581
56,359
26,238 221,178
5,948
5,672
(5,044) 227,754
Properties held for saleH9
Cash and cash equivalentsH10
TOTAL ASSETS
Prudential plc Annual Report 2010
195
BY OPERATING SEGMENT
EQUITY AND LIABILITIES
Equity
Shareholders’ equityH11
Non-controlling interests
Total equity
2009 £m
Insurance operations
UK
D2
US
D3
Asia
D4
Total
insurance
opera-
tions
Asset
manage-
ment
opera-
tions
E2
Unallo-
cated to a
segment
(central
opera-
tions)
Intra
group
elimina-
tions
31 Dec
2009
Group
total
1,939
28
3,011
–
1,462
1
6,412
29
1,659
3
(1,800)
–
1,967
3,011
1,463
6,441
1,662
(1,800)
–
–
–
6,271
32
6,303
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
Unallocated surplus of with-profits funds
(reflecting application of ‘realistic’ basis
provisions for UK regulated with-profits
funds) D2(g)ii,H12
Total policyholder liabilities and unallocated surplus
13,794
1,965
46
15,805
9,966
–
53
10,019
of with-profits fundsnote e
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
–
–
–
158
1,284
–
154
154
203
–
–
–
–
–
154
154
210
–
571
1,284
142
–
2,038
–
sale and repurchase agreements
2,108
1,374
–
3,482
–
–
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
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
50
136
54
–
–
–
–
(5,044)
–
–
–
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
–
–
–
–
–
–
–
–
–
–
–
–
–
2,691
549
3,240
– 145,713
–
–
24,880
15,805
–
10,019
– 196,417
–
–
–
–
–
–
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
O
F
R
E
S
U
L
T
S
B
:
S
U
M
M
A
R
Y
2,691
703
3,394
2,751
1,284
3,482
3,809
3,872
1,215
594
1,612
643
1,501
877
196
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
B: SUMMARY OF RESULTS
CONTINUED
B6: GROUP STATEMENT OF FINANCIAL POSITION > CONTINUED
b Group statement of financial position by business type
2010 £m
2009 £m
Shareholder-backed business
Unit-
linked
and
variable
annuity
Asset
manage-
ment
operations
E2
Unallo-
cated to a
segment
(central
operations)
Non-
linked
business
Partici-
pating
funds
Intra-
group
elimina-
tion
31 Dec
2010
Group
total
31 Dec
2009
Group
total
–
–
–
166
110
276
276
–
–
–
–
–
–
–
236
1,230
4,600
9
4,836
1,239
–
–
–
–
–
–
4,836
1,239
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,466
1,310
4,609
4,049
6,075
5,359
166
124
110
276
106
230
6,351
5,589
109
2,749
–
651
1,594
3,285
123
999
362
4,159
–
(5,761)
2,188
6,082
2,708
5,425
–
–
8,993
745
1,509
–
2,144
–
–
71
5,699
1,418
31,371 54,274
53,261
3,887
7,272
839
9,054 52,463
1,561
1,851
131
749
151
1,574
59
80
254
1,915
–
1,490
3
1,267
–
1,436
–
–
–
–
–
141
–
141
–
523
– 11,247
10,905
–
–
71
6
9,261
8,754
– 86,635
69,354
– 116,352 101,751
–
5,132
–
12,820
5,779
9,952
– 239,297 208,722
–
–
257
6,631
3
5,307
112,231 67,094 74,978
7,079
5,185
(5,761) 260,806 227,754
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 d
Equity securities and portfolio holdings in
unit trusts
Debt securitiesnote d
Other investments
Deposits
Properties held for saleH9
Cash and cash equivalentsH10
TOTAL ASSETS
Prudential plc Annual Report 2010
Total investmentsG1,H7,H8, note c
106,928 64,953 63,993
3,282
197
BY BUSINESS TYPE
EQUITY AND LIABILITIES
Equity
Shareholders’ equityH11
Non-controlling interests
Total equity
2010 £m
2009 £m
Shareholder-backed business
Unit-
linked
and
variable
annuity
Asset
manage-
ment
operations
E2
Unallo-
cated to a
segment
(central
operations)
Non-
linked
business
Partici-
pating
funds
Intra-
group
elimina-
tion
31 Dec
2010
Group
total
31 Dec
2009
Group
total
–
35
35
–
–
–
8,112
5
1,787
4
(1,868)
–
8,117
1,791
(1,868)
–
–
–
8,031
44
6,271
32
8,075
6,303
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’ basis
provisions for UK regulated with-profits
funds) D2g(ii),H12
92,544 65,598 56,585
10,253
–
–
Total policyholder liabilities and
unallocated surplus of with-profits fundsnote e
102,797 65,598 56,585
Core structural borrowings of shareholder-financed
–
–
–
–
–
–
– 214,727 186,398
– 10,253
10,019
– 224,980 196,417
operations:H13
Subordinated debt
Other
Total
Operational borrowings attributable
to shareholder-financed operations G1,H13
Borrowings attributable to with-profits
operationsG1,H13
Deferred tax liabilities
Other non-insurance liabilities
–
–
–
–
–
–
–
–
–
159
159
–
250
2,718
549
250
3,267
–
–
–
2,718
958
2,691
703
3,676
3,394
441
3
2,560
–
3,004
2,751
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
1,522
1,576
6,301
–
25
1,471
–
2,408
7,268
–
5
5,030
–
210
1,016
–
–
1,522
4,224
(5,761) 15,325
1,284
3,872
13,733
Total liabilities
112,196 67,094 66,861
5,288
7,053
(5,761) 252,731 221,451
TOTAL EQUITY AND LIABILITIES
112,231 67,094 74,978
7,079
5,185
(5,761) 260,806 227,754
O
F
R
E
S
U
L
T
S
B
:
S
U
M
M
A
R
Y
198
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
B: SUMMARY OF RESULTS
CONTINUED
B6: GROUP STATEMENT OF FINANCIAL POSITION > CONTINUED
c Reconciliation of movement in investments
A reconciliation of the Group’s directly held investments from the beginning of the year to the end of the year is as follows:
Insurance operations
UK
£m
US
£m
Total
insurance
operations
£m
Asset
Manage-
ment
£m
Unallo-
cated to a
segment
£m
Asia
£m
Group
total
£m
AT 31 DECEMBER 2008/1 JANUARY 2009
Total investments (including derivative assets)
Less: investments held by consolidated investment funds
Less: derivative liabilitiesG3
121,862
(609)
(3,401)
46,171
–
(863)
21,809 189,842
(1,710)
(1,101)
(4,296)
(32)
3,303
–
(292)
289 193,434
(1,710)
(4,832)
–
(244)
Directly held investments, net of derivative liabilities
117,852
45,308
20,676 183,836
3,011
45 186,892
Net cash inflow (outflow) from operating activities
Disposal of Taiwan agency business
Realised gains (losses) in the year
Unrealised gains and losses and exchange movements
in the year
Reclassification of property under development
Movement in the year of directly held investments, net of
1,432
–
108
2,755
–
(529)
3,028
(3,261)
(243)
7,215
(3,261)
(664)
10,623
131
1,581
–
2,326
–
14,530
131
(148)
–
34
(56)
–
(52)
–
4
7,015
(3,261)
(626)
43
–
14,517
131
derivative liabilities
12,294
3,807
1,850
17,951
(170)
(5)
17,776
AT 31 DECEMBER 2009/1 JANUARY 2010
Total investments (including derivative assets)
Less: investments held by consolidated investment funds
Less: derivative liabilitiesG3
132,690
(1,835)
(709)
49,576
–
(461)
23,390 205,656
(2,553)
(1,316)
(718)
(146)
2,890
–
(49)
176 208,722
(2,553)
(1,501)
–
(136)
Directly held investments, net of derivative liabilities
130,146
49,115
22,526 201,787
2,841
40 204,668
Net cash inflow from operating activities
Realised gains (losses) in the year
Unrealised gains and losses and exchange movements
in the year
Dilution of PruHealth investment
Acquisition of UOB Life Assurance Ltd
Movement in the year of directly held investments, net of
derivative liabilities
AT 31 DECEMBER 2010
1,329
2,233
5,958
56
–
7,306
21
6,264
–
–
2,167
984
10,802
3,238
3,301
–
1,004
15,523
56
1,004
329
11
23
–
–
120
(148)
11,251
3,101
(17) 15,529
56
1,004
–
–
9,576
13,591
7,456
30,623
363
(45) 30,941
Total investments (including derivative assets)
Less: investments held by consolidated investment funds
Less: derivative liabilitiesG3
141,426
(912)
(792)
63,505
–
(799)
30,943 235,874
(1,651)
(1,813)
(739)
(222)
3,282
–
(78)
141 239,297
(1,651)
(2,037)
–
(146)
Directly held investments, net of derivative liabilities
139,722
62,706
29,982 232,410
3,204
(5) 235,609
* The above reconciliation analyses the movement of directly held investments net of derivative liabilities. The deduction of derivative liabilities
reflects the fact that these are considered an integral part of the Group’s investment portfolio and the exclusion from investments is merely a matter
of required balance sheet presentation. The analysis excludes investments held in the balance sheet as a result of the consolidation of Open-Ended
Investment Companies (OEICs) and unit trusts, as the Group’s exposure is merely to its share of the value of the fund as a whole rather than to the
underlying investments and other assets and liabilities.
Prudential plc Annual Report 2010
199
d 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 MBS based on NAIC valuations (see below)
– NAIC 1
– NAIC 2
– NAIC 3-6
Fitch
Other
2010 £m
2009 £m
Insurance operations
UK
US
Asia
Total
insurance
operations
Asset
Manage-
ment
Group
total
Group
total
18,833
6,885
21,508
12,848
3,403
4,187
801
5,156
8,202
866
2,934 25,954
2,138
9,824
2,843 29,507
913 21,963
6,042
1,773
884
143
452
70
6
26,838
9,967
29,959
22,033
6,048
22,106
9,060
26,849
20,581
4,479
63,477 19,212 10,601 93,290
1,555
94,845
83,075
765
360
632
949
233
2,939
–
–
–
–
630
7,258
34
32
36
73
135
310
3,083
181
232
3,496
176
3,172
65
115
130
95
49
864
507
798
1,117
417
454
3,703
–
–
–
–
3,083
181
232
3,496
49
855
3,004 13,434
–
14
–
2
–
16
–
–
–
–
–
3
864
521
798
1,119
417
870
687
1,144
919
411
3,719
4,031
3,083
181
232
747
105
473
3,496
1,325
855
13,437
1,342
11,978
Total debt securities
74,304 26,366 14,108 114,778
1,574 116,352 101,751
In the table above, with the exception 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. In addition, in 2010, NAIC applied the revised ratings
process for commercial 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(d), D3(d), D4(d) and E2 provide further details on the credit
risks of debt securities by segment.
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
O
F
R
E
S
U
L
T
S
B
:
S
U
M
M
A
R
Y
200
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
B: SUMMARY OF RESULTS
CONTINUED
B6: GROUP STATEMENT OF FINANCIAL POSITION > CONTINUED
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 2010
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
i UK insurance operations
The UK insurance operations’ exposure to asset-backed securities at 31 December 2010 comprises:
Shareholder-backed business (2010: 51% AAA, 23% AA)
With-profits operations (2010: 52% AAA, 13% AA)
Total
2010 £m
2009 £m
1,181
6,135
113
437
7,866
5,237
435
5,672
2,044
6,376
59
326
8,805
6,451
378
6,829
13,538
15,634
2010 £m
2009 £m
1,181
5,237
6,418
2,044
6,451
8,495
All of the £1,181 million (2009: £2,044 million) exposure of the shareholder-backed business relates to the UK market, primarily to
investments held by PRIL. £3,685 million of the £5,237 million (2009: £4,695 million of the £6,451 million) exposure of the with-profits
operations relates to exposure to the UK market while the remaining £1,552 million (2009: £1,756 million) relates to exposure to the
US market.
ii US insurance operations
The US insurance operations’ exposure to asset-backed securities at 31 December 2010 comprises:
RMBS*:
Sub-prime (2010: 40% AAA, 11% AA)
Alt-A (2010: 15% AAA, 6% AA)
Prime including agency (2010: 79% AAA, 2% AA)
CMBS* (2010: 36% AAA, 15% AA)
CDO funds (2010: 4% AAA, 4% AA),† including £1 million exposure to sub-prime
Other ABS (2010: 26% AAA, 20% AA), including £37 million exposure to sub-prime
Total
2010 £m
2009 £m
224
415
2,145
2,375
162
814
6,135
194
443
2,679
2,104
79
877
6,376
* RMBS ratings refer to the rating implicit within NAIC risk-based capital valuation (see note d(i)). For 2010, CMBS ratings refer to the NAIC rating.
† 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(d).
Prudential plc Annual Report 2010
201
iii Asian insurance operations
The Asian insurance operations’ exposure to asset-backed securities is primarily held by the with-profits operations.
The £435 million (2009: £378 million) asset-backed securities exposure of the Asian with-profits operations comprises:
CMBS
CDO funds and other ABS
Total
2010 £m
2009 £m
251
184
435
91
287
378
The £435 million (2009: £378 million) includes £341 million (2009: £228 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 £7 million (2009: £61 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 £435 million, 43 per cent (2009: £378 million, 72 per cent) are investments
graded by Standard & Poor’s.
iv Other operations
Other operations’ exposure to asset-backed securities at 31 December 2010 is held by Prudential Capital and comprises:
RMBS: Prime (2010: 96% AAA, 4% AA)
CMBS (2010: 30% AAA, 23% AA)
CDO funds and other ABS – all without sub-prime exposure (2010: 98% AAA)
Total
2010 £m
2009 £m
197
184
56
437
91
193
42
326
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.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
B: SUMMARY OF RESULTS
CONTINUED
B6: GROUP STATEMENT OF FINANCIAL POSITION > CONTINUED
e 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 2009
Premiums
Surrenders
Maturities/Deaths
Net 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
UK
£m
115,961
6,867
(3,971)
(7,239)
(4,343)
(202)
–
(46)
14,118
707
–
US
£m
45,361
9,177
(3,255)
(733)
5,189
–
–
–
2,986
(5,225)
–
Asia
£m
21,069
3,807
(1,201)
(342)
2,264
(20)
(63)
(4)
4,242
(2,069)
(3,508)
Total
£m
182,391
19,851
(8,427)
(8,314)
3,110
(222)
(63)
(50)
21,346
(6,587)
(3,508)
AT 31 DECEMBER 2009/ 1 JANUARY 2010
126,195
48,311
21,911
196,417
Comprising
– Policyholder liability
– Unallocated surplus of with-profits funds
Premiums
Surrenders
Maturities/Deaths
Net flows
Shareholders’ transfers post-tax
Assumption changes (shareholder-backed business)
Investment-related items and other movements
Foreign exchange translation differences
Dilution of holding in PruHealth investment
Acquisition of UOB Life Assurance Limited
AT 31 DECEMBER 2010
Comprising
– Policyholder liability
– Unallocated surplus of with-profits funds
Average policyholder liability balances*
2010
2009
116,229
9,966
48,311
–
21,858
53
186,398
10,019
7,890
(3,779)
(7,303)
(3,192)
(223)
(46)
13,218
(208)
(27)
–
11,735
(3,598)
(769)
7,368
–
–
3,464
1,380
–
–
4,308
(2,241)
(498)
1,569
(24)
19
2,216
2,081
–
968
23,933
(9,618)
(8,570)
5,745
(247)
(27)
18,898
3,253
(27)
968
135,717
60,523
28,740
224,980
125,530
10,187
60,523
–
28,674
66
214,727
10,253
120,880
54,417
25,750
201,047
111,969
46,837
19,630
178,436
* Adjusted for acquisition and disposals in the period and excluding unallocated surplus of with-profits funds.
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 and claims represent the
policyholder liabilities released).
Prudential plc Annual Report 2010
C: GROUP RISK MANAGEMENT
203
a: OVERVIEW
As a provider of financial services, including insurance, the management of risk lies at the heart of the Group’s business. 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, which has established the Group Risk Committee to assist in providing leadership, direction and
oversight, and with the Group Chief Executive and the chief executive 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 internal
control and risk management systems is provided by the Group Audit Committee, supported by the Group-wide Internal Audit.
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 appetite for risk exposures as well as the approach 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, expected dividends and to withstand unexpected shocks, and (c) earnings (and cash
flows) are managed properly across geographies and are consistent with the Group’s funding strategies. The two measures applied to
monitor the volatility of the Group’s earnings are International Financial Reporting Standards (IFRS) operating profit based on longer-
term investment returns and European Embedded Value (EEV) operating profit based on longer-term investment returns although IFRS
and EEV total profits are also considered.
ii 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 applied by the Group are the EU
Insurance Groups Directive (IGD) capital requirements and internal economic capital requirements. In addition, the Group also monitors
capital requirements on a local statutory basis.
Business units must establish suitable market, credit, insurance 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. The 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.
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. The limits on the total Group-wide exposures to
a single counterparty are specified within different credit rating ‘categories’. Group Risk and the Group Credit Risk Committee monitor
the Group’s actual exposures against these limits on at least a monthly basis, escalating matters to Group Executive Risk Committee
as appropriate.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
C: GROUP RISK MANAGEMENT
CONTINUED
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.
i Use of derivatives
In the UK business, equity exposure is incurred in the with-profits fund, and it includes a large inherited estate. The inherited estate itself
is partially protected against falls in equity markets by a derivative hedging portfolio.
In the US, to protect the shareholders against the volatility introduced by embedded options, Jackson uses both a comprehensive
hedging programme and reinsurance. Jackson makes use of the natural offsets that exist between the variable annuity guarantees and
the fixed index annuity book, and then uses a combination of OTC options and futures to hedge the residual risk, allowing for significant
market shocks and limiting the amount of capital at risk. Internal positions are generally netted before any external hedge positions are
considered. Jackson manages 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.
Prudential principally operates in the UK, the US, and in 13 countries in Asia. The geographical diversity of the Group’s business
means that Prudential is inevitably subject to the risk of exchange rate fluctuations. The Group does 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.
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, is 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.
Prudential plc Annual Report 2010
205
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.
Foreign exchange risk
Prudential faces foreign exchange risk, primarily because its presentation currency is pounds sterling, whereas approximately 73 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 2010, 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.
Approximately 79 per cent of the Group’s IFRS basis shareholders’ equity at 31 December 2010 arose in Prudential’s US and Asian
operations (2009: approximately 77 per cent). To mitigate the exposure of the US component there are US$2.3 billion of borrowings
held centrally, which are formally designated as net investment hedges at 31 December 2010. Net of the currency position arising from
these borrowings some 61 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 if another party fails to meet its obligations, or fails to do so in a timely fashion. 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
Liquidity risk is 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 assets of insurers are in general relatively liquid, whilst
liabilities to policyholders are mainly illiquid. Accordingly, for insurers, the focus of managing liquidity risk concentrates 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. 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 reporting 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 £2.1 billion
of undrawn syndicated and bilateral committed banking facilities, maturing between 2011 and 2015.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
C: GROUP RISK MANAGEMENT
CONTINUED
d: RISK EXPOSURES > CONTINUED
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, persistency, 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 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 for the resulting additional risk.
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 or systems, or from
external events. This includes legal and regulatory compliance risk. Business environment risk may arise from exposure to forces in the
external environment that could significantly change the fundamentals that drive the business’s 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.
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, including tax, regimes. Prudential also has a significant number of third-party relationships that are important to the
distribution and processing of its products, both as market counterparties and as business partners. This results in reliance upon the
operational performance of these outsourcing partners.
The Group uses the qualitative and quantitative analysis of operational risk exposures material to the Group to support business
decision making and lessons learned activities; the ongoing improvement of the control environment; the informing of overall levels of
capital held; and determination of the adequacy of Prudential’s corporate insurance programme.
With regard to business environment risk, the Group has a wide-ranging programme of active and constructive engagement with
governments, policymakers and regulators in our key markets and with relevant international institutions, undertaken both directly and
indirectly via trade associations. The Group has procedures in place to monitor and track political and regulatory developments. Where
appropriate, the Group provides submissions and technical input to officials and others, either via submissions to formal consultations or
through interactions with officials.
With regard to strategic risk, business units and the Group Head Office are required to adopt a forward-looking approach to risk
management by performing risk assessments as part of the annual strategic planning process. This supports the identification of
potential threats and the initiatives needed to address them, as well as competitive opportunities. The impact on the underlying
business unit and/or Group-wide risk profile is also considered to ensure that strategic initiatives are within the Group’s risk appetite.
Prudential plc Annual Report 2010
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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 European Union (EU) Insurance Groups
Directive (IGD) as implemented by the FSA in the UK. The IGD pertains to groups whose activities are primarily concentrated in the
insurance sector. 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. 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 2010 the Group held £1,463 million (2009: £1,422
million) of Innovative Tier 1 capital in the form of perpetual securities, £nil (2009: £nil) of Upper Tier 2 and £1,255 million (2009: £1,269
million) of Lower Tier 2 capital. In addition, Jackson held £159 million of surplus notes at the end of the financial year 2010 (2009: £154
million) which, although the US does not have a similar capital categorisation under its regulatory framework, are akin to the FSA’s Lower
Tier 2 Capital and have been disclosed as such in note H13. Further details on Group borrowings are shown in note H13.
At 31 December 2009, Prudential met the requirements of the IGD with £3.4 billion of surplus capital before allowing for the 2009
final dividend. In addition, during 2010, Prudential met the requirements of the FSA under the IGD. The IGD position as at 31 December
2010 will be submitted to the FSA by 30 April 2011 and at the time of preparation of these financial statements the surplus capital under
the test was estimated to be around £4.3 billion before allowing for the 2010 final dividend giving a solvency ratio of circa 305 per cent.
The main components of the increase in IGD surplus during 2010 are:
• Net capital generation mainly through operating earnings (in-force releases less investment in new business) of £1.7 billion;
• Release of tax provisions of £0.2 billion;
• Foreign exchange movements of positive £0.1 billion;
• Offset by dividend payments, external financing costs and other central costs, costs incurred in relation to the terminated AIA
transaction and inadmissible assets arising on the purchase of UOB’s life assurance subsidiary in Singapore.
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 design and product
pricing.
Prudential’s 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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FINANCIAL STATEMENTS > 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.
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.
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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.
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. Reinsurance recoverable insurance assets are not
a significant component of the Group’s statement of financial position and accordingly, exposure to concentrations of reinsurance risk
is not significant to the Group. At 31 December 2010, 97 per cent (2009: 98 per cent) of the reinsurance recoverable insurance assets
were ceded by the Group’s UK and US operations, of which 90 per cent (2009: 92 per cent) of the balance were from reinsurers with
Standard & Poor’s rating A- and above.
c Guarantees
Notes D2(e), D3(e) and D4(e) 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 2010 as described in section D2(g)(ii). The UK
business also has products with guaranteed annuity option features, mostly within SAIF, as described in section D2(e). 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(e). Jackson’s derivative programme seeks to manage
the exposures as described in section D3(f). 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 2010 EEV sensitivity disclosures
are shown in note 15 of the EEV basis supplementary information in this Annual Report.
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e Sensitivity of IFRS basis profit or loss and equity to market and other risks
i Overview of risks by business unit
The financial and insurance 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.
Type of business
Investments/derivatives
Liabilities/unallocated surplus Other exposure
Insurance and lapse risk
Market and credit risk
UK insurance operations (see also section D2(j))
With-profits business
Net neutral direct exposure (Indirect exposure only)
(including Prudential
Annuities Limited)
Investment performance
subject to smoothing
through declared
bonuses
Persistency risk to future
shareholder transfers
SAIF sub-fund
Net neutral direct exposure (Indirect exposure only) Asset management fees
Unit-linked business
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
earned by M&G
Investment performance
through asset
management fees
Persistency risk
Mortality experience
and assumptions for
longevity
Prudential plc Annual Report 2010
211
Type of business
Investments/derivatives
Liabilities/unallocated surplus Other exposure
Insurance and lapse risk
Market and credit risk
US insurance operations (see also section D3(j))
All business
Currency risk
Variable annuity business Net effect of market risk arising from incidence
Persistency risk
Fixed index annuity
business
of guarantee features and variability of asset
management fees offset by derivative hedging
programme
Derivative hedge
programme to the extent
not fully hedged against
liability and fund
performance
Incidence of equity
participation features
Fixed index annuities,
Fixed annuities and
GIC business
Credit risk
Interest rate 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
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
fo sale’ under IAS 39
Asian insurance operations (see also section D4(j))
All business
Currency risk
With-profits business
Net neutral direct exposure (Indirect exposure only)
Unit-linked business
Net neutral direct exposure (Indirect exposure only)
Investment performance
subject to smoothing
through declared
bonuses
Investment performance
through asset
management fees
Non-participating
business
Interest rate and price risk Long-term interest rates
.
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Mortality and
morbidity risk
Persistency risk
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ii IFRS shareholder results – Exposures for market and other risk
Key Group exposures
Detailed analyses of sensitivity of IFRS basis profit or loss and equity to market and other risks are provided in notes D2(j), D3(j), D4(j)
and E4. The sensitivity analyses provided show the effect on IFRS basis profit or loss and equity to changes in the relevant risk variables,
all of which are reasonably possible at the relevant balance sheet date.
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 not mitigated by the interest derivative programmes and second order equity-
based exposure in respect of variable annuity asset management fees. 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).
See note D3(j) for details of the hedging.
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 writes annuity business, but 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.
Prudential plc Annual Report 2010
213
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.
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 – the spread differential between the earned rate and the rate credited to policyholders on the general
account funds and the effect of market movements on fees earned on separate account funds;
• 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.
In addition, the total profit for Jackson is affected by the level of impairment losses on the debt securities portfolio, net effect of market
risk arising from the incidence and valuation of guarantee features, guaranteed benefit payments and equity index participation features,
offset by variability of benefit related fees and equity derivative hedging performance, short-term value movements on derivatives held
to manage the fixed annuity and other general account business, and other temporary value movements on portfolio investments
classified as fair value through profit and loss.
The Group has amended its presentation of operating profit for its US insurance operations to remove the net equity hedge
accounting effect and include it in short-term fluctuations as explained further in note A4(d)(ii). Following this change the operating
profit based on longer-term investment returns of the US insurance operations of £833 million for 2010 (2009: £618 million) excludes
£367 million (2009: £159 million) negative net equity hedge accounting effects, net of related change to amortisation of deferred
acquisition costs. The presentation of results for 2009 has been amended accordingly.
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FINANCIAL STATEMENTS > 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 certain 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 factor
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(k), D3(k) and D4(k).
In the years 2006 to 2010, claims paid on the Group’s life assurance contracts including those classified as investment contracts
under IFRS 4 ranged from £15 billion to £18 billion. Indicatively, it is to be expected that, of the Group’s policyholder liabilities (excluding
unallocated surplus) at 31 December 2010 of £214.7 billion, the amounts likely to be paid in 2011 will be of a similar magnitude.
Prudential plc Annual Report 2010
215
D2: UK INSURANCE OPERATIONS
a Summary statement of financial position
In order to reflect 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.
£94.8 billion of the £141.4 billion of investments are held by SAIF and the PAC WPSF. Shareholders are exposed only indirectly to value
movements on these assets.
PAC with-profits sub-fund note i
Other funds and subsidiaries
UK insurance
operations
Scottish
Amicable
Insurance
Fund
note ii
£m
Excluding
Prudential
Annuities
Limited
£m
Prudential
Annuities
Limited
note iii
£m
Unit-
linked
assets
and
liabilities
£m
Annuity
and other
long-term
business
£m
Total
note iv
£m
Total
£m
2010
Total
£m
2009
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 note viii
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
–
–
–
–
–
–
2
–
–
166
13
179
179
93
–
–
–
–
–
–
14
–
–
166
13
179
179
107
–
–
–
–
–
–
–
118
118
118
118
118
118
127
127
–
–
–
–
–
–
118
105
118
105
166
13
179
297
214
124
9
133
260
292
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412
1,810
322
2,132
557
1,532
2,089
4,633
3,074
673
7,589
731
8,320
745
1,474
2,219 11,212
10,861
–
–
–
–
153
979
138
1,117
–
–
69
69
69
4
1,032
1,032
2,302
1,815
229 23,945 13,434
3,105 23,716
4,704 29,013 12,785 41,798
3,419
6,473
3,241
6,038
178
435
276
793
35 13,469 40,519
6,045 21,757 27,802 74,304
3,998
9,022
230
1,258
303
1,756
73
498
37,051
67,772
3,630
11,557
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Total investmentsnote b
9,704 70,576 14,496 85,072 20,795 25,855 46,650 141,426 132,690
Properties held for sale
Cash and cash equivalents
–
170
254
1,127
–
82
254
1,209
–
1,153
–
307
–
1,460
254
2,839
–
2,265
TOTAL ASSETS
10,288 74,039 14,914 88,953 22,505 27,917 50,422 149,663 138,581
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D: LIFE ASSURANCE BUSINESSES
CONTINUED
D2: UK INSURANCE OPERATIONS > CONTINUED
PAC with-profits sub-fund note i
Other funds and subsidiaries
UK insurance
operations
Scottish
Amicable
Insurance
Fund
note ii
£m
Excluding
Prudential
Annuities
Limited
£m
Prudential
Annuities
Limited
note iii
£m
Unit-
linked
assets
and
liabilities
£m
Annuity
and other
long-term
business
£m
Total
note iv
£m
Total
£m
2010
Total
£m
2009
Total
£m
–
–
–
–
35
35
–
–
–
–
35
35
–
–
–
2,148
–
2,148
–
2,148
35
1,939
28
2,148
2,148
2,183
1,967
9,759 59,545 12,282 71,827 21,671 22,273 43,944 125,530 116,229
–
8,363
1,824 10,187
–
–
–
10,187
9,966
EQUITY AND LIABILITIES
Equity
Shareholders’ equity
Non-controlling 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)note vii
Total
9,759 67,908 14,106 82,014 21,671 22,273 43,944 135,717 126,195
Operational borrowings attributable
to shareholder-financed operations
Borrowings attributable to with-profits
funds
Deferred tax liabilities
Other non-insurance liabilities
–
–
–
–
–
162
162
162
158
118
80
331
1,404
903
3,789
–
252
556
1,404
1,155
4,345
–
–
834
–
503
2,831
–
503
3,665
1,522
1,738
8,341
1,284
1,606
7,371
Total liabilities
10,288 74,004 14,914 88,918 22,505 25,769 48,274 147,480 136,614
TOTAL EQUITY AND LIABILITIES
10,288 74,039 14,914 88,953 22,505 27,917 50,422 149,663 138,581
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 comprises 3.5 per cent of the total assets of WPSF and includes the with-profits annuity
business transferred to Prudential from the Equitable Life Assurance Society on 1 December 2007 (with assets of approximately £1.7 billion).
Profits to shareholders on this with-profits annuity business emerge on a ‘charges less expenses’ basis and policyholders are entitled to
100 per cent of the investment earnings.
SAIF is a separate sub-fund within the PAC long-term business fund.
ii
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 £2,302 million (2009: £1,815 million) comprise loans held by the PAC WPSF of £1,270 million
(2009: £1,106 million) and loans held by shareholder-backed business of £1,032 million (2009: £709 million).
The loans held by the PAC WPSF comprise mortgage loans of £256 million, policy loans of £21 million and other loans of £993 million
(2009: £145 million, £24 million and £937 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 £1,027 million
(2009: £702 million) and other loans of £5 million (2009: £7 million).
Prudential plc Annual Report 2010
217
2010 £m
2009 £m
926
3,072
3,998
910
2,720
3,630
vi Other investments comprise:
Derivative assets*(note G3)
Partnerships in investment pools and other†
* 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 £792 million (2009: £709 million), which are also included in the statement of financial position, the
overall derivative position was a net asset of £134 million (2009: £201 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.
vii Unallocated surplus of with-profits funds
Prudential’s long-term business written in the UK comprises predominantly life insurance policies 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 PAC Board of directors. The shareholders’
share currently represents one-ninth of the cost of bonuses declared for with-profits policies.
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.
viii Investment properties
At 31 December 2010, the Group’s UK insurance operations had £11,212 million (2009: £10,861 million) of investment properties. The following
table shows the property portfolio by type of investment. The properties are shown at market value below in accordance with the policies
described in note A4.
Office buildings
Shopping centres/commercial
Retail warehouses/industrial
Development
Other
Total
2010
2009
£m
4,617
3,777
2,184
402
232
%
41.2
33.7
19.5
3.6
2.0
£m
4,820
3,699
1,780
20
542
%
44.4
34.0
16.4
0.2
5.0
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10,861
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Approximately 46.2 per cent (2009: 42.4 per cent) of the UK held investment property is located in London and Southeast England including
Buckinghamshire, Berkshire, East and West Sussex, Hampshire, Isle of Wight, Kent, Oxfordshire and Surrey, with 36.7 per cent (2009: 39.8 per
cent) located throughout the rest of the UK and the remaining 17.1 per cent (2009: 17.8 per cent) located overseas.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
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D2: UK INSURANCE OPERATIONS > CONTINUED
b Reconciliation of movement in investments
A reconciliation of the total investments of UK insurance operations from the beginning of the year to the end of the year is
as follows:
PAC with-profits sub-fund
Other funds and
subsidiaries
Scottish
Amicable
Insurance
Fund
£m
Excluding
Prudential
Annuities
Limited
£m
Prudential
Annuities
Limited
£m
Unit-
linked
assets
and
liabilities
£m
Annuity
and other
long-term
business
£m
UK
insurance
operations
Total
£m
Total
£m
AT 1 JANUARY 2009
Total investments (including derivative assets)
Less: Investments held by consolidated investment funds
Less: Derivative liabilities
10,438
–
(414)
62,814
(145)
(2,331)
13,329
–
(280)
76,143
(145)
(2,611)
15,571
(424)
(14)
19,710 121,862
(609)
(3,401)
(40)
(362)
Directly held investments, net of derivative liabilities
10,024
60,338
13,049
73,387
15,133
19,308 117,852
Net cash inflow (outflow) from operating activities
Realised gains (losses) in the year
Unrealised gains and losses and exchange movements
in the year
Reclassification of property under development
Movement in the year of directly held investments, net of
(1,226)
165
507
554
848
–
4,935
131
(30)
(20)
610
–
477
534
258
(285)
1,923
(306)
1,432
108
5,545
131
2,586
–
1,644
–
10,623
131
derivative liabilities
(213)
6,127
560
6,687
2,559
3,261
12,294
AT 31 DECEMBER 2009/1 JANUARY 2010
Total investments (including derivative assets)
Less: Investments held by consolidated investment funds
Less: Derivative liabilitiesnote G3
9,848
–
(37)
67,832
(1,050)
(317)
13,794
(19)
(166)
81,626
(1,069)
(483)
18,421
(729)
–
22,795 132,690
(1,835)
(709)
(37)
(189)
Directly held investments, net of derivative liabilities
9,811
66,465
13,609
80,074
17,692
22,569 130,146
Net cash inflow (outflow) from operating activities
Realised gains in the year
Unrealised gains and losses and exchange movements
in the year
Dilution of PruHealth investment
Movement in the year of directly held investments, net of
derivative liabilities
AT 31 DECEMBER 2010
(762)
368
(838)
1,502
(21)
73
(859)
1,575
1,000
267
249
–
2,963
–
608
–
3,571
–
1,131
–
1,950
23
1,007
56
1,329
2,233
5,958
56
(145)
3,627
660
4,287
2,398
3,036
9,576
Total investments (including derivative assets)
Less: Investments held by consolidated investment funds
Less: Derivative liabilitiesnote G3
9,704
–
(38)
70,576
(140)
(344)
14,496
(22)
(205)
85,072
(162)
(549)
20,795
(705)
–
25,855 141,426
(912)
(792)
(45)
(205)
Directly held investments, net of derivative liabilities
9,666
70,092
14,269
84,361
20,090
25,605 139,722
Prudential plc Annual Report 2010
219
c Reconciliation of movement in policyholder liabilities and unallocated surplus of with-profits funds
A reconciliation of the total policyholder liabilities and unallocated surplus of with-profits funds of UK insurance operations from the
beginning of the year to the end of the year is as follows:
AT 1 JANUARY 2009
Premiums
Surrenders
Maturities/Deaths
Net flowsnote a
Shareholders transfers post-tax
Switches
Assumption changes (shareholder-backed business)note D2i, note c
Investment-related items and other movementsnote b
Foreign exchange translation differences
AT 31 DECEMBER 2009/1 JANUARY 2010
Comprising:
– Policyholder liabilities
– Unallocated surplus of with-profits funds
Premiums
Surrenders
Maturities/Deaths
Net flowsnote a
Shareholders transfers post-tax
Switches
Assumption changes (shareholder-backed business)note D2i, note c
Investment-related items and other movementsnote b
Dilution of holding in PruHealth
Foreign exchange translation differences
AT 31 DECEMBER 2010
Comprising:
– Policyholder liabilities
– Unallocated surplus of with-profits funds
Average policyholder liabilities balances*
2010
2009
Other shareholder-backed
funds and subsidiaries
Unit-
linked
liabilities
£m
16,318
1,860
(1,535)
(670)
(345)
–
270
–
2,849
(57)
Annuity
and other
long-term
business
£m
UK insurance
operations
Total
£m
17,535
1,736
(42)
(1,422)
272
–
–
(46)
1,904
–
115,961
6,867
(3,971)
(7,239)
(4,343)
(202)
–
(46)
14,118
707
SAIF
and PAC
with-profits
sub-fund
£m
82,108
3,271
(2,394)
(5,147)
(4,270)
(202)
(270)
–
9,365
764
87,495
19,035
19,665
126,195
77,529
9,966
3,311
(2,453)
(5,079)
(4,221)
(223)
(236)
–
9,165
–
(207)
19,035
–
2,301
(1,272)
(726)
303
–
236
–
2,097
–
–
19,665
–
2,278
(54)
(1,498)
726
–
–
(46)
1,956
(27)
(1)
116,229
9,966
7,890
(3,779)
(7,303)
(3,192)
(223)
–
(46)
13,218
(27)
(208)
91,773
21,671
22,273
135,717
81,586
10,187
21,671
–
22,273
–
125,530
10,187
79,558
20,353
20,969
120,880
75,692
17,677
18,600
111,969
* Excluding the unallocated surplus of the with-profits funds and as adjusted for corporate transactions in the period.
Notes
a Net flows of negative £3,192 million have improved from negative £4,343 million in 2009, principally as a result of increased premiums due to
b
bulk annuity transaction in 2010 and improved unit-linked flows.
Investment-related items and other movements of £13,218 million across fund types reflected the continued strong performance of UK equity
markets in 2010, as well as the continued increase in value of debt securities.
c Assumption changes principally represent the net impact of changes to the mortality assumptions and expense assumptions.
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d Information on credit risk of debt securities
The following table summarises by rating the securities held by UK insurance operations as at 31 December 2010 and 2009:
PAC with-profits sub-fund
Other funds and subsidiaries
UK insurance
operations
Scottish
Amicable
Insurance
Fund
£m
Excluding
Prudential
Annuities
Limited
£m
Prudential
Annuities
Limited
£m
Unit-
linked
assets
and
liabilities
£m
Total
£m
1,128
346
1,211
1,011
359
5,741
2,045
7,568
6,960
2,662
9,056
3,315
1,334
3,379
3,778 11,346
8,113
1,153
2,840
178
2,459
608
1,672
836
34
Other
annuity
and
long-term
business
£m
2010
Total
£m
2009
Total
£m
966 18,833
253
6,885
812 21,508
424 12,848
3,403
21
16,091
6,472
19,693
12,183
2,667
PRIL
£m
5,224
2,299
6,467
2,464
149
4,055 24,976
9,758 34,734
5,609 16,603
2,476 63,477
57,106
78
9
27
63
16
428
81
169
358
116
56
51
214
248
31
484
132
383
606
147
193
1,152
600
1,752
28
428
207
2,678
118
2,309
325
4,987
80
52
33
92
10
267
48
121
93
141
169
155
57
615
30
26
20
33
3
765
360
632
949
233
463
276
801
815
339
112
2,939
2,694
208
1,622
21
100
630
7,258
1,022
6,950
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
4,704 29,013 12,785 41,798
6,045 19,048
2,709 74,304
67,772
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 £7,258 million total debt securities
held in 2010 (2009: £6,950 million) which are not externally rated, £2,210 million were internally rated AAA to A-, £3,861 million were
internally rated BBB to B- and £1,187 million were rated below B- or unrated (2009: £2,190 million, £3,445 million and £1,315 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
£1,722 million PRIL and other annuity and long-term business investments which are not externally rated, £7 million were internally rated
AAA, £92 million AA, £496 million A, £899 million BBB, £82 million BB and £146 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.
e 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.
Prudential plc Annual Report 2010
221
i With-profits products and PAC with-profits sub-fund
Within the statement of financial position of UK insurance operations at 31 December 2010, as shown in note D2(a), there are
policyholder liabilities and unallocated surplus of £82.0 billion (2009: £77.5 billion) that relate to the WPSF. These amounts include the
liabilities and capital of Prudential Annuities Limited, a wholly-owned subsidiary of the fund. The WPSF mainly contains with-profits
business but it also contains some non-profit business (unit-linked, term assurances and annuities). The WPSF’s profits are apportioned
90 per cent to its policyholders and 10 per cent to shareholders as surplus for distribution is determined via the annual actuarial
valuation.
The WPSF held a provision of £24 million at 31 December 2010 (2009: £31 million) to honour guarantees on a small amount of
guaranteed annuity products. SAIF’s exposure to guaranteed annuities is described below.
Beyond the generic guarantees described above, there are very few explicit options or guarantees such as minimum investment
returns, surrender values or annuities at retirement and any granted have generally been at very low levels.
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 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.
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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.
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.
Prudential plc Annual Report 2010
223
2010 £m
2009 £m
8,815
(6,390)
(4,301)
2,019
(8,672)
3,148
9
(600)
(528)
2,172
70
2,242
2,019
223
2,242
10,461
(6,253)
(3,692)
1,827
(8,118)
3,063
(2)
(842)
(640)
3,922
(1,893)
2,029
1,827
202
2,029
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 expenditure
Tax (charge)
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
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 a ‘required smoothed return 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 required smoothed return bonus rate selected by the policyholder when the product is purchased and the smoothed return
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 2010, £35.6 billion (2009: £32.3 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 £336 million was held in SAIF at
31 December 2010 (2009: £284 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.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
D: LIFE ASSURANCE BUSINESSES
CONTINUED
D2: UK INSURANCE OPERATIONS > CONTINUED
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.
f 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.
g 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.
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.
Prudential plc Annual Report 2010
225
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.
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:
(a) the expected level of future defaults;
(b) the credit risk premium that is required to compensate for the potential volatility in default levels;
(c) the liquidity premium that is required to compensate for the lower liquidity of corporate bonds relative to swaps; and
(d) the mark to market risk premium that is required to compensate for the potential volatility in corporate bond spreads (and hence
market values) at the time of sale.
The sum of (c) and (d) is often referred to as ‘liquidity premium’.
The credit risk allowance is a function of the asset mix and the credit quality of the underlying portfolio. At 31 December 2010, 84 per
cent (2009: 80 per cent) of the assets backing the UK 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 (d).
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.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
D: LIFE ASSURANCE BUSINESSES
CONTINUED
D2: UK INSURANCE OPERATIONS > CONTINUED
Historically, until the second half of 2007, when corporate bond spreads widened significantly, the allowance for credit risk was
calculated as the long-term expected defaults and a long-term credit risk premium. This long-term credit risk was supplemented by
a short-term allowance from 31 December 2007 to allow for the concern that credit ratings applied by the rating agencies may be
downgraded and defaults in the short-term might be higher than the long-term assumptions.
The weighted components of the bond spread over swap rates for shareholder-backed fixed and linked annuity business for PRIL
at 31 December 2010, 2009 and 2008, based on the asset mix at the relevant balance sheet date are shown below.
2010
Adjustment
from
regulatory
to IFRS
basis
(bps)
note v
–
–
–
(26)
(26)
26
Pillar I
Regulatory
basis
(bps)
160
16
10
42
68
92
2009
Adjustment
from
regulatory
to IFRS
basis
(bps)
note v
Pillar I
Regulatory
basis
(bps)
175
19
13
39
71
104
–
–
–
(24)
(24)
24
IFRS
(bps)
160
16
10
16
42
118
IFRS
(bps)
175
19
13
15
47
128
31 December 2010
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
31 December 2009
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
Prudential plc Annual Report 2010
227
IFRS
(bps)
323
15
11
29
55
268
2008
Adjustment
from
regulatory
to IFRS
basis
(bps)
note v
Pillar I
Regulatory
basis
(bps)
323
15
11
54
80
243
–
–
–
(25)
(25)
25
31 December 2008
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
Notes
(i) Bond spread over swap rates reflect market observed data.
(ii) For the valuations prior to 31 December 2010, long-term expected defaults were 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 was based on external credit rating and for this purpose the credit rating assigned to each asset held was the lowest credit rating published
by Moody’s, Standard and Poors and Fitch.
For the 31 December 2010 valuation, long-term expected defaults are derived by applying Moody’s data from 1970 to 2009 and the definition
of the credit rating used has been revised from the lowest credit rating to the second highest credit rating published by Moody’s, Standard and
Poors and Fitch.
(iii) For the valuations prior to 31 December 2010, 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.
For the 31 December 2010 valuation, the long-term credit risk premium is derived from Moody’s data from 1970 to 2009.
The combined effect of this change and the changes described in (ii) above is neutral on the long-term credit risk allowance for PRIL.
(iv) The short-term allowance for credit risk assumed in the Pillar 1 solvency valuations at 31 December 2008 was determined 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.
Subsequent to this date movements have reflected events in the period, namely the impact of credit migration, the decision not to release
favourable default experience, new business and asset trading amongst other items. This is demonstrated by the analyses below.
(v) The very prudent Pillar 1 regulatory basis reflects the overriding objective of ensuring sufficient provisions and capital to ensure payments to
policyholders can be made. The approach for IFRS aims to establish liabilities that are closer to ‘best estimate’. IFRS default assumptions are
therefore set between the EEV and Pillar I assumptions.
Factors affecting the credit risk allowance at 31 December 2010
The main factors influencing the credit risk allowance at 31 December 2010 are as follows:
a Credit downgrades and default experience
The credit risk allowances have been adjusted during 2010 to take account of emerging downgrade and default experience. Experience
in relation to changes in credit rating has improved in 2010 and no assets defaulted for the PRIL business during the year. The allowance
for short-term downgrades has been reduced to offset the impact of credit downgrades on the long-term assumptions. In addition, the
allowance for short-term defaults has been updated to eliminate any experience profits that would otherwise have arisen due to default
experience being better than allowed for in the opening reserves.
b Asset trading
Since the second half of 2009, the Group started trading out of subordinated financial debt into higher quality assets. The continuation
of the reduction in the subordinated financial debt holdings in 2010 improved the overall credit quality of the corporate bond portfolio
and so allowed for a release of long-term credit reserves.
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, the reduction in subordinated financial debt holdings generated a pre-tax IFRS operating loss of £4 million
(2009: loss of £51 million).
c Asset purchases in respect of new business
Similar to 2009, the assets purchased during 2010 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 2010 is
reduced when the new business assets and in-force assets are aggregated together.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
D: LIFE ASSURANCE BUSINESSES
CONTINUED
D2: UK INSURANCE OPERATIONS > CONTINUED
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 2009
Credit downgrades
Retention of surplus from favourable default
experience
Asset trading
New business
Other
Total allowance for credit risk
at 31 December 2010
Pillar 1 Regulatory basis
(bps)
IFRS
(bps)
Long-term
Short-term
Total
Long-term
Short-term
Total
32
1
–
(5)
–
(2)
26
39
(1)
7
–
(2)
(1)
42
71
–
7
(5)
(2)
(3)
68
32
1
–
(5)
–
(2)
26
15
(1)
3
–
(1)
–
16
47
–
3
(5)
(1)
(2)
42
Overall this has led to the credit allowance for Pillar 1 purposes to be 43 per cent (2009: 41 per cent) of the bond spread over swap rates.
For IFRS purposes it represents 26 per cent (2009: 27 per cent) of the bond spread over swap rates.
The reserves for credit risk allowance at 31 December 2010 for UK shareholder annuity fund were as follows:
PRIL
PAC non-profit sub-fund
Total
Pillar 1 Regulatory basis
£bn
IFRS
£bn
Long-term
Short-term
Total
Long-term
Short-term
Total
0.6
0.1
0.7
1.0
0.1
1.1
1.6
0.2
1.8
0.6
0.1
0.7
0.4
–
0.4
1.0
0.1
1.1
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.
In 2009, Prudential’s annuity business liabilities were determined using the Continuous Mortality Investigation (‘CMI’) medium
cohort projections with a floor. In November 2009 a new mortality projection model was released by the CMI. This model is expected
to become the new industry standard. The new model has been applied in determining the 2010 results with calibration to reflect an
appropriate view of future mortality improvement. In recognition of the trend in assumed mortality improvements the Company has in
previous years included margins in its annuity liabilities. In determining the 2010 results the appropriate level of these margins has been
reassessed. See note D2 (i) below for the net effect of applying the new model, releases of margin, and changes to other related
mortality assumptions.
Prudential plc Annual Report 2010
229
The tables and range of percentages used are set out in the following tables:
2010
In payment
PAL
PRIL
Males
Females
Males
Females
92% – 98% PCMA00
with future
improvements in line
with Prudential’s own
calibration of the CMI
2009 mortality model,
with a long-term
improvement rate
of 2.25%
88% – 100% PCFA00
with future
improvements in line
with Prudential’s own
calibration of the CMI
2009 mortality model,
with a long-term
improvement rate
of 1.25%
94% – 95% PCMA00
with future
improvements in line
with Prudential’s own
calibration of the CMI
2009 mortality model,
with a long-term
improvement rate
of 2.25%
86% – 97% PCFA00
with future
improvements in line
with Prudential’s own
calibration of the CMI
2009 mortality model,
with a long-term
improvement rate
of 1.25%
In deferment
AM92 minus 4 years
AF92 minus 4 years
AM92 minus 4 years
AF92 minus 4 years
2009
In payment
PAL
PRIL
Males
Females
Males
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
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
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
PAL
PRIL
Males
Females
Males
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
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
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
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.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
D: LIFE ASSURANCE BUSINESSES
CONTINUED
D2: UK INSURANCE OPERATIONS > CONTINUED
h Reinsurance
The Group’s UK insurance business cedes only minor amounts of business outside the Group. During 2010, reinsurance premiums for
externally ceded business were £128 million (2009: £122 million) and reinsurance recoverable insurance assets were £608 million
(2009: £502 million) in aggregate. The gains and losses recognised in profit and loss for the 2010 contracts were immaterial.
During 2009 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 in 2009. The gains and losses recognised in profit and loss
for other contracts in 2009 were immaterial.
i Effect of changes in assumptions used to measure insurance assets and liabilities
2010
Credit risk
The approach to reserving for credit risk is set out in note D2(g)(iii).
Other operating assumption changes
Note D2(g)(iii) above explains the application of a new mortality projection model in 2010 to determine the Prudential’s annuity
business.
The net effect of applying the new model, releases of margins and changes to other related mortality assumptions for
shareholder-backed business is a credit of £8 million. With a £38 million benefit from altered expense assumptions the overall credit
for shareholder-backed business is £46 million.
For the with-profits sub-fund, the aggregate effect of assumption changes in 2010 was a net charge to unallocated surplus of
£62 million, relating to changes in mortality, expense, persistency and economic assumptions.
2009
Credit risk
The approach to reserving for credit risk is set out in note D2(g)(iii).
Other operating assumptions changes
Overall mortality experience was in line with expectations and no change was therefore required to the overall strength of mortality
assumptions at 31 December 2009.
For the shareholder-backed business, the aggregate effect of assumption changes in 2009 was a net credit to the shareholder result
of £46 million, primarily related to changes to the deflation reserve, expense assumptions and modelling changes.
For the with-profits sub-fund, the aggregate effect of assumption changes in 2009 was a net credit to unallocated surplus of
£65 million principally for altered expense assumptions.
j 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 investment of 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 2010 and 2009 are demonstrated in note D5.
Prudential plc Annual Report 2010
231
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 £53 million (2009: £44 million).
A decrease in credit default assumptions of five basis points would increase gross profits by £119 million (2009: £91 million).
A decrease in renewal expenses (excluding asset management expenses) of five per cent would increase gross profits by £23 million
(2009: £17 million). The effect on profits would be approximately symmetrical for changes in assumptions that are directionally
opposite to those explained above.
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(e) and (g), 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
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in interest rates is as follows.
Carrying value of debt securities and
derivatives
Policyholder liabilities
Related deferred tax effects
Net sensitivity of profit after tax and
shareholders’ equity
2010 £m
2009 £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%
6,547
(5,977)
(154)
2,938
(2,723)
(58)
(2,434)
2,109
88
(4,481)
3,929
149
5,372
(5,125)
(69)
2,422
(2,304)
(33)
(2,020)
1,905
32
(3,731)
3,498
65
416
157
(237)
(403)
178
85
(83)
(168)
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.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
D: LIFE ASSURANCE BUSINESSES
CONTINUED
D2: UK INSURANCE OPERATIONS > CONTINUED
Pre-tax profit
Related deferred tax effects
Net sensitivity of profit after tax and shareholders’ equity
2010 £m
2009 £m
A decrease
of 20%
A decrease
of 10%
A decrease
of 20%
A decrease
of 10%
(302)
82
(220)
(151)
41
(110)
(292)
82
(210)
(146)
41
(105)
A 10 or 20 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.
In the equity risk sensitivity analysis given above, the Group has considered the impact of an instantaneous 20 per cent fall in equity
markets. If equity markets were to fall by more than 20 per cent, the Group believes that this would not be an instantaneous fall but
rather this would be expected to occur over a period of time during which the Group would be able to put in place mitigating
management actions.
k 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(g) 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 2010 and 2009 for that purpose for insurance contracts, as defined by IFRS, i.e. those
containing significant insurance risk, and investment contracts, which do not.
With-profits business
Insurance
contracts
Investment
contracts
2010 £m
Annuity business
(Insurance contracts)
Other
Total
PAL
PRIL
Total
Insurance
contracts
Investment
contracts
Total
TOTAL
Policyholder liabilities
43,691 25,613 69,304 12,282
16,442
28,724
11,737 15,765 27,502 125,530
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
46
25
13
7
4
5
31
25
19
14
8
3
40
25
16
10
6
3
32
25
18
12
7
6
2010 %
29
23
17
13
8
10
30
24
18
12
8
8
35
26
18
10
6
5
29
21
20
11
8
11
32
23
19
11
7
8
36
24
17
11
7
5
Prudential plc Annual Report 2010
233
With-profits business
Insurance
contracts
Investment
contracts
2009 £m
Annuity business
(Insurance contracts)
Other
Total
PAL
PRIL
Total
Insurance
contracts
Investment
contracts
Total
TOTAL
Policyholder liabilities
40,780
24,780
65,560
11,969
14,292
26,261
10,614
13,794
24,408 116,229
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
50
26
13
6
3
2
29
25
19
14
9
4
41
26
15
9
6
3
32
25
18
11
7
7
2009 %
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
38
25
16
10
6
5
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
Investment contracts under Other comprise certain unit-linked and similar contracts accounted for under IAS 39 and IAS 18.
assumption 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.
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234
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
D: LIFE ASSURANCE BUSINESSES
CONTINUED
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 before shareholder tax
Tax
Profit for the year
Profit 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 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
Total comprehensive income for the year
Dividends, interest payments to central companies and other movements
Net increase in equity
Shareholders’ equity at beginning of year
Shareholders’ equity at end of year
2010 £m
2009(1) £m
833
(378)
455
(117)
338
618
(132)
486
102
588
2010 £m
2009 £m
338
85
1,170
51
1,221
(469)
(247)
563
901
(97)
804
3,011
3,815
588
(231)
2,249
420
2,669
(1,069)
(557)
812
1,400
(87)
1,313
1,698
3,011
Note
(i) The Group has amended the presentation of operating profit for its US insurance operations to remove the net equity hedge accounting effect
(incorporating related amortisation of deferred acquisition costs) and include it in short-term fluctuations. The 2009 comparatives have been
amended accordingly. Note A4(d)(ii) explains the effect of the change.
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 £1,221 million (2009: £2,669 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 2010, Jackson recorded £124 million (2009: £630 million) of impairment losses arising from:
Residential mortgage-backed securities
Public fixed income
Other
Prudential plc Annual Report 2010
2010 £m
2009 £m
71
1
52
124
509
91
30
630
235
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, investments in
structured securities 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.
In 2010, there was a movement in the statement of financial position value for debt securities classified as available-for-sale from a
net unrealised gain of £4 million to a net unrealised gain of £1,210 million (2009: net unrealised loss of £2,897 million to a net unrealised
gain of £4 million).This increase reflects the effects of tightening credit spreads in the US bond market and lower interest rates. During
2010, the gross unrealised gain in the statement of financial position increased from £970 million at 31 December 2009 to £1,580 million
at 31 December 2010 while the gross unrealised loss decreased from £966 million at 31 December 2009 to £370 million at 31 December
2010. Details of the securities in an unrealised loss position are shown in D3(d) below.
These features are included in the table shown below of the movements in the values of available-for-sale securities:
2010
2009
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
634
(38)
587
23
1,221
(15)
4,372
(370)
4,002
20,743
1,580
22,323
25,115
1,210
26,325
1,221
(15)
1,206
£m
8,220
(966)
7,254
14,444
970
15,414
22,664
4
22,668
2,669
232
2,901
* Book value represents cost/amortised cost of the debt securities.
† Debt securities for US operations as included in the statement of financial position of £26,366 million (2009: £22,831 million) comprise £26,325 million
(2009: £22,668 million) in respect of securities classified as ‘available-for-sale’ and £41 million (2009: £163 million) for securities of consolidated
investment funds classified as fair value through profit and loss.
‡ Translated at the average rate of US$1.55: £1.
Included within the movement in gross unrealised losses for the debt securities of Jackson of £634 million (2009: £1,925 million) as
shown above was a net increase in value of £84 million (2009: £72 million decrease) relating to the sub-prime and Alt-A securities as
referred to in section B6.
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236
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
D: LIFE ASSURANCE BUSINESSES
CONTINUED
D3: US INSURANCE OPERATIONS > CONTINUED
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 trustsnote v
Debt securitiesnote D3d
Other investmentsnote iii
Deposits
Total investmentsnote G
Properties held for sale
Cash and cash equivalents
TOTAL ASSETS
EQUITY AND LIABILITIES
Equity
Shareholders’ equity
Total equity
Liabilities
Policyholder liabilities:note iv
Variable annuity
separate account
assets and
liabilities
note i
£m
Fixed
annuity, GIC
and other
business
note i
£m
3,543
3,543
1,391
1,241
–
–
–
–
–
US insurance operations
2010
Total
£m
3,543
3,543
1,391
1,241
2009
Total
£m
3,092
3,092
1,944
1,404
26
26
33
–
31,203
–
–
–
4,201
298
26,366
1,199
212
4,201
31,501
26,366
1,199
212
31,203
32,302
63,505
–
–
3
232
3
232
4,319
20,984
22,831
955
454
49,576
3
340
31,203
38,712
69,915
56,359
–
–
3,815
3,815
3,815
3,815
3,011
3,011
Contract liabilities (including amounts in respect of contracts
classified as investment contracts under IFRS 4)
31,203
29,320
60,523
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
31,203
29,320
60,523
–
–
–
–
159
90
1,776
3,552
159
90
1,776
3,552
31,203
34,897
66,100
31,203
38,712
69,915
48,311
48,311
154
203
1,858
2,822
53,348
56,359
Prudential plc Annual Report 2010
237
Notes
i Assets and liabilities attaching to variable annuity business that are not held in the separate account are shown within other business.
ii Loans
The loans of the Group’s US insurance operations of £4,201 million (2009: £4,319 million) comprise mortgage loans of £3,641 million
(2009: £3,774 million), policy loans of £548 million (2009: £530 million) and other loans of £12 million (2009: £15 million). 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
2010 %
2009 %
31
18
19
21
10
1
100
32
18
20
19
10
1
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 £6.6 million (2009: £6.3 million).
The portfolio has a current estimated average loan to value of 73 per cent (2009: 74 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†
2010 £m
2009 £m
645
554
1,199
519
436
955
* 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 £799 million (2009: £461
million), which is also included in the statement of financial position, the derivative position for US operations is a net liability of £154 million
(2009: net asset of £58 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 161 (2009: 159) 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 2010
The policyholder liabilities, net of reinsurers’ share of £694 million (2009: £667 million), reflect balances in respect of the following:
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Policy reserves and liabilities on non-linked business:
Reserves for future policyholder benefits and claims payable
Deposits on investment contracts (as defined under IFRS ‘grandfathered’ US GAAP)
Guaranteed investment contracts
Unit-linked (variable annuity) business
2010 £m
2009 £m
1,567
25,494
1,565
31,203
59,829
1,645
23,706
1,654
20,639
47,644
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 £1,411 million (2009: £1,444 million) and are
included in ‘other non-insurance liabilities’ in the statement of financial position above.
Equity securities and portfolio holdings in unit trusts include investments in mutual funds, the majority of which are equity based.
v
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
D: LIFE ASSURANCE BUSINESSES
CONTINUED
D3: US INSURANCE OPERATIONS > CONTINUED
b Reconciliation of movement in investments
A reconciliation of the total investments of US insurance operations from the beginning of the year to the end of the year is as follows:
AT 1 JANUARY 2009
Total investments (including derivative assets)
Less: Derivative liabilities
Directly held investments, net of derivative liabilities
Net cash inflow (outflow) from operating activities
Realised losses in the year
Unrealised gains and losses and exchange movements in the year
Movement in the year of directly held investments, net of derivative liabilities
AT 31 DECEMBER 2009/1 JANUARY 2010
Total investments (including derivative assets)
Less: Derivative liabilitiesnote G3
Directly held investments, net of derivative liabilities
Net cash inflow from operating activities
Realised gains in the year
Unrealised gains and losses and exchange movements in the year
Movement in the year of directly held investments, net of derivative liabilities
AT 31 DECEMBER 2010
Total investments (including derivative assets)
Less: Derivative liabilitiesnote G3
Directly held investments, net of derivative liabilities
Variable
annuity
separate
account
assets and
liabilities
£m
Fixed annuity,
GIC and other
business
£m
US insurance
operations
Total
£m
14,538
–
14,538
4,050
–
2,051
6,101
20,639
–
20,639
6,441
–
4,123
10,564
31,203
–
31,203
31,633
(863)
46,171
(863)
30,770
45,308
(1,295)
(529)
(470)
(2,294)
2,755
(529)
1,581
3,807
28,937
(461)
49,576
(461)
28,476
49,115
865
21
2,141
3,027
7,306
21
6,264
13,591
32,302
(799)
63,505
(799)
31,503
62,706
Prudential plc Annual Report 2010
239
c 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 2009
Premiums
Surrenders
Maturities/Deaths
Net flowsnote b
Transfers from general to separate account
Investment-related items and other movementsnote c
Foreign exchange translation differencesnote a
AT 31 DECEMBER 2009/1 JANUARY 2010
Premiums
Surrenders
Maturities/Deaths
Net flowsnote b
Transfers from general to separate account
Investment-related items and other movementsnote c
Foreign exchange translation differencesnote a
AT 31 DECEMBER 2010
Average policyholder liabilities
2010
2009
Variable
annuity
separate
account
liabilities
£m
14,538
4,667
(882)
(199)
3,586
984
3,368
(1,837)
20,639
7,420
(1,403)
(259)
5,758
1,411
2,875
520
Fixed annuity,
GIC and other
business
£m
US insurance
operations
Total
£m
30,823
4,510
(2,373)
(534)
1,603
(984)
(382)
(3,388)
27,672
4,315
(2,195)
(510)
1,610
(1,411)
589
860
45,361
9,177
(3,255)
(733)
5,189
–
2,986
(5,225)
48,311
11,735
(3,598)
(769)
7,368
-
3,464
1,380
31,203
29,320
60,523
25,921
17,589
28,496
29,248
54,417
46,837
Notes
a Movements in the year have been translated at an average rate of 1.55 (2009: 1.57). The closing balance has been translated at closing rate of
1.57 (2009: 1.61). Differences upon retranslation are included in foreign exchange translation differences of £1,380 million (2009: £5,225 million).
b Net flows for the year were £7,368 million compared with £5,189 million in 2009, 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 of £2,875 million in 2010 and
£3,368 million in 2009 represent increases in the US equity market during the respective periods. Fixed annuity, GIC and other business
investment and other movements primarily reflects the movement in the valuation of the product guarantees and interest credited to
policyholder accounts. In 2010, interest credited exceeded the small reduction in the guarantee valuation to give an overall increase in
liabilities. In 2009, there was a more significant fall in the valuation of guarantees.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
D: LIFE ASSURANCE BUSINESSES
CONTINUED
D3: US INSURANCE OPERATIONS > CONTINUED
d Information on credit risks of debt securities
Summary
Corporate and government security and commercial loans:
Government
Publicly traded and SEC Rule 144A securities
Non-SEC Rule 144A securities
Total
Residential mortgage-backed securities
Commercial mortgage-backed securities
Other debt securities
Total debt securities
2010 £m
2009 £m
Carrying
value
Carrying
value
2,440
14,747
3,044
20,231
2,784
2,375
976
26,366
379
12,959
3,117
16,455
3,316
2,104
956
22,831
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.
The following table shows the quality of the publicly traded and non-SEC Rule 144A debt securities by NAIC classifications:
NAIC designation:
1
2
3
4
5
6
2010
2009
Carrying value
Carrying value
£m
% of total
£m
% of total
5,338
8,550
644
201
11
3
36
58
5
1
–
–
4,688
7,508
598
122
40
3
36
58
5
1
–
–
14,747
100
12,959
100
The following table shows the quality of the non-SEC Rule 144A private placement portfolio by NAIC classifications:
NAIC designation:
1
2
3
4
5
6
Prudential plc Annual Report 2010
2010
2009
Carrying value
Carrying value
£m
% of total
£m
% of total
1,125
1,772
114
18
13
2
3,044
37
58
4
1
–
–
100
1,084
1,792
162
54
20
5
3,117
35
57
5
2
1
–
100
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Included within other debt securities of £976 million (2009: £956 million) in the summary shown above are £723 million
(2009: £652 million) of asset-backed securities held directly by Jackson, of which £527 million (2009: £447 million) were NAIC
designation 1 and £135 million (2009: £152 million) NAIC designation 2. In addition, other debt securities includes £211 million
(2009: £172 million) in respect of securities held by the Piedmont trust entity and £42 million (2009: £132 million) from the
consolidation of investment funds managed by PPM America.
In addition to the ratings disclosed above, the following table summarises by rating the debt securities, as at 31 December 2010
using Standard and Poor’s (S&P), Moody’s, Fitch and implicit ratings of mortgage-backed securities (MBS) 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 MBS based on NAIC valuations (see below)
NAIC 1
NAIC 2
NAIC 3-6
Fitch
Other*
Total debt securities
2010 £m
2009 £m
Carrying
value
Carrying
value
4,187
801
5,156
8,202
866
3,287
846
5,192
7,659
895
19,212
17,879
34
32
36
73
135
310
3,083
181
232
3,496
176
3,172
273
43
32
64
57
469
747
105
473
1,325
281
2,877
26,366
22,831
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* The amounts within Other which are not rated by S&P, Moody’s, Fitch nor are MBS securities using the revised regulatory ratings have the following
NAIC classifications:
NAIC 1
NAIC 2
NAIC 3-6
2010 £m
2009 £m
1,193
1,849
130
3,172
1,102
1,623
152
2,877
In the table above, with the exception of some residential mortgage-backed securities and commercial mortgage-backed securities for
2010, and for residential mortgage-backed securities for 2009, commercial mortgage-backed securities 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 NAIC in the US revised the regulatory ratings process for more than 20,000 residential
mortgage-backed securities. In addition, in 2010, the NAIC expanded the revised process to include commercial mortgage-backed
securities. The table above includes these securities, where held by Jackson, using the regulatory rating levels established by external
third parties (PIMCO for residential mortgage-backed securities and BlackRock Solutions for commercial mortgage-backed securities).
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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 do not have an externally quoted price based on regular trades
or are quoted in markets that are no longer active as a result of market conditions, 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 2010, 0.3 per cent of Jackson’s debt securities were classified as level 3 (2009: three
per cent) comprising fair values where there are significant inputs which are not based on observable market data.
iii Asset-backed securities funds exposures
Included within the debt securities of Jackson at 31 December 2010 are exposures to asset-backed securities as follows:
RMBS Sub-prime (31 Dec 2010: 40% AAA, 11% AA)†
Alt-A (31 Dec 2010: 15% AAA, 6% AA)
Prime including agency (31 Dec 2010: 79% AAA, 2% AA)
CMBS (31 Dec 2010: 36% AAA, 15% AA)†
CDO funds (31 Dec 2010: 4% AAA, 4% AA)*, including £1 million exposure to sub-prime
ABS (31 Dec 2010: 26% AAA, 20% AA), including £37 million exposure to sub-prime
2010 £m
2009 £m
224
415
2,145
2,375
162
814
6,135
194
443
2,679
2,104
79
877
6,376
* Including Group’s economic interest in Piedmont and other consolidated CDO funds.
† MBS 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
The following tables show some key attributes of those securities that are in an unrealised loss position at 31 December 2010.
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 £370 million (2009: £966 million). This
relates to assets with fair market value and book value of £4,002 million (2009: £7,254 million) and £4,372 million (2009: £8,220 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% note d
Total
2010 £m
2009 £m
Fair value
Unrealised
loss
Fair value
Unrealised
loss
3,390
273
339
4,002
(102)
(44)
(224)
(370)
5,127
1,201
926
7,254
(169)
(203)
(594)
(966)
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
Prudential plc Annual Report 2010
2010 £m
2009 £m
Fair value
Unrealised
loss
Fair value
Unrealised
loss
98
55
56
209
(6)
(9)
(25)
(40)
102
160
159
421
(3)
(28)
(88)
(119)
243
2010 £m
2009 £m
Unrealised
loss
Unrealised
loss
–
(6)
(47)
(49)
(268)
(370)
–
(29)
(127)
(92)
(718)
(966)
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
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
2010 £m
2009 £m
Non-
investment
grade
Investment
grade
(3)
(2)
(13)
(27)
(58)
(103)
(67)
–
(20)
(55)
(125)
(267)
Non-
investment
grade
Investment
grade
(7)
(25)
(59)
(125)
(35)
(251)
(51)
(59)
(234)
(199)
(172)
(715)
Total
(70)
(2)
(33)
(82)
(183)
(370)
Total
(58)
(84)
(293)
(324)
(207)
(966)
At 31 December 2010, the gross unrealised losses in the statement of financial position for the sub-prime and Alt-A securities in an
unrealised loss position were £40 million (2009: £119 million), as shown above in note (a). Of these losses £1 million (2009: £21 million)
relate to securities that have been in an unrealised loss position for less than one year and £39 million (2009: £98 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, £224 million of the £370 million of gross unrealised losses at 31 December 2010 (2009: £594 million of
the £966 million of gross unrealised losses) related to securities whose fair values were below 80 per cent of the book value. The analysis
of the £224 million, (2009: £594 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:
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Category analysis
Residential mortgage-backed securities
Prime (including agency)
Alt-A
Sub-prime
Commercial mortgage-backed securities
Other asset-backed securities
Total structured securities
Corporates
Total
2010 £m
2009 £m
Fair
value
Unrealised
loss
Fair
value
Unrealised
loss
88
15
41
144
8
123
275
64
339
(39)
(4)
(20)
(63)
(29)
(105)
(197)
(27)
(224)
322
77
82
481
87
183
751
175
926
(153)
(33)
(55)
(241)
(86)
(188)
(515)
(79)
(594)
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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
2010 £m
2009 £m
Fair
value
Unrealised
loss
Fair
value
Unrealised
loss
–
–
339
339
(1)
–
(223)
(224)
153
5
768
926
(45)
(3)
(546)
(594)
e 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 2010, interest-sensitive fixed annuities accounted for 19 per cent (2009: 24 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 (2009: 1.5 per cent to 5.5 per cent) depending on the jurisdiction of issue and the
date of issue, with 78 per cent (2009: 82 per cent) of the fund at three per cent or less. The average guarantee rate is 3.1 per cent
(2009: 3.1 per cent).
Approximately 45 per cent (2009: 61 per cent) of the interest-sensitive fixed annuities Jackson wrote in 2010 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 9 per cent (2009: 10 per cent) of Jackson’s policy and contract liabilities at 31 December 2010.
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 per cent.
Jackson hedges the equity return risk on fixed indexed products using futures and options linked to the relevant index as well as
through offsetting equity exposure in the VA product. 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 2010, immediate annuities accounted for two per cent (2009: 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 2010, VAs accounted for 58 per cent (2009: 49 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 2010,
approximately 12 per cent (2009: approximately 14 per cent) of VA funds were in fixed accounts.
Prudential plc Annual Report 2010
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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(f). The GMIB is no longer offered, with existing coverage being reinsured.
iii Life insurance
Jackson’s life insurance products accounted for seven per cent (2009: nine per cent) of Jackson’s policy and contract liabilities at
31 December 2010. 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 2010,
institutional products accounted for five per cent of policy and contract liabilities (2009: six 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 (2009: 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.
f 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 91 per cent
(2009: 90 per cent) of its general account investments support interest-sensitive and fixed indexed annuities, life business and surplus
and nine per cent (2009: ten 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.
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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.
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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, are included within short-term fluctuations in investment returns and excluded
from operating results based on longer-term investment returns (defined as segment profit). The types of derivatives used by Jackson
and their purpose are as follows:
• 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.
Put-swaptions hedge against significant movements in interest rates;
• equity index futures contracts and equity index options (including various call and put options and put spreads) 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 short-term 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 if a defined
default event occurs in exchange for periodic payments made by Jackson for the life of the agreement.
Note D3(j) parts (iii) and (iv) show the sensitivities of Jackson’s results through its exposure to equity risk and interest rate risk.
g 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.
Prudential plc Annual Report 2010
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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 US GAAP, the grandfathered basis for IFRS, which specifies how certain guarantee features should be accounted
for the GMDB and certain ‘for life’ GMWB liabilities are not fair valued but are instead determined each period end by estimating the
expected value of 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 2010, these liabilities were valued using a series of deterministic investment
performance scenarios, a mean investment return of 8.4 per cent (2009: 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 2010 and 2009 are consistent with those used for
calculating the GMDB and ‘for life’ GMWB liabilities. The change in these reserves, along with claim payments and associated fees
included in reserves are included along with the hedge results in short-term fluctuations, resulting in removal of the market impact from
the operating profit based on longer-term investment returns.
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.
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.
GMWB ‘not for life’ 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 short-term fluctuations.
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 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.
Deferred acquisition costs
Under IFRS 4, the Group applies grandfathered US GAAP for measuring the insurance assets and liabilities of Jackson. In the case of
Jackson term business, acquisition costs are deferred and amortised in line with expected premiums. For annuity and interest-sensitive
life business, acquisition costs are deferred and amortised in line with a combination of historical and future expected gross profits on
the relevant contracts. For fixed and indexed annuity and interest-sensitive life business, the key assumption is the long-term spread
between the earned rate on investments and the rate credited to policyholders, which is based on an annual spread analysis. Expected
gross profits also 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 mortality, lapse, and expense experience is performed using internally developed experience studies.
As with fixed and indexed annuity and interest-sensitive life business, acquisition costs for Jackson’s variable annuity products are
amortised in line with the emergence of profits. The measurement of the amortisation in part reflects current period fees (including those
for guaranteed minimum death, income, or withdrawal benefits) earned on assets covering liabilities to policyholders, and the historical
and expected level of future gross profits which depends on the assumed level of future fees, as well as components related to mortality,
lapse, and expense.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
D: LIFE ASSURANCE BUSINESSES
CONTINUED
D3: US INSURANCE OPERATIONS > CONTINUED
Under US GAAP (as grandfathered under IFRS 4) the projected gross profits reflect an assumed long-term level of equity return which,
for Jackson, is 8.4 per cent after deduction of net external fund management fees. This is applied to the period end level of separate
account equity assets after application of a mean reversion technique that removes a portion of the effect of levels of short-term
variability in current market returns. Under the mean reversion technique applied by Jackson, the projected level of return for each of the
next five years is adjusted from period to period so that in combination with the actual rates of return for the preceding two years and the
current year, the 8.4 per cent annual return is realized on average over the entire eight year period. Projected returns after the mean
reversion period revert back to the 8.4 per cent target. A capping feature, which currently applies due to the very sharp market falls in
2008, is that the projected rates of return for the next five years can be no more than 15 per cent (gross of asset management fee)
per annum. If Jackson had not applied the mean reversion methodology and had instead applied a constant 8.4 per cent annual return
from today’s asset values, the Jackson DAC balance of £3,543 million would fall approximately £80 million to £3,463 million at
31 December 2010.
The amortisation charge to the income statement is reflected in operating profit and short-term fluctuations in investment returns.
The amortisation charge to the operating profit in a reporting period will incorporate an element of acceleration or deceleration that
reflects the variance between the actual level of return attained and the assumed level in the mean reversion calculation. In 2010,
the element of DAC amortisation charge included in operating profit includes £11 million of accelerated amortisation. This amount
reflects actual separate account return shortfalls in the periods compared with the assumed level of 15 per cent for the year. For 2009,
reflecting the excess of actual separate account returns over the 15 per cent assumed level, the operating profit incorporates a credit
for decelerated amortisation of £39 million.
For 2010, the separate account return (gross of asset management fees) was approximately 13 per cent. In 2011, while the capping
feature is in effect, each one per cent divergence of the actual separate account return below or above the assumed return of 15 per cent
is estimated to give rise to accelerated or decelerated amortisation, respectively, of approximately £6 million (£3 million if the projected
rate falls below the 15 per cent cap).
In the absence of significant market declines between now and the end of 2011, Jackson would expect to see higher amortisation
levels than normal in 2011. This would essentially represent a reversal of the mean reversion benefits to date, as at that point highly
negative returns from 2008 will no longer be included in the mean reverting return calculation.
Statement of changes in equity – ‘shadow DAC adjustments’
Consequent upon the positive unrealised valuation movement in 2010 of £1,221 million (2009: positive £2,669 million) there is a debit
of £496 million (2009: £1,069 million debit) 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 reflected in the statement of financial position had been sold, crystallising the unrealised gains or losses, and the proceeds
reinvested at the yields currently available in the market. At 31 December 2010 the cumulative ‘shadow DAC balance’ was negative
£520 million (2009: negative £10 million).
h 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 2010, the premiums for such ceded business amounted to £83 million (2009: £82 million). Net
commissions received on ceded business and claims incurred ceded to external reinsurers totalled £12 million and £72 million
respectively, during 2010 (2009: £12 million and £66 million respectively). There were no deferred gains or losses on reinsurance
contracts in either 2010 or 2009. The reinsurance asset for business ceded outside the Group was £694 million (2009: £667 million).
i Effect of changes in assumptions used to measure insurance assets and liabilities
2010
There are no changes of assumptions that had a material impact on the 2010 results of US insurance operations.
Separately, in 2010, the Group amended its presentation of operating profit for its US insurance operations to exclude the net
equity hedge accounting effect of negative £367 million (2009: negative £159 million) relating to its variable and fixed index annuity
business and reclassified it as a short-term fluctuation within the Group’s supplementary analysis of profit. This is explained further
in note A4(d)(ii). This change had no effect on the measurement of insurance assets and liabilities and therefore on total profit or
shareholders’ equity.
2009
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) with lifetime benefits
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.
Prudential plc Annual Report 2010
249
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. 2010 has been prepared on a
consistent basis to 2009.
j 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 2010, the rates were US$1.55 (2009: US$1.57) and US$1.57
(2009: US$1.61) 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
2010 £m
2009 £m
2010 £m
2009 £m
(41)
(31)
(347)
(44)
(54)
(274)
50
37
424
54
65
335
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.
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;
• spread returns for the difference between investment returns and rates credited to policyholders; and
• amortisation of deferred acquisition costs.
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For term business, acquisition costs are deferred and amortised in line with expected premiums. For annuity business, acquisition costs
are deferred and amortised in line with expected gross profits on the relevant contracts. For interest-sensitive business, the key
assumption is the expected long-term spread between the earned rate and the rate credited to policyholders, which is based on an
annual spread analysis. In addition, expected gross profits depend on mortality assumptions, assumed unit costs and terminations other
than deaths (including the related charges) all of which are based on a combination of actual experience of Jackson, industry experience
and future expectations.
A detailed analysis of actual experience is measured by internally developed mortality and persistency studies. For variable annuity
business, the key assumption is the expected long-term level of equity market returns, which for 2010 and 2009 was 8.4 per cent per
annum implemented using a mean reversion methodology. These returns affect the level of future expected profits through their effects
on the fee income and the required level of provision for guaranteed minimum benefits. The mean reversion methodology dampens the
impact of equity market movements during a particular year, but does not fully eliminate the effects of movements in the equity markets.
In addition, the mean reversion methodology includes both a cap and a floor that determine the maximum impact that the
methodology may have. The projected rates of return are capped at no more than 15 per cent for each of the next five years. Further
details are explained in note D3(g) above.
Except to the extent of mortality experience, which primarily affects profits through variations in claim payments and GMDB
reserves, the profits of Jackson are relatively insensitive to changes in insurance risk.
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250
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
D: LIFE ASSURANCE BUSINESSES
CONTINUED
D3: US INSURANCE OPERATIONS > CONTINUED
iii Exposure to equity risk
Variable annuity contracts related
Jackson issues variable annuity contracts through its separate accounts for which investment income and investment gains and losses
accrue to, and investment risk is borne by, the contract holder (traditional variable annuities). It also issues variable annuity and life
contracts through separate accounts where it contractually guarantees to the contract holder (variable contracts with guarantees) either
a) return of no less than 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 (GMDB),
annuitisation (GMIB), at specified dates during the accumulation period (GMWB) or at the end of a specified period (GMAB).
At 31 December 2010 and 2009, Jackson had variable annuity contracts with guarantees, for which the net amount at risk (‘NAR’)
is generally the amount of guaranteed benefit in excess of current account value, as follows:
31 December 2010
Return of net deposits plus a minimum return
GMDB
GMWB – Premium only
GMWB – For life
GMAB – Premium only
Highest specified anniversary account value minus withdrawals
post-anniversary
GMDB
GMWB – Highest anniversary only
GMWB – For life
Combination net deposits plus minimum return, highest
specified anniversary account value minus withdrawals
post-anniversary
GMDB
GMIB
GMWB – For life
31 December 2009
Return of net deposits plus a minimum return
GMDB
GMWB – Premium only
GMWB – For life
GMAB – Premium only
Highest specified anniversary account value minus withdrawals
post-anniversary
GMDB
GMWB – Highest anniversary only
GMWB – For life
Combination net deposits plus minimum return, highest
specified anniversary account value minus withdrawals
post-anniversary
GMDB
GMIB
GMWB – For life
Minimum
return
Account
value
£m
Net amount
at risk
£m
Weighted
average
attained age
Period until
expected
annuitisation
0-6%
0%
0-5%*
0%
25,540
2,742
1,996
48
3,742
2,010
852
2,106 64.0 years
149
415†
1
466 63.3 years
343
196†
0-6%
0-6%
0-8%*
1,768
1,933
15,025
311 65.7 years
418
672†
5.1 years
Minimum
return
Account
value
£m
Net amount
at risk
£m
Weighted
average
attained age
Period until
expected
annuitisation
0-6%
0%
0-5%*
0%
16,915
2,505
1,240
27
2,834
277
471†
2
63.8 years
2,933
1,694
811
1,307
1,815
6,934
691
496
258†
384
488
568†
0-6%
0-6%
0-7%*
62.8 years
65.1 years
5.9 years
* Ranges shown based on simple interest. The upper limits of five per cent, seven per cent and eight per cent simple interest are approximately equal to
4.1 per cent, 5.5 per cent and six per cent respectively, on a compound interest basis over a typical 10-year bonus period.
† The NAR for GMWB – ‘For life’ has been estimated as the present value of future expected benefit payments remaining after the amount of the ‘not for
life’ guaranteed benefit is zero.
Prudential plc Annual Report 2010
251
2010 £m
2009 £m
23,841
3,417
3,345
451
31,054
15,477
2,340
2,186
522
20,525
Account balances of contracts with guarantees were invested in variable separate accounts as follows:
Mutual fund type
Equity
Bond
Balanced
Money market
Total
As noted in note D3(f), 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 as illustrated above. 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 2010, 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 £100 million, excluding the impact
on future separate account fees (2009: £60 million). After related deferred tax there would have been an estimated increase in
shareholders’ equity at 31 December 2010 of up to £60 million (2009: £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 £170 million (2009: £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 2010 of up to £110 million (2009: £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.
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.
Other exposure to equity risk
In addition to the above, Jackson is also exposed to equity risk from its holding of equity securities, partnerships in investment pools and
other financial derivatives.
A range of reasonably possible movements in the value of equity securities, partnerships in investment pools and other financial
derivatives have been applied to Jackson’s holdings at 31 December 2010 and 31 December 2009. The table below shows the sensitivity
to a 10 and 20 per cent fall in value and the impact that this would have on pre-tax profit, net of related changes in amortisation of DAC,
profit after tax and shareholders’ equity.
Pre-tax profit, net of related changes in amortisation of DAC
Related deferred tax effects
Net sensitivity of profit after tax and shareholders’ equity
2010 £m
2009 £m
A decrease
of 20%
A decrease
of 10%
A decrease
of 20%
A decrease
of 10%
(143)
50
(93)
(72)
25
(47)
(117)
41
(76)
(58)
20
(38)
A 10 or 20 per cent increase in their value is estimated to have an approximately equal and opposite effect on profit and shareholders’
equity to the sensitivities shown above.
In the equity risk sensitivity analysis given above, the Group has considered the impact of an instantaneous 20 per cent fall in equity
markets. If equity markets were to fall by more than 20 per cent, the Group believes that this would not be an instantaneous fall but
rather this would be expected to occur over a period of time during which the Group would be able to put in place mitigating
management actions.
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252
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
D: LIFE ASSURANCE BUSINESSES
CONTINUED
D3: US INSURANCE OPERATIONS > CONTINUED
iv Exposure to interest rate risk
Notwithstanding the market risk exposure described in note D3(f), 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(e) and D3(g). The GMWB
features attaching to variable annuity business (other than ‘for-life’) 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, 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 2010 and
2009 is as follows:
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
2010 £m
2009 £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
842
(547)
47
363
(243)
23
(277)
219
(34)
(529)
416
(63)
(319)
(418)
364
(148)
(185)
162
159
170
(156)
370
334
(328)
579
(237)
342
(120)
222
245
(102)
143
(50)
(181)
89
(92)
32
(345)
169
(176)
62
93
(60)
(114)
(144)
(229)
(373)
131
(242)
(62)
(109)
(171)
60
(111)
56
117
173
(60)
113
109
267
376
(131)
245
2,663
(1,174)
(521)
968
1,190
1,454
(641)
(285)
(1,454)
641
285
(2,663)
1,174
521
528
621
(528)
(968)
(588)
(1,082)
2,183
(764)
(497)
922
680
1,179
(413)
(268)
(1,179)
413
268
(2,183)
764
497
498
387
(498)
(385)
(922)
(677)
Prudential plc Annual Report 2010
253
k 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 2010 and 2009:
2010 £m
2009 £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
29,320
31,203
60,523
27,672
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
%
50
27
11
5
3
4
%
50
29
12
6
2
1
%
50
28
12
5
3
2
%
52
27
10
5
3
3
Variable
annuity
20,639
Total
48,311
%
50
28
12
6
2
2
%
51
28
11
5
2
3
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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FINANCIAL STATEMENTS > 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:
Goodwill
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 assets
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 d
Other investments
Deposits
Total investmentsnote b
Cash and cash equivalents
TOTAL ASSETS
EQUITY AND LIABILITIES
Equity
Shareholders’ equity
Non-controlling 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
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
Prudential plc Annual Report 2010
Asian insurance operations
With-profits
business
note i
£m
Unit-linked
assets and
liabilities
£m
–
–
–
97
–
205
–
–
874
4,321
6,759
192
6
–
–
–
–
–
94
–
–
–
9,637
3,009
58
251
12,152
12,955
Other
£m
236
939
2010
Total
£m
236
939
1,175
1,175
–
98
512
9
2
466
506
4,340
132
381
5,836
97
98
811
9
2
1,340
14,464
14,108
382
638
30,943
536
337
728
1,601
2009
Total
£m
80
822
902
97
132
880
11
2
1,207
11,182
9,984
258
746
23,390
837
12,990
13,386
8,349
34,725
26,238
–
–
–
–
–
–
2,149
5
2,154
2,149
5
2,154
1,462
1
1,463
10,958
66
12,724
–
11,024
12,724
–
341
1,625
–
25
637
12,990
13,386
12,990
13,386
4,992
–
4,992
189
129
885
6,195
8,349
28,674
66
28,740
189
495
3,147
32,571
34,725
21,858
53
21,911
210
384
2,270
24,775
26,238
255
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 £1,340 million (2009: £1,207 million) comprise mortgage loans of £25 million
(2009: £13 million), policy loans of £528 million (2009: £437 million) and other loans of £787 million (2009: £757 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.
Summary policyholder liabilities (net of reinsurance) and unallocated surplus
At 31 December 2010, the policyholder liabilities (net of reinsurance of £41 million (2009: £18 million)) and unallocated surplus for Asian
operations of £28.7 billion (2009: £21.9 billion) comprised the following:
Singapore
Hong Kong
Malaysia
Indonesia
Korea
Taiwan
Other countries
Total Asian operations
2010 £m
2009 £m
9,731
6,621
2,544
1,475
1,897
968
5,463
6,960
5,762
1,823
968
1,519
545
4,316
28,699
21,893
b Reconciliation of movement in investments
A reconciliation of the total investments of Asian insurance operations from the beginning of the year to the end of the year is as follows:
With-profits
business
£m
Unit-linked
assets and
liabilities
£m
AT 1 JANUARY 2009
Total investments (including derivative assets)
Less: Investments held by consolidated investment funds
Less: Derivative liabilities
Directly held investments, net of derivative liabilities
Net cash inflow from operating activities
Disposal of Taiwan agency business
Realised gains (losses) in the year
Unrealised gains and losses and exchange movements in the year
8,866
(705)
–
8,161
565
–
(183)
671
Movement in the year of directly held investments, net of derivative liabilities
1,053
AT 31 DECEMBER 2009/1 JANUARY 2010
Total investments (including derivative assets)
Less: Investments held by consolidated investment funds
Less: Derivative liabilitiesnote G3
Directly held investments, net of derivative liabilities
Net cash inflow from operating activities
Realised gains in the year
Unrealised gains and losses and exchange movements in the year
Acquisition of UOB Life Assurance Limited
9,547
(270)
(63)
9,214
278
638
993
527
Movement in the year of directly held investments, net of derivative liabilities
2,436
7,330
(153)
–
7,177
1,243
(734)
1
2,048
2,558
9,953
(218)
–
9,735
838
327
1,786
3
2,954
AT 31 DECEMBER 2010
Total investments (including derivative assets)
Less: Investments held by consolidated investment funds
Less: Derivative liabilitiesnote G3
Directly held investments, net of derivative liabilities
12,152
(382)
(120)
12,955
(266)
–
11,650
12,689
Asian
insurance
operations
Total
£m
21,809
(1,101)
(32)
20,676
3,028
(3,261)
(243)
2,326
1,850
23,390
(718)
(146)
22,526
2,167
984
3,301
1,004
7,456
30,943
(739)
(222)
29,982
Other
£m
5,613
(243)
(32)
5,338
1,220
(2,527)
(61)
(393)
(1,761)
3,890
(230)
(83)
3,577
1,051
19
522
474
2,066
5,836
(91)
(102)
5,643
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
D: LIFE ASSURANCE BUSINESSES
CONTINUED
D4: ASIAN INSURANCE OPERATIONS > CONTINUED
c Reconciliation of movement in policyholder liabilities and unallocated surplus of with-profits funds
A reconciliation of the total policyholder liabilities and unallocated surplus of with-profits funds of Asian insurance operations from the
beginning of the year to the end of the year is as follows:
AT 1 JANUARY 2009
Premiums
New businessnote ii
In-force
Surrendersnote iii
Maturities/Deaths
Net flows
Change in reserving basis in Malaysia note iv
Change in other reserving basis
Shareholders’ transfers post-tax
Investment-related items and other movements
Foreign exchange translation differencesnote i
Disposal of Taiwan agency businessnote vi
AT 31 DECEMBER 2009/1 JANUARY 2010
Comprising:
– Policyholder liabilities
– Unallocated surplus of with-profits funds
Premiums
New businessnote ii
In-force
Surrendersnote iii
Maturities/Deaths
Net flows
Change in other reserving basis
Shareholders’ transfers post-tax
Investment-related items and other movementsnote v
Foreign exchange translation differencesnote i
Acquisition of UOB Life Assurance Limitednote vii
AT 31 DECEMBER 2010
Comprising:
– Policyholder liabilities
– Unallocated surplus of with-profits funds
Average policyholder liability balances*
2010
2009
With-profits
business
£m
Unit-linked
assets and
liabilities
£m
8,094
7,220
46
777
823
(361)
(253)
209
–
–
(20)
1,431
(853)
–
8,861
8,808
53
141
897
1,038
(441)
(326)
271
–
(24)
693
719
504
643
1,223
1,866
(666)
(19)
1,181
(9)
–
–
2,661
(612)
(724)
9,717
9,717
–
1,072
1,130
2,202
(1,572)
(40)
590
–
–
1,405
1,009
3
Asian
insurance
operations
Total
£m
21,069
1,206
2,601
3,807
(1,201)
(342)
2,264
(63)
(4)
(20)
4,242
(2,069)
(3,508)
Other
£m
5,755
517
601
1,118
(174)
(70)
874
(54)
(4)
–
150
(604)
(2,784)
3,333
21,911
3,333
–
21,858
53
452
616
1,068
(228)
(132)
708
19
–
118
353
461
1,665
2,643
4,308
(2,241)
(498)
1,569
19
(24)
2,216
2,081
968
11,024
12,724
4,992
28,740
10,958
66
12,724
–
4,992
–
28,674
66
10,135
11,222
8,371
8,107
4,393
3,152
25,750
19,630
*Adjusted for transactions in the period and excluding the unallocated surplus of with-profits funds.
Prudential plc Annual Report 2010
257
Notes
i Movements in the year have been translated at the average exchange rate for the year ended 31 December 2010. The closing balance has been
translated at the closing spot rates as at 31 December 2010. Differences upon retranslation are included in foreign exchange translation
differences of positive £2,081 million in 2010 (2009: negative £2,069 million).
ii The increase in policyholder liabilities due to new business premium for the unit-linked business was predominantly driven by an increase in
sales during the year of individual linked products.
iii Following the recovery of the stock markets in Asia in late 2009 and 2010, policyholders in Asia took the opportunity to capitalise on the
increased value of their unit-linked policies through withdrawals, principally in Indonesia, Malaysia, and India.
The depressed state of the investment markets in late 2008 and 2009 resulted in both the number of, and average value of, withdrawals of
investment related products decreasing.
iv 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.
v The positive investment related items and other movements in 2010 for with-profits (£693 million) and unit-linked business (£1,405 million) are
mainly driven from Asian equity market gains in the period.
vi The disposal of Taiwan agency business reflects the liabilities transferred at the date of disposal.
vii The acquisition of UOB Life Assurance Limited reflects the liabilities acquired at the date of acquisition.
d Information on credit risks of debt securities
The following table summarises the credit quality of the debt securities of the Asian insurance operations as at 31 December 2010 by
rating agency ratings:
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
2010 £m
2009 £m
With-profits
business
Unit-linked
business
Other
business
2,199
744
1,337
729
649
5,658
49
44
55
50
31
229
4
868
6,759
349
100
861
24
465
1,799
10
48
16
10
–
84
33
1,093
3,009
386
1,294
645
160
659
3,144
6
23
59
35
18
141
12
1,043
4,340
Total
2,934
2,138
2,843
913
1,773
10,601
65
115
130
95
49
454
49
3,004
14,108
Total
2,259
1,594
1,496
682
917
6,948
134
349
309
40
15
847
39
2,150
9,984
F
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Of the £1,043 million (2009: £517 million) debt securities for other business which are not rated in the table above, £350 million
(2009: £225 million) are in respect of government bonds and £666 million (2009: £265 million) are in respect of corporate bonds
rated as investment grade by local external ratings agencies, and £5 million (2009: £22 million) structured deposits issued by
banks which are themselves rated but where the specific deposits have not been.
Products and guarantees
e
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.
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258
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
D: LIFE ASSURANCE BUSINESSES
CONTINUED
D4: ASIAN INSURANCE OPERATIONS > CONTINUED
Subject to local market circumstances and regulatory requirements, the guarantee features described in note D2(e) in respect of UK
business broadly apply to similar types of participating contracts written in the Hong Kong branch, Singapore and Malaysia. Participating
products have both guaranteed and non-guaranteed elements.
Non-participating long-term products are the only ones where the insurer is contractually obliged to provide guarantees on all
benefits. Investment-linked products have the lowest level of guarantee, if any.
Product guarantees in Asia can be broadly classified into four main categories, namely premium rate, cash value and interest rate
guarantees, policy renewability and convertibility options.
The risks on death coverage through premium rate guarantees are low due to appropriate product pricing.
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.
• 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 2010 of £408 million and £1,491 million respectively
(2009: £349 million and £1,173 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.
f 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.
g 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, Vietnam and
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.
Prudential plc Annual Report 2010
259
h Reinsurance
The Asian businesses cede only minor amounts of business outside the Group with immaterial effects on reported profit. During 2010,
reinsurance premiums for externally ceded business were £146 million (2009: £119 million) and the reinsurance assets were £41 million
(2009: £18 million) in aggregate.
i Effect of changes in bases, estimates and assumptions used to measure insurance assets and liabilities
2010
In 2010, one-off changes made to reserving assumptions resulted in a release from liabilities of £19 million.
2009
In 2009, the local regulatory basis in Malaysia was 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, but
with an overlay constraint to the method such that negative reserves derived at an individual policyholder level are not included. This
change resulted in a one-off release from liabilities at 1 January 2009 of £63 million. Excluding the change in Malaysia, the 2009 result for
Asian operations was reduced by the effect of a number of individually small assumption changes of, in aggregate £4 million.
j 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 2010, 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:
(Loss) profit before tax attributable to shareholdersnote i
(Loss) profit for the year
Shareholders’ equity, excluding goodwill, attributable to Asian operations
A 10% increase in
exchange rates
A 10% decrease in
exchange rates
2010
£m
(65)
(58)
(193)
2009
£m
(40)
(35)
(129)
2010
£m
80
71
236
2009
£m
49
43
158
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.
iii Other business
a Interest rate risk
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, the results of the Asian business are sensitive to the vagaries
of routine movements in interest rates.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
D: LIFE ASSURANCE BUSINESSES
CONTINUED
D4: ASIAN INSURANCE OPERATIONS > CONTINUED
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 2010,
10 year government bond rates vary from territory to territory and range from 1.1 per cent to 12.25 per cent (2009: 1.3 per cent to
11.45 per cent). Exception to this arises in Japan and Taiwan where reasonably possible interest rate movements have been determined
as 0.5 per cent (2009: Japan and Taiwan 0.5 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
2010 £m
2009 £m
A decrease
of 1%
note i
A decrease
of 1%
note i
110
(41)
69
91
(22)
69
Note
i
One per cent sensitivity has been used in all territories (except Japan and Taiwan (0.5 per cent)) (2009: Japan and Taiwan 0.5 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
segmental analysis of profit before tax.
At 31 December 2010, an increase in the rates of one per cent (Japan and Taiwan (0.5 per cent)) (2009: one per cent except Japan and Taiwan
0.5 per cent) is estimated to have the effect of decreasing pre-tax profit by £112 million (2009: £109 million). After adjusting these results for
deferred tax the reasonable possible effect on shareholders’ equity is a decrease of £82 million (2009: £83 million).
b Equity price risk
The non-linked shareholder business has limited exposure to equity and property investment (£515 million at 31 December 2010).
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 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
2010 and 2009, would be as follows:
Pre-tax profit
Related deferred tax (where applicable)
Net effect on profit and equity
2010 £m
2009 £m
A decrease
of 20%
A decrease
of 10%
A decrease
of 20%
A decrease
of 10%
(103)
10
(93)
(52)
5
(47)
(58)
8
(50)
(29)
4
(25)
A 10 or 20 per cent increase in their value is estimated to have an approximately equal and opposite effect on profit and shareholders’
equity to the sensitivities shown above.
In the equity risk sensitivity analysis given above the Group has considered the impact of an instantaneous 20 per cent fall in equity
markets. If equity markets were to fall by more than 20 per cent, the Group believes that this would not be an instantaneous fall but
rather this would be expected to occur over a period of time during which the Group would be able to put in place mitigating
management actions.
c 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 £21 million (2009: £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.
Prudential plc Annual Report 2010
261
k 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 2010
and 2009:
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
2010 £m
2009 £m
28,674
21,858
%
24
20
15
12
10
19
%
24
21
15
12
9
19
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FINANCIAL STATEMENTS > 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 2010 and 2009.
2010 £m
Other
UK life
assurance
subsidi-
aries and
funds
note ii
Total
PAC
with-
profits
fund
Asian
life
assurance
subsidi-
aries
Total
life
assurance
opera-
tions
M&G
(including
Prudential
Capital)
Jackson
SAIF
WPSF
note i
Parent
company
and share-
holders’
equity of
other
subsidi-
aries and
funds
Group
total
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
716
–
716
1,399
3,815
–
3,815
–
1,913
236
2,149
–
6,444
236
6,680
1,399
254
1,153
1,407
–
(1,532)
77
(1,455)
–
5,166
1,466
6,632
1,399
2,115
3,815
2,149
8,079
1,407
(1,455)
8,031
10,187
10,187
(2,938)
(2,938)
–
–
–
–
66
10,253
–
(2,938)
(13)
–
(13)
–
(116)
–
(3,543)
159
(993)
–
(4,665)
159
–
–
–
1,900
–
1,900
60
60
(1,202)
(1,202)
–
–
–
–
–
–
60
(1,202)
706
706
(292)
576
156
1,146
6,800
6,800
(408)
(908)
(771)
4,713
–
6,800
6,800
1,707
2,907
1,378
12,792
31 December 2010
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
basis 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
Prudential plc Annual Report 2010
263
2010 £m
Other
UK life
assurance
subsidi-
aries and
funds
note ii
Total
PAC
with-
profits
fund
SAIF
WPSF
note i
Asian life
assurance
subsidi-
aries
Total life
assurance
operations
Jackson
9,115
31,395
40,510
376
9,491
25,237
56,632
25,613
66,123
–
–
–
–
–
–
–
–
5,284
45,794
119
5,403
25,732
71,526
5,555
5,555
–
–
–
–
268
2,128
13,067
2,128
13,335
8,882
19,297
31,203
27,438
12,724
4,935
54,937
65,005
31 December 2010
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
–
–
–
15,765
1,882
57
17,704
Total
268
15,195
15,463
43,944
60,523
23,271
143,201
TOTAL POLICYHOLDER
LIABILITIES SHOWN IN
THE CONSOLIDATED
STATEMENT OF FINANCIAL
POSITION
9,759
71,827
81,586
43,944
60,523
28,674
214,727
F
I
N
A
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C
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D: LIFE ASSURANCE BUSINESSES
CONTINUED
D5: CAPITAL POSITION STATEMENT FOR LIFE ASSURANCE BUSINESSES > CONTINUED
2009 £m
Other
UK life
assurance
subsidi-
aries and
funds
note ii
Total
PAC
with-
profits
fund
Asian
life
assurance
subsidi-
aries
Total
life
assurance
opera-
tions
M&G
(including
Prudential
Capital)
Jackson
SAIF
WPSF
note i
Parent
company
and share-
holders’
equity of
other
subsidi-
aries and
funds
Group
total
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
788
–
788
1,114
3,011
–
3,011
–
1,382
80
1,462
–
5,181
80
5,261
1,114
173
1,153
1,326
–
(1,507)
77
(1,430)
–
3,847
1,310
5,157
1,114
1,902
3,011
1,462
6,375
1,326
(1,430)
6,271
9,966
9,966
(3,001)
(3,001)
–
–
–
–
53
10,019
–
(3,001)
(2)
–
(7)
–
(9)
–
(124)
–
(3,092)
154
(786)
–
(4,011)
154
–
–
–
2
–
–
–
–
2,221
–
2,221
65
65
(1,294)
(1,294)
–
–
–
–
–
–
65
(1,294)
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
basis 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
Prudential plc Annual Report 2010
265
2009 £m
Other
UK life
assurance
subsidi-
aries and
funds
note ii
Total
PAC
with-
profits
fund
SAIF
WPSF
note i
Asian life
assurance
subsidi-
aries
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
9,717
3,287
3,942
39,147
60,124
–
–
291
–
–
1,998
12,726
1,998
13,017
6,793
18,113
20,639
25,707
–
291
–
–
14,724
15,015
13,794
38,700
1,965
48,311
46
15,805
16,992
119,018
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S
9,972
67,557
77,529
38,700
48,311
21,858
186,398
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
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.
ii Excluding PAC shareholders’ equity that is included in ‘parent company and shareholders’ equity of other subsidiaries and funds’.
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 bases 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 I3).
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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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
of 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 £6.8 billion (2009: £6.4 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 £1.5 billion at
31 December 2010 (2009: £1.4 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(g)(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.
Prudential plc Annual Report 2010
267
Other UK life assurance subsidiaries and funds
The available capital of £1,707 million (2009: £1,607 million) reflects the excess of regulatory basis assets over liabilities of the
subsidiaries and funds, before deduction of the capital resources requirement of £1,086 million (2009: £952 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 for the most part on a formula-based capital standard that they calculate by applying
factors to various asset, premium and reserve items and separate model based calculations of risk associated primarily with variable
annuity products. The risk-based capital formula takes into account the risk characteristics of a company, including asset risk, insurance
risk, interest rate risk, market risk and business risk.
The available capital of Jackson shown above of £2,907 million (2009: £2,488 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. At 31 December 2010, Jackson had a permitted
practice in effect as granted by the local regulator allowing Jackson to carry certain 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 total effect of this
permitted practice, which expires on 1 October 2011 was to increase statutory surplus by £83 million at 31 December 2010.
iii Asian operations
The available capital shown above of £1,378 million (2009: £1,129 million) represents the excess of local regulatory basis assets over
liabilities before deduction of required capital of £572 million (2009: £438 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.
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 a 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.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
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CONTINUED
D5: CAPITAL POSITION STATEMENT FOR LIFE ASSURANCE BUSINESSES > CONTINUED
Malaysia
In Malaysia, a risk-based capital framework applies since 2009.
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. The risk-based regulatory framework was adopted in 2009 by the
Company. Under the new framework, insurance companies in Korea are expected to maintain a level of free surplus in excess of the
capital requirements with the general target level of solvency margin being in excess of 150 per cent of the risk-based capital.
iv 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 2010, together with market risk sensitivity
disclosure provided to key management, is provided in the business review section of the Group’s 2010 Annual Report and in section C.
c Movements in total available capital
Total available capital for the Group’s life assurance operations has changed during 2010 as follows:
AVAILABLE CAPITAL AT 31 DECEMBER 2009
Changes in assumptions
Changes in management policy
Changes in regulatory requirements
New business and other factors(note v)
AVAILABLE CAPITAL AT 31 DECEMBER 2010
Other
UK life
assurance
subsidiaries
and funds
note iii
1,607
30
–
–
70
1,707
WPSF
note i
6,432
(83)
364
–
87
6,800
2010 £m
Asian life
assurance
subsidiaries
note iv
1,129
(2)
–
–
251
1,378
Jackson
note ii
2,488
–
–
(60)
479
2,907
Group
total
11,656
(55)
364
(60)
887
12,792
Prudential plc Annual Report 2010
269
Detail on the movement for 2009 is as follows:
AVAILABLE CAPITAL AT 31 DECEMBER 2008
Changes in assumptions
Changes in management policy
Changes in regulatory requirements
New business and other factors(note v)
AVAILABLE CAPITAL AT 31 DECEMBER 2009
Notes
i WPSF
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
Group
total
10,583
43
(75)
306
799
11,656
The increase in 2010 reflects primarily the positive effect of changes in management policy in respect of hedge strategy, asset allocation, and
other risk alignment changes.
The increase in 2009 reflected primarily the positive investment returns earned on the opening available capital and £18 million positive
ii
effect of changes in assumptions on a regulatory basis.
Jackson
The increase of £419 million in 2010 reflects an underlying increase of £340 million (applying the 2010 year end exchange rate of $1.57:£1) and
£79 million of exchange translation gains.
The decrease of £270 million in 2009 reflected 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 underlying movement of the available capital of Jackson included 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 increase of £251 million in 2010 reflects an underlying increase of £127 million (applying the relevant 2010 year end exchange rates) and
£124 million of exchange translation gain. The underlying increase of available capital in 2010 included the effects of the acquisition of UOB Life
Assurance Limited in Singapore in February 2010.
The decrease of £281 million in 2009 reflected an underlying decrease of £152 million (applying the relevant 2009 year end exchange rates)
and £129 million of exchange translation loss. The underlying decrease of available capital in 2009 included 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.
v New business and other factors comprise the effect of changes in new business, valuation interest rate, investment return, foreign exchange and
other factors.
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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.
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 statutory net gain from operations for the prior year or 10 per cent of Jackson’s
statutory surplus 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.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
D: LIFE ASSURANCE BUSINESSES
CONTINUED
D5: CAPITAL POSITION STATEMENT FOR LIFE ASSURANCE BUSINESSES > CONTINUED
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.
Prudential plc Annual Report 2010
E: ASSET MANAGEMENT (INCLUDING
US BROKER-DEALER) AND OTHER OPERATIONS
271
E1: INCOME STATEMENT FOR ASSET MANAGEMENT OPERATIONS
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.
a The profit included in the income statement in respect of asset management operations for the year is as follows:
Asset management operations
2010 £m
2009 £m
M&G
US
Asia§
Total
Total
Revenue (excluding revenue of consolidated investment funds
and NPH broker-dealer fees)
Revenue of consolidated investment funds*
NPH broker-dealer fees†
Gross revenue
Charges (excluding revenue of consolidated investment funds
and NPH broker-dealer fees)
Charges of consolidated investment funds*
NPH broker-dealer fees†
Gross 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
943
11
–
954
(617)
(11)
–
(628)
326
284
47
(5)
326
229
–
369
598
(207)
–
(369)
(576)
22
22
–
–
22
251
–
–
251
1,423
11
369
1,803
(179)
(1,003)
–
–
(11)
(369)
1,097
102
317
1,516
(744)
(102)
(317)
(179)
(1,383)
(1,163)
72
420
353
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
72
–
–
72
378
47
(5)
420
297
70
(14)
353
* Revenue in respect of consolidated investment funds. 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 gains (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.
† NPH broker-dealer fees represents commissions received and then paid to the writing broker on sales of investment products.
‡ Short-term fluctuations for M&G are primarily in respect of unrealised value movements on Prudential Capital’s bond portfolio.
§ Included within Asian asset management charges of £179 million are £60 million of commissions (2009: £57 million).
E
:
A
S
S
E
T
M
A
N
A
G
E
M
E
N
T
A
N
D
O
T
H
E
R
O
P
E
R
A
T
I
O
N
S
(
I
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C
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N
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U
S
B
R
O
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E
R
D
E
A
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E
R
-
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272
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
E: ASSET MANAGEMENT (INCLUDING
US BROKER-DEALER) AND OTHER OPERATIONS
CONTINUED
E1: INCOME STATEMENT FOR ASSET MANAGEMENT OPERATIONS > CONTINUED
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
2010 £m
2009 £m
612
3
(263)
(123)
229
17
246
38
284
457
13
(205)
(100)
165
12
177
61
238
The difference between the fees and other income shown above in respect of asset management operations, and the revenue figure for
M&G shown (excluding consolidated investment funds) in the main table primarily relates to total revenue of Prudential Capital including
short-term fluctuations of £136 million (2009: £155 million) and commissions which have been netted off in arriving at the fee income of
£612 million (2009: £457 million) in the table above. The difference in the presentation of commission is aligned with how management
reviews the business.
Prudential plc Annual Report 2010
273
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:
ASSETS
Intangible assets:
Goodwill
Deferred acquisition costs
Total
Other non-investment and non-cash assets
Financial investments:
Loansnote i
Equity securities and portfolio holdings in unit trusts
Debt securitiesnote ii
Other investmentsnote v
Deposits
Total financial investments
Cash and cash equivalentsnote v
TOTAL ASSETS
EQUITY AND LIABILITIES
Equity
Shareholders’ equity
Non-controlling interests
Total equity
LIABILITIES
Core structural borrowing of shareholder-financed operations
Intra Group debt represented by operational borrowings at
Group levelnote iv
Net asset value attributable to external holders of consolidated
unit trusts and similar fundsnote v
Other non-insurance liabilities
Total liabilities
TOTAL EQUITY AND LIABILITIES
Asset management operations
2010 £m
2009 £m
US
Asia
Total
Total
16
–
16
174
–
–
–
1
22
23
39
252
122
–
122
–
–
–
130
130
252
61
–
61
94
–
10
14
7
25
56
128
339
258
–
258
–
–
–
81
81
339
1,230
9
1,239
1,122
1,418
151
1,574
59
80
3,282
1,436
7,079
1,787
4
1,791
1,230
8
1,238
850
1,413
137
1,164
113
63
2,890
970
5,948
1,659
3
1,662
250
–
2,560
2,038
458
2,020
5,288
7,079
410
1,838
4,286
5, 948
M&G
note iii
1,153
9
1,162
854
1,418
141
1,560
51
33
3,203
1,269
6,488
1,407
4
1,411
250
2,560
458
1,809
5,077
6,488
Notes
i
Loans
The M&G loans of £1,418 million (2009: £1,413 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 £213 million A+ to A– (2009: £92 million), £873 million BBB+ to BBB– (2009: £835 million), £219 million BB+ to BB– (2009:
£330 million) and £113 million B+ to B– (2009: £156 million).
ii Debt securities
Of the total debt securities of £1,574 million in 2010 (2009: £1,164 million) of which £1,560 relates to M&G (2009: £1,149 million), £1,468 million were
rated AAA to A– by Standard and Poor’s or Aaa rated by Moody’s (2009: £1,072 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 £2,311 million
(2009: £2,031million) of commercial paper and £249 million (2009: £7 million) of medium-term notes.
v Consolidated investment 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 £304 million (2009: £269 million), £167 million of other
investments (2009: £158 million), £(13) million of other net assets and liabilities (2009: £(17) million) and the net asset value attributable to
external unit holders of £458 million (2009: £410 million) which are non-recourse to M&G and the Group.
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
E
:
A
S
S
E
T
M
A
N
A
G
E
M
E
N
T
A
N
D
O
T
H
E
R
O
P
E
R
A
T
I
O
N
S
(
I
I
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C
L
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N
G
U
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B
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O
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E
R
D
E
A
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)
274
FINANCIAL STATEMENTS > 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 > CONTINUED
Reconciliation of movement in investments
A reconciliation of the total investments of asset management operations from the beginning of the year to the end of the year is
as follows:
AT 1 JANUARY 2009
Total investments (including derivative assets)
Less: Derivative liabilities
Directly held investments, net of derivative liabilities
Net cash outflow from operating activities
Realised gains in the year
Unrealised gains and losses and exchange movements in the year
Movement in the year of directly held investments, net of
derivative liabilities
AT 31 DECEMBER 2009/1 JANUARY 2010
Total investments (including derivative assets)
Less: Derivative liabilitiesnote G3
Directly held investments, net of derivative liabilities
Net cash inflow from operating activities
Realised gains in the year
Unrealised gains and losses and exchange movements in the year
Movement in the year of directly held investments, net of
derivative liabilities
AT 31 DECEMBER 2010
Total investments (including derivative assets)
Less: Derivative liabilitiesnote G3
Directly held investments, net of derivative liabilities
E3: REGULATORY AND OTHER SURPLUS
M&G
£m
3,216
(292)
2,924
(124)
34
(48)
(138)
2,835
(49)
2,786
310
11
18
339
3,203
(78)
3,125
US
£m
40
–
40
(21)
–
(4)
(25)
15
–
15
8
–
–
8
23
–
23
Asia
£m
Total
£m
47
–
47
(3)
–
(4)
(7)
40
–
40
11
–
5
16
56
–
56
3,303
(292)
3,011
(148)
34
(56)
(170)
2,890
(49)
2,841
329
11
23
363
3,282
(78)
3,204
Certain asset management operations are subject to regulatory requirements. 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 unregulated asset management
operations, is as follows:
REGULATORY AND OTHER SURPLUS
Beginning of year
Gains during the year
Movement in capital requirement
Capital injection
Distributions made
Exchange movement
End of year
Asset management operations
2010 £m
2009 £m
M&G
US
Asia
Total
Total
85
245
9
–
(152)
–
187
111
12
–
–
(4)
3
122
126
55
(32)
1
(38)
11
123
322
312
(23)
1
(194)
14
432
155
97
125
9
(37)
(27)
322
The movement in the year reflects gains driven by profits generated during the year and also changes in regulatory requirements.
Distributions consist of dividends paid up to the parent company.
The M&G figures include those for Prudential Capital.
Prudential plc Annual Report 2010
275
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 2010, 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 £9 million (2009: £5 million) and £28 million (2009: £23 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 2010 by asset management operations were £1,574 million (2009: £1,164 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 £450 million (2009: negative £395 million) as detailed in note B1. An analysis of the
assets and liabilities of other operations is shown in note B6.
F
I
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A
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C
I
A
L
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A
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E
:
A
S
S
E
T
M
A
N
A
G
E
M
E
N
T
A
N
D
O
T
H
E
R
O
P
E
R
A
T
I
O
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S
(
I
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N
C
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U
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B
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O
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E
R
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-
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276
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
F: INCOME STATEMENT NOTES
F1: SEGMENTAL INFORMATION
Insurance operations
Asset management (note E1)
Year ended 31 December 2010 £m
UK
US
Asia
M&G
Gross premiums earned
Outward reinsurance premiums
Earned premiums, net of reinsurance
Investment returnnote ii
Other income
6,371
(128)
11,817
(83)
6,380
(146)
6,243
14,374
233
11,734
4,576
(24)
6,234
2,744
139
Total revenue, net of reinsurance
20,850
16,286
9,117
Benefits and claims
Outward reinsurers’ share of benefits
and claims
Movement in unallocated surplus
of with-profits funds note iv
Benefits and claims and movements in
unallocated surplus of with-profits
funds, net of reinsurance
Acquisition costs and other operating
(18,674) (15,472)
(6,462)
243
70
49
–
43
(315)
(18,361) (15,423)
(6,734)
–
–
–
186
768
954
–
–
–
–
US
–
–
–
1
597
598
–
–
–
–
Asia
Total
segment
Unallo-
cated
corporate
Group
total
–
–
24,568
(357)
–
–
24,568
(357)
–
3
248
24,211
21,884
1,961
–
24,211
(115) 21,769
1,666
(295)
251
48,056
(410) 47,646
– (40,608)
– (40,608)
–
–
335
(245)
–
–
335
(245)
– (40,518)
– (40,518)
expenditurenote F3
(1,093)
(395)
(1,662)
(628)
(576)
(179)
(4,533)
(266)
(4,799)
Finance costs: interest on core structural
borrowings of shareholder-financed
operations
–
(13)
–
–
–
–
(13)
(244)
(257)
Total charges, net of reinsurance
(19,454) (15,831)
(8,396)
(628)
(576)
(179) (45,064)
(510) (45,574)
Profit (loss) before tax (being tax
attributable to shareholders’ and
policyholders’ returns)note i
Tax charge attributable to policyholders’
1,396
455
721
326
returns
(536)
–
(75)
–
Profit (loss) from continuing operations
before tax attributable to shareholders
860
455
646
326
22
–
22
72
2,992
(920)
2,072
–
(611)
–
(611)
72
2,381
(920)
1,461
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 2010 £m
Insurance operations
Asset management
UK
US
Asia
M&G
US
Asia
Total
segment
Unallo-
cated
corporate
Group
total
Operating profit based on longer-term
investment returnsnote iii
719
833
532
284
22
72
2,462
(521)
1,941
Short-term fluctuations in investment
returns on shareholder-backed
business
Shareholders’ share of actuarial and other
gains and losses on defined benefit
pension schemes
Costs of terminated AIA transaction
Gain on dilution of holding in PruHealth
investment
Profit (loss) from continuing operations
116
(378)
114
47
(5)
–
30
–
–
–
–
–
–
(5)
–
–
–
–
–
–
–
–
–
–
(101)
(22)
(123)
(10)
–
30
–
(377)
(10)
(377)
–
30
before tax attributable to shareholders
860
455
646
326
22
72
2,381
(920)
1,461
Prudential plc Annual Report 2010
277
Unallo-
cated
corporate
Group
total
Asia
Total
segment
–
–
20,299
(323)
–
–
20,299
(323)
–
74
143
217
19,976
27,355
1,222
–
(466)
12
19,976
26,889
1,234
48,553
(454)
48,099
– (39,901)
– (39,901)
–
–
265
(1,559)
–
–
265
(1,559)
– (41,195)
– (41,195)
Insurance operations
Asset management (note E1)
Year ended 31 December 2009 £m
UK
US
Asia
M&G
Gross premiums earned
Outward reinsurance premiums
Earned premiums, net of reinsurance
Investment returnnote ii
Other income
5,757
(122)
5,635
17,366
176
9,197
(82)
9,115
5,070
(18)
5,345
(119)
5,226
4,357
110
Total revenue, net of reinsurance
23,177
14,167
9,693
Benefits and claims
Outward reinsurers’ share of benefits
and claims
Movement in unallocated surplus of
with-profits fundsnote iv
Benefits and claims and movements in
unallocated surplus of with-profits
funds, net of reinsurance
Acquisition costs and other operating
(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
–
–
–
–
expenditurenote F3
(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’
1,469
486
(112)
294
returns
(750)
–
(68)
–
Profit (loss) from continuing operations
before tax attributable to shareholders
719
486
(180)
294
4
–
4
55
2,196
(632)
1,564
–
(818)
–
(818)
55
1,378
(632)
746
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
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
Total
segment
Unallo-
cated
corporate
Group
total
Operating profit based on longer-term
investment returnsnote iii
657
618
410
238
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
108
(132)
31
70
(46)
–
–
–
–
(14)
(621)
–
before tax attributable to shareholders
719
486
(180)
294
4
–
–
–
4
55
1,982
(418)
1,564
–
–
–
77
(200)
(123)
(60)
(14)
(74)
(621)
–
(621)
55
1,378
(632)
746
N
O
T
E
S
F
:
I
N
C
O
M
E
S
T
A
T
E
M
E
N
T
278
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
F: INCOME STATEMENT NOTES
CONTINUED
F1: SEGMENTAL INFORMATION > CONTINUED
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 The Group has amended the presentation of operating profit for its US insurance operations to remove the net equity hedge accounting effect
(incorporating related amortisation of deferred acquisition costs) and include it in short-term fluctuations. The 2009 comparatives have been
amended accordingly. Note A4d(ii) explains the effect of the change.
iv The movement in unallocated surplus of with-profits funds for Asia above includes movement relating to the Hong Kong branch of PAC.
For the purpose of the presentation of unallocated surplus of with-profits funds within the statement of financial position, the Hong Kong branch
balance is shown within the unallocated surplus of the PAC with-profits sub-fund.
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 reinsurancenote iv
INVESTMENT RETURN
Realised and unrealised gains and losses on securities at fair value through profit and loss
Realised and unrealised losses and gains on derivatives at fair value through profit and loss
Realised losses on available-for-sale securities, previously recognised in other comprehensive income
Realised losses on loans
Interestnotes i,ii
Dividends
Other investment return
Investment return
FEE INCOME FROM INVESTMENT CONTRACT BUSINESS AND ASSET MANAGEMENTnotes iii,iv
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
2010 £m
2009 £m
23,647
750
171
(357)
24,211
14,728
(891)
(51)
(12)
5,976
1,394
625
21,769
1,666
47,646
19,347
789
163
(323)
19,976
18,175
1,164
(420)
(115)
5,575
1,755
755
26,889
1,234
48,099
2010 £m
2009 £m
4,371
1,014
412
127
–
2
5,926
50
5,976
3,848
1,051
522
140
2
2
5,565
10
5,575
Interest income includes £21 million (2009: £17 million) accrued in respect of impaired securities.
ii
iii Fee income includes £11 million (2009: £1 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.
Prudential plc Annual Report 2010
279
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
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:
2010 £m
Asia
US
UK
Intragroup
Total
6,373
248
–
(77)
6,544
11,710
597
–
(72)
12,235
6,476
768
29
(175)
7,098
(10)
(314)
–
324
–
24,549
1,299
29
–
25,877
2009 £m
Asia
US
UK
Intragroup
Total
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
Earned premiums, net of reinsurance
Fee income from investment contract business and asset management (included within ‘Other income’)
Total revenue from external customers
2010 £m
2009 £m
24,211
1,666
25,877
19,976
1,234
21,210
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
£314 million (2009: £271 million) earned £165 million (2009: £134 million) by M&G, £72 million (2009: £67 million) by the US asset
management segment and £77 million (2009: £70 million) by the Asian asset management segment. In 2010, the remaining £10 million
(2009: £11 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.
Revenue from external customers of Asian, US and UK insurance operations shown above are net of outwards reinsurance
premiums of £146 million, £83 million and £128 million respectively (2009: £119 million, £82 million and £122 million respectively).
In Asia, revenue from external customers from no individual country exceeds 10 per cent of the Group total. The largest country
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is Hong Kong with a total revenue from external customers of £1,246 million (2009: £1,013 million).
Due to the nature of the business of the Group, there is no reliance on any major customers.
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F: INCOME STATEMENT NOTES
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F3: ACQUISITION COSTS AND OTHER EXPENDITURE
Acquisition costs incurrednotes i,ii
Acquisition costs deferred less amortisation of acquisition costs
Administration costs and other expenditure
Movements in amounts attributable to external unit holdersnote v
Total acquisition costs and other expenditurenotes iii,iv,vi
2010 £m
2009 £m
2,024
(918)
3,496
197
4,799
1,796
(763)
2,924
615
4,572
Notes
i
The acquisition costs as shown on the table above relate to policy acquisition costs. Acquisition costs from business combinations are included
within other expenditure. Acquisition costs in 2010 comprise amounts related to insurance contracts of £941 million (2009: £871 million), and
investment contracts and asset management contracts of £165 million (2009: £162 million).
ii There were no fee expenses relating to financial liabilities held at amortised cost included in acquisition costs in 2010 and 2009.
iii The total depreciation and amortisation expense is £309 million (2009: £377 million). Of this amount, £226 million (2009: £305 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:
Insurance operations:
UK
US
Asia
Asset management operations:
M&G
US
Asia
TOTAL SEGMENT
Unallocated corporate
TOTAL
2010 £m
2009 £m
35
(6)
258
8
2
4
301
8
309
25
88
246
2
2
4
367
10
377
iv Interest expense, excluding interest on core structural borrowings of shareholder-financed operations, amounted to £113 million
(2009: £89 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
2010 £m
2009 £m
28
33
13
19
–
–
93
20
113
28
32
1
–
–
–
61
28
89
v Movements in amounts attributable to external unit holders comprises £61 million (2009: £310 million) for UK insurance operations £136 million
(2009: £305 million) for Asian insurance operations.
Prudential plc Annual Report 2010
281
vi The total amounts for acquisition costs and other expenditure shown above includes Corporate Expenditure shown in note B1 (Segment
disclosure – income statement). The charge for Corporate Expenditure comprises:
Group head office:
Regular and project costs
Provision for property leases and other non-recurrent items
Asia regional office:
Gross costs
Recharges to Asia operations
Total
2010 £m
2009 £m
(147)
(25)
(172)
(90)
42
(48)
(220)
(140)
(6)
(146)
(95)
38
(57)
(203)
F4: FINANCE COSTS: INTEREST ON CORE STRUCTURAL BORROWINGS OF SHAREHOLDER-FINANCED OPERATIONS
Finance costs consist of £244 million (2009: £196 million) interest on core debt of the parent company and £13 million (2009: £13 million)
on US insurance operations’ surplus notes.
F5: TAX
a Total tax charge 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:
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
Total deferred tax charge
Total tax charge
The total tax expense arises as follows:
Current tax expense:
UK
Foreign
Deferred tax (charge) credit:
UK
Foreign
Total
2010 £m
2009 £m
(378)
287
(91)
(518)
(27)
(545)
(636)
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(500)
(29)
(529)
(340)
(4)
(344)
(873)
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2010 £m
2009 £m
(61)
(30)
(91)
(252)
(293)
(545)
(636)
(527)
(2)
(529)
(368)
24
(344)
(873)
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F: INCOME STATEMENT NOTES
CONTINUED
F5: TAX > CONTINUED
The current tax charge of £91 million includes £13 million for 2010 (2009: charge of £6 million) in respect of the tax charge for Hong
Kong. The Hong Kong current tax charge is calculated as 16.5 per cent for all periods on either (i) five per cent of the net insurance
premium or (ii) the estimated assessable profits, depending on the nature of the business written.
The total tax charge of £636 million for 2010 (2009: charge of £873 million) comprises a charge of £313 million (2009: charge of
£895 million) for UK tax and a charge of £323 million (2009: credit of £22 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 £25 million for 2010 (2009: charge of £55 million) comprises a credit of
£187 million (2009: charge of £176 million) for UK tax and a charge of £212 million (2009: credit of £121 million) for overseas tax. The
tax charge attributable to shareholders’ returns includes an exceptional tax credit of £158 million which primarily relates to the impact
of a settlement agreed with the UK Tax authorities. This exceptional tax credit is recorded within ‘Adjustments in respect of prior years’.
In addition, adjustments in respect of prior years also includes other changes that arose as a result of routine revision of tax returns.
The total deferred tax (charge) 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
2010 £m
2009 £m
(217)
(28)
(431)
(8)
139
(545)
(35)
(12)
(105)
1
(193)
(344)
In 2010, a deferred tax charge of £287 million (2009: charge of £546 million) has been taken through other comprehensive income.
Other movements in deferred tax totalling a £40 million charge 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 £0.9 billion in the Group’s net deferred tax
liability (2009: increase of £0.8 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 and tax (charge)
The income statement includes the following items:
Profit before tax
Tax charge attributable to policyholders’ returns
Profit before tax attributable to shareholders
Tax attributable to shareholders’ profits:
Tax charge
Less: tax attributable to policyholders’ returns
Tax (charge) attributable to shareholders’ returns
Profit from continuing operations after tax
Prudential plc Annual Report 2010
2010 £m
2009 £m
2,072
(611)
1,461
(636)
611
(25)
1,436
1,564
(818)
746
(873)
818
(55)
691
283
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:
Profit before tax
Taxation charge:
Expected tax rate
Expected tax charge
Variance from expected tax chargenote v(ii)
Actual tax (charge)
Average effective tax rate
2010 £m
2009 £m
Attributable to
shareholders
Attributable to
policyholders*
1,461
611
28%
(406)
381
(25)
2%
100%
(611)
–
(611)
100%
Total
2,072
49%
(1,017)
381
(636)
31%
Attributable to
shareholders
Attributable to
policyholders*
746
31%
(233)
178
(55)
7%
818
100%
(818)
–
(818)
100%
Total
1,564
67%
(1,051)
178
(873)
56%
* 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.
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.
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.
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F5: TAX > CONTINUED
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.
Prudential plc Annual Report 2010
v Reconciliation of tax charge on profit attributable to shareholders for continuing operations:
Profit (loss) before tax attributable to shareholders:
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
Cost of terminated AIA transaction
Gain on dilution of holding in PruHealth
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
Cost of terminated AIA transaction
Gain on dilution of holding in PruHealth
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
Cost of terminated AIA transaction
Gain on dilution of holding in PruHealth
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
Cost of terminated AIA transaction
Gain on dilution of holding in PruHealth
Total
Actual tax (charge) credit:
Operating profit based on longer-term investment returns,
excluding exceptional tax creditnote iii
Exceptional tax credit*
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
Cost of terminated AIA transaction
Gain on dilution of holding in PruHealth
2010 £m (except for tax rates)
Asian
insurance
operations
US
insurance
operations
UK
insurance
operations
Other
operations
532
114
833
(378)
–
–
–
–
646
455
22%
25%
–
–
–
35%
35%
–
–
–
719
116
(5)
30
860
28%
28%
28%
–
28%
(117)
(29)
(292)
132
(201)
(32)
–
–
–
–
–
–
1
–
(8)
(146)
(160)
(240)
59
21
–
–
–
80
(58)
–
(58)
(8)
–
–
–
43
–
–
–
–
43
(249)
–
(249)
132
–
–
–
18
–
–
–
8
26
(183)
–
(183)
(32)
1
–
–
(143)
25
(5)
(377)
–
(500)
28%
28%
28%
28%
–
40
(7)
1
106
–
140
237
7
1
(13)
–
232
119
158
277
–
2
93
–
Total
(66)
(117)
(214)
372
Actual tax rate:
Operating profit based on longer-term investment returns
Total profit
Actual tax rate (excluding exceptional tax credit):*
Operating profit based on longer-term investment returns
Total profit
11%
10%
11%
10%
30%
26%
30%
26%
25%
25%
25%
25%
194%
74%
83%
43%
285
Total
1,941
(123)
(10)
(377)
30
1,461
29%
52%
20%
28%
28%
(570)
64
2
106
(8)
(406)
357
28
1
(13)
8
381
(371)
158
(213)
92
3
93
–
(25)
11%
2%
19%
13%
* The tax charge attributable to shareholders’ return includes an exceptional tax credit of £158 million which primarily relates to the impact of a
settlement agreed with the UK tax authorities.
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F: INCOME STATEMENT NOTES
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F5: TAX > CONTINUED
Profit (loss) before tax attributable to shareholders:
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
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 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
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 profit
2009* £m (except for tax rates)
Asian
insurance
operations
US
insurance
operations
UK
insurance
operations
Other
operations
410
31
–
(621)
(180)
24%
25%
–
25%
(98)
(8)
–
155
49
35
15
–
(137)
(87)
(63)
7
–
18
(38)
618
(132)
–
–
486
35%
35%
–
–
(216)
46
–
–
657
108
(46)
–
719
28%
28%
28%
–
(184)
(30)
13
–
(170)
(201)
76
196
–
–
272
(140)
242
–
–
(29)
–
–
–
(29)
(213)
(30)
13
–
(121)
(130)
(28)
–
(279)
28%
36%
28%
–
34
47
8
–
89
8
14
–
–
22
42
61
8
–
102
(230)
111
15%
(21)%
23%
(21)%
32%
32%
35%
40%
Total
1,564
(123)
(74)
(621)
746
30%
45%
28%
25%
(464)
55
21
155
(233)
90
225
–
(137)
178
(374)
280
21
18
(55)
24%
7%
* The Group has amended the presentation of operating profit for its US insurance operations to remove the net equity hedge accounting effect
(incorporating related amortisation of deferred acquisition costs) and include it in short-term fluctuations. The 2009 comparatives have been
amended accordingly. Note A4d(ii) explains the effect of the change.
Prudential plc Annual Report 2010
287
Notes
(i) Expected tax rates for profit (loss) attributable to shareholders:
•
•
•
The expected tax rates shown in the table above reflect the corporation tax rates generally applied to taxable profits of the relevant country
jurisdictions.
For Asian operations the expected tax rates reflect the corporation tax rates weighted by reference to the source of profits of operations
contributing to the aggregate business result.
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 2010 and 2009, the principal variances arise from a number of factors, including:
(a) Asian long-term operations
For 2010 and 2009, 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) Jackson
For 2010, the benefit of a deduction from taxable income of a proportion of dividends received attributable to the variable annuity business.
For 2009, 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) UK insurance operations
For 2010, routine revisions to prior period tax returns. For 2009, adjustments in respect of prior year tax charge and different tax bases of
UK life business.
(d) Other operations
For 2010, an exceptional tax credit which primarily relates to the impact of the settlement agreed with the UK tax authorities and the ability
to recognise a deferred tax credit on various tax losses which we were previously unable to recognise, partly offset by the inability to fully
recognise a tax credit in respect of non deductible capital costs incurred in relation to the terminated AIA transaction. For 2009, the ability to
recognise a deferred tax asset on various tax losses which we were previously unable to recognise partly offset by adjustments in respect of
the prior year tax charge.
(e) For 2009, the actual tax rate in relation to Asia excluding the result for the sold Taiwan agency business would have been 13 per cent.
(iii) Operating profit based on longer-term investment returns is net of attributable restructuring costs and development expenses.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
F: INCOME STATEMENT NOTES
CONTINUED
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
Policyholder returns
Assets backing unit-linked liabilities
With-profits business
Shareholder returns
Total
US OPERATIONS
Policyholder returns
2010 £m
2009 £m
1,279
1,039
2,318
429
2,747
2,539
1,519
4,058
373
4,431
Assets held to back (separate account) unit-linked liabilities
3,520
3,760
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
Prudential plc Annual Report 2010
21
20
1,016
1,057
4,577
1,075
2,119
8,815
12,009
1,717
834
2,551
(529)
340
1,567
1,378
5,138
1,438
2,947
10,461
14,846
1,827
1,113
2,940
14,560
17,786
(115)
(466)
17,847
3,922
21,769
22,664
4,225
26,889
289
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.
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.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
F: INCOME STATEMENT NOTES
CONTINUED
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
Increase in policyholder liabilities
Movement in unallocated surplus of with-profits funds
2010 £m
Asia
US
UK
Total
(2,595)
(3,824)
(315)
(4,348)
(11,075)
–
(9,941)
(8,490)
70
(16,884)
(23,389)
(245)
(6,734)
(15,423)
(18,361)
(40,518)
2009 £m
Asia
(1,814)
(6,230)
334
US
UK
Total
(4,092)
(9,193)
–
(9,875)
(8,432)
(1,893)
(15,781)
(23,855)
(1,559)
(7,710)
(13,285)
(20,200)
(41,195)
Prudential plc Annual Report 2010
G: FINANCIAL ASSETS
AND LIABILITIES
291
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 participation 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
–
–
86,635
90,027
227
5,779
–
–
182,668
Fair value
through
profit
and lossv
–
–
82
–
3,372
–
15,822
–
2,037
–
21,313
–
–
–
26,325
–
–
–
–
26,325
3,676
3,004
1,440
4,199
–
–
1,882
2,321
–
1,129
2010 £m
Available-
for-sale
Loans and
Receivables
Total
carrying
value
6,631
9,952
86,635
116,352
9,261
5,779
2,668
903
Fair value
6,631
9,952
86,635
116,352
9,083
5,779
2,668
903
6,631
9,952
–
–
9,034
–
2,668
903
29,188
238,181
2010 £m
Amortised
cost
IFRS 4
basic value
Total
carrying
value
Fair value
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–
–
–
–
–
3,676
3,866
3,004
1,522
2,991
1,524
4,199
4,236
3,372
3,372
25,732
25,732
–
–
–
–
–
17,704
2,321
2,037
1,129
64,696
17,652
2,321
2,037
1,129
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17,651
25,732
292
FINANCIAL STATEMENTS > 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
–
–
69,354
79,083
–
5,132
–
–
153,569
Fair value
through
profit
and lossv
–
–
105
–
3,809
–
13,840
–
1,501
–
19,255
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
basic value
Total
carrying
value
Fair value
3,394
2,751
1,179
3,482
–
–
1,965
1,612
–
877
–
–
–
–
–
3,394
2,751
1,284
3,482
3,809
3,424
2,751
1,281
3,540
3,809
24,880
24,880
–
–
–
–
–
15,805
1,612
1,501
877
59,395
15,866
1,612
1,501
877
15,260
24,880
Notes
i
As at 31 December 2010, £685 million (2009: £659 million) of convertible bonds were included in debt securities and £352 million
(2009: £347 million) were included in borrowings.
Loans and receivables are reported net of allowance for loan losses of £52 million (2009: £44 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
iv
v
funds and limited liability property partnerships.
It is impractical to determine the fair value of investment contracts with discretionary participation features due to the lack of a reliable basis to
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 2010
and 2009.
Prudential plc Annual Report 2010
293
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 exchange-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 disclosed value cannot be realised in immediate settlement
of the financial instrument.
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.
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.
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 funds valued with
observable inputs. It also includes net assets attributable to unit-holders 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 are generally classified as level 2
as the nature of these quotations means that they do not strictly meet the definition of level 1 assets. 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.
Pricing services, where available, are used to obtain the third-party broker quotes. Where pricing services providers are used, a single
valuation is obtained and applied.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
G: FINANCIAL ASSETS
AND LIABILITIES
CONTINUED
G1: FINANCIAL INSTRUMENTS – DESIGNATION AND FAIR VALUES > CONTINUED
When prices are not available from pricing services, quotes are sourced directly from brokers. Prudential seeks to obtain a number of
quotes from different brokers so as to obtain the most comprehensive information available on their executability. Where quotes are
sourced directly from brokers, the price used in the valuation is normally selected from one of the quotes based on a number of factors,
including the timeliness and regularity of the quotes and the accuracy of the quotes considering the spreads provided. The selected
quote is the one which best represents an executable quote for the security at the measurement date.
Generally, no adjustment is made to the prices obtained from independent third-parties. Adjustment is made in only limited
circumstances, where it is determined that the third-party valuations obtained do not reflect fair value (e.g. either because the value
is stale and/or the values are extremely diverse in range). These are usually securities which are distressed or that could be subject
to a debt restructure or where reliable market prices are no longer available due to an inactive market or market dislocation. In these
instances, prices are derived using internal valuation techniques including those as described above in this note with the objective
of arriving at a fair value measurement which reflects the price at which an orderly transaction would take place between market
participants on the measurement date. The techniques used require a number of assumptions relating to variables such as credit risk
and interest rates. Examples of such variables include an average credit spread based on the corporate bond universe and the relevant
duration of the asset being valued. Prudential measures the input assumptions based on the best available information at the
measurement dates. Securities valued in such manner are classified as level 3 where these significant inputs are not based on observable
market data.
In addition level 2 includes debt securities that are valued internally using standard market practices. Of the total level 2 debt
securities of £89,948 million at 31 December 2010 (2009: £83,301 million), £6,638 million are valued internally (2009: £6,426 million).
The majority of such securities are valued using matrix pricing, which is based on assessing the credit quality of the underlying borrower
to derive a suitable discount rate relative to government securities of a comparable duration. Under matrix pricing, the debt securities are
priced taking the credit spreads on comparable quoted public debt securities and applying these to the equivalent debt instruments
factoring 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 2010 the Group held £4,194 million (2009: £5,190 million), two per cent of the fair valued financial instruments
(2009: three per cent), within level 3. Of these amounts £3,359 million (2009: £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 3.3 per cent of the total assets of the participating funds at 31 December 2010 (2009: 3.7 per cent). Total level 3
liabilities at 31 December 2010 were £371 million out of total participating fund liabilities of £112,196 million (2009: £348 million out of
£104,817 million).
Of the £866 million level 3 fair valued financial investments at 31 December 2010 (2009: £1,684 million), net of derivative liabilities
which support non-linked shareholder-backed business (1.6 per cent of the total financial investments net of derivative liabilities backing
this business) (2009: 3.6 per cent), £728 million are externally valued and £138 million are internally valued (2009: £1,653 million and
£31 million respectively). Internal valuations, which represent 0.2 per cent of the total financial investments net of derivative liabilities
supporting non-linked shareholder-backed business at 31 December 2010 (2009: 0.06 per cent), are inherently more subjective than
external valuations.
If the value of all level 3 investments backing non-linked shareholder-backed business was varied downwards by 10 per cent, the
change in valuation would be £14 million (2009: £3 million), which would reduce shareholders’ equity by this amount before tax. Of this
amount a £7 million decrease (2009: £5 million increase) would pass through the income statement substantially as part of short-term
fluctuations in investment returns outside of operating profit and a £7 million decrease (2009: offset by an £8 million decrease) would be
included as part of other comprehensive income, being unrealised movements on assets classified as available-for-sale.
Prudential plc Annual Report 2010
295
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
Borrowings attributable to the with-profits fund 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 SEPARATE ACCOUNT
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 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
Loans
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 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
Loans
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total financial investments, net of derivative liabilities
Borrowings attributable to the 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
31 December 2010 £m
Level 1
Level 2
Level 3
Total
29,675
11,114
137
(56)
40,870
–
1,281
41,375
1,207
(626)
43,237
(82)
415
772
2,543
(25)
3,705
–
31,371
53,261
3,887
(707)
87,812
(82)
(519)
(511)
(346)
(1,376)
40,351
47%
42,644
49%
3,359
4%
86,354
100%
54,272
3,784
43
–
58,099
–
(1,360)
56,739
118%
–
808
10,389
52
(80)
11,169
–
2
5,268
88
–
5,358
(13,841)
–
(8,483)
(18)%
227
21
43,305
1,146
(1,049)
43,650
(1,981)
(220)
(383)
10,949
20%
41,286
78%
–
84,755
25,287
232
(136)
110,138
–
–
227
1,304
89,948
2,441
(1,675)
92,245
(82)
(15,822)
–
2
–
–
2
–
–
2
–
–
161
343
563
(201)
866
–
(33)
833
2%
–
576
1,117
3,106
(226)
4,573
–
–
54,274
9,054
131
–
63,459
(13,841)
(1,360)
48,258
100%
227
990
54,037
1,761
(1,330)
55,685
(1,981)
(636)
53,068
100%
227
86,635
116,352
5,779
(2,037)
206,956
(82)
(15,822)
(2,099)
(894)
(379)
(3,372)
108,039
58%
75,447
40%
4,194
2%
187,680
100%
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FINANCIAL STATEMENTS > 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
Borrowings attributable to the with-profits fund 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 SEPARATE ACCOUNT
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 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
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
Borrowings attributable to the 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
Prudential plc Annual Report 2010
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%
4
5,525
80
–
5,609
(12,242)
(7)
(6,640)
(19)%
36
38,725
787
(703)
38,845
(1,598)
–
40
–
–
40
–
(2)
38
0%
179
1,068
632
(195)
1,684
–
78,067
100%
38,620
8,848
110
–
47,578
(12,242)
(1,333)
34,003
100%
772
45,576
1,574
(918)
47,004
(1,598)
(342)
(42)
(494)
36,905
82%
839
83,301
2,066
(1,207)
84,999
(105)
(13,840)
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%
297
Reconciliation of movements in level 3 financial instruments measured at fair value
The following tables reconcile the value of level 3 financial instruments at 1 January 2010 to that presented at 31 December 2010 and
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.
The transfers out from level 3 during 2010 comprise mainly transfers within the Jackson’s portfolio. Certain broker-priced assets of
Jackson were previously classified as level 3 holdings as a result of illiquidity in the market and the resultant lack of observability into the
assumptions used to produce those fair values. During 2010, as a result of ongoing consideration regarding the use of assumptions by
pricing sources and the changes in the level of observability of these inputs over recent periods, Jackson determined that these assets
would be more appropriately categorised as level 2. As a result, Jackson transferred debt securities of £606 million and derivative assets
of £101 million from level 3 to level 2. The remaining transfers out of level 3 of the Group are primarily debt securities reclassifications
from level 3 to level 2 which reflect improving liquidity during the period.
The transfers out from level 3 during 2009 included a transfer of £2,072 million from level 3 to level 2 in respect of structured
securities of Jackson. At 31 December 2008, Jackson had utilised internal valuations for certain structured securities given the illiquidity
of the market at that time. These assets had therefore been classified as level 3 given the unobservable nature of 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. The remaining transfers in and out of level 3 in 2009 represented sundry individual asset
reclassifications, none of which are materially significant as highlighted in the table below.
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
A
N
D
L
I
A
B
I
L
I
T
I
E
S
G
:
F
I
N
A
N
C
I
A
L
A
S
S
E
T
S
298
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
G: FINANCIAL ASSETS
AND LIABILITIES
CONTINUED
G1: FINANCIAL INSTRUMENTS – DESIGNATION AND FAIR VALUES > CONTINUED
Total
gains/
losses in
income
statement
£m
At 1 Jan
2010
£m
Total
gains/
losses
recorded
in other
compre-
hensive
income
£m
Purchases
£m
Sales
£m
Settled
£m
Transfers
into
level 3
£m
Transfers
out of
level 3
£m
At
31 Dec
2010
£m
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
SEPARATE ACCOUNTS
Debt securities
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
Prudential plc Annual Report 2010
475
1,213
2,170
(25)
(6)
(113)
309
–
3,833
190
(323)
3,510
(32)
158
40
40
(2)
38
179
1,068
632
(195)
–
–
–
–
43
49
15
(5)
–
18
5
–
23
–
23
3
3
–
3
48
15
372
–
(59)
(158)
(312)
–
–
(34)
–
–
435
(529)
(34)
9
–
–
444
(529)
(34)
(4)
(18)
2
2
–
2
(4)
–
(4)
5
72
32
(1)
30
46
129
–
(95)
(213)
(144)
–
(18)
–
(18)
–
(27)
–
–
1,684
102
108
205
(452)
(27)
(42)
1,642
(17)
85
(1)
(16)
43
–
107
189
(409)
(27)
654
2,321
2,802
(220)
37
(64)
324
(5)
5
93
37
(1)
78
63
501
–
(154)
(375)
(456)
–
–
(79)
–
–
–
11
–
–
11
–
11
–
–
–
–
2
61
–
–
63
–
63
2
72
–
–
(43)
(180)
415
772
(1)
–
2,543
(25)
(224)
3,705
–
(346)
(224)
3,359
(21)
(21)
2
(19)
2
2
–
2
(3)
(713)
(101)
–
161
343
563
(201)
(817)
866
–
(33)
(817)
833
(46)
(914)
576
1,117
(102)
–
3,106
(226)
5,557
292
134
642
(985)
(79)
74
(1,062)
4,573
(367)
5,190
(49)
243
(1)
(7)
43
–
–
2
(379)
133
635
(942)
(79)
74
(1,060)
4,194
299
Purchases
£m
Sales
£m
Settled
£m
Transfers
into
level 3
£m
Transfers
out of
level 3
£m
At
31 Dec
2009
£m
–
142
–
–
142
–
142
–
–
(1)
(1)
–
(54)
–
–
475
1,213
2,170
(25)
(54)
3,833
–
(323)
(54)
3,510
(4)
(4)
–
(4)
40
40
(2)
38
–
200
43
(1)
(24)
(2,177)
(2)
–
179
1,068
632
(195)
242
(2,203)
1,684
–
–
(42)
242
(2,203)
1,642
26
50
403
–
479
49
528
16
16
(1)
15
21
104
153
(64)
214
–
214
47
170
556
(64)
(56)
(225)
(55)
(23)
–
(17)
–
–
(359)
(17)
–
–
(359)
(17)
(8)
(8)
–
(8)
–
(2)
–
–
(2)
–
(2)
–
–
–
–
(55)
(473)
(308)
23
(813)
–
(813)
(111)
(698)
(363)
–
–
(27)
–
–
–
342
43
(1)
(24)
(2,235)
(2)
–
654
2,321
2,802
(220)
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
A
N
D
L
I
A
B
I
L
I
T
I
E
S
G
:
F
I
N
A
N
C
I
A
L
A
S
S
E
T
S
Total
gains/
losses in
income
statement
£m
At 1 Jan
2009
£m
Total
gains/
losses
recorded
in other
compre-
hensive
income
£m
509
1,342
2,122
–
(3)
(14)
(211)
(2)
(1)
(11)
(89)
–
3,973
(230)
(101)
(381)
9
–
3,592
(221)
(101)
2
2
–
2
(47)
(15)
130
93
161
17
178
(50)
(27)
(81)
91
1
1
–
1
(34)
(565)
(76)
–
(675)
6
(669)
(35)
(575)
(165)
–
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
SEPARATE ACCOUNT
Debt securities
Total financial investments, net of
derivative liabilities
Net asset value attributable to unit holders of
consolidated unit trusts and similar funds
Total
33
33
–
33
NON-LINKED SHAREHOLDER-BACKED
Equity securities and portfolio holdings
in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
318
3,996
692
(246)
Total financial investments, net of
derivative liabilities
Net asset value attributable to unit holders of
consolidated unit trusts and similar funds
Total
4,760
(65)
4,695
GROUP TOTAL
Equity securities and portfolio holdings
in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
827
5,371
2,814
(246)
Total financial investments, net of
derivative liabilities
Net asset value attributable to unit holders of
consolidated unit trusts and similar funds
8,766
(67)
(775)
709
(1,172)
(27)
384
(2,261)
5,557
(446)
26
6
48
–
–
(1)
–
(367)
Total
8,320
(41)
(769)
757
(1,172)
(27)
383
(2,261)
5,190
300
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
G: FINANCIAL ASSETS
AND LIABILITIES
CONTINUED
G1: FINANCIAL INSTRUMENTS – DESIGNATION AND FAIR VALUES > CONTINUED
Of the total gains and losses in the income statement in 2010 of £243 million gains, £315 million relates to financial instruments still held
at the end of the year, which can be analysed as £18 million for equity securities, £110 million for debt securities, £243 million for other
investments, £(6) million for derivative liabilities and £(50) million for net asset value attributable to unit holders of consolidated unit
trusts and similar funds.
Of the total gains and losses in the income statement in 2009 of £41 million losses, £(205) million relates to financial instruments still
held at the end of the year, which can be analysed as £41 million losses for equity securities, £44 million losses for debt securities,
£221 million losses for other investments, £76 million gains for derivative liabilities and £25 million gains for net asset value attributable
to unit holders of consolidated unit trusts and similar funds.
Transfers between level 1 and level 2
During 2010, transfers from level 1 to level 2 amounted to £354 million in respect of certain investment funds held by the Group’s
participating funds which arose to reflect the change in the observability of the inputs used in valuing these funds.
There were no significant transfers between level 1 and level 2 during 2009.
Interest income and expense
The interest income on financial assets not at fair value through profit and loss for the year ended 31 December 2010 from continuing
operations was £1,994 million (2009: £1,998 million).
The interest expense on financial liabilities not at fair value through profit and loss for the year ended 31 December 2010 from
continuing operations was £427 million (2009: £366 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
2010 £m
Fair value
interest
rate risk
Cash flow
interest
rate risk
Not directly
exposed to
interest
rate risk
–
887
110,168
6,238
1,616
–
8,941
5,824
3,001
448
6,631
124
360
22
3,715
Total
6,631
9,952
116,352
9,261
5,779
118,909
18,214
10,852
147,975
3,676
2,624
679
631
988
705
121
9,424
–
377
710
3,568
894
431
129
6,109
–
3
133
–
15,822
901
879
17,738
3,676
3,004
1,522
4,199
17,704
2,037
1,129
33,271
Prudential plc Annual Report 2010
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
301
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
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 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.
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
20 years
No stated
maturity
Total
2010 £m
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
FINANCIAL LIABILITIES
Core structural borrowings of
shareholder-financed operationsH13
3,676
164
Operational borrowings attributable
to shareholder-financed operationsH13
3,004
2,510
861
561
3
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
1,522
155
1,051
161
4,199
1,129
4,199
867
3,372
2,321
3,372
2,321
–
16
–
–
–
50
–
–
731
1,314
835
1,244
1,469
6,618
3
2
–
–
–
–
3
2
–
–
–
–
10
–
3,090
121
182
1,674
–
–
–
–
–
196
4,199
1,129
–
–
3,372
2,321
A
N
D
L
I
A
B
I
L
I
T
I
E
S
G
:
F
I
N
A
N
C
I
A
L
A
S
S
E
T
S
19,223
13,588
2,489
945
1,319
840
1,375
1,847
22,403
302
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
G: FINANCIAL ASSETS
AND LIABILITIES
CONTINUED
G2: MARKET RISK > CONTINUED
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
20 years
No stated
maturity
Total
2009 £m
FINANCIAL LIABILITIES
Core structural borrowings of
shareholder-financed operationsH13
3,394
148
Operational borrowings attributable
to shareholder-financed operationsH13
2,751
2,351
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
3,482
877
3,482
643
3,809
1,612
3,809
1,612
588
435
882
–
11
–
–
733
1,394
877
1,343
1,422
6,505
9
102
–
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
ii) Maturity analysis of derivatives
The following table provides a maturity analysis of derivative assets and liabilities:
Net derivative position
Net derivative position
Total
carrying
value
2
Total
carrying
value
279
1 year
or less
1
1 year
or less
340
2010 £m
After 1
year to
3 years
1
After 3
years to
5 years
–
2009 £m
After 1
year to
3 years
10
After 3
years to
5 years
(1)
The net derivative positions as shown in the table above comprise the following derivative assets and liabilities:
Derivative assets
Derivative liabilities
Net derivative position
After
5 years
–
After
5 years
–
Total
2
Total
349
2010 £m
2009 £m
2,039
(2,037)
2
1,780
(1,501)
279
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.
Prudential plc Annual Report 2010
303
Life assurance investment contracts
3
12
15
14
12
15
71
43
2010 £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
Over
20 years
Total
undis-
counted
value
Carrying
value
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
Over
20 years
Total
undis-
counted
value
Carrying
value
Life assurance investment contracts
3
11
13
13
11
17
68
41
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 £11 billion
(2009: £9 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 of financial instruments 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, and other debtors, 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 £74 million (2009: £64 million) are past their due date but have not been impaired. Of the total
past due but not impaired, £26 million is less than one year past their due date and £9 million is more than six months but less than one
year past their due date (2009: £64 million and £11 million 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 £97 million
(2009: £55 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 2010
(2009: £nil).
In addition, during the year the Group took possession of £22 million (2009: £15 million) of other collateral held as security, which
mainly consists of assets that could be readily convertible into cash.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
G: FINANCIAL ASSETS
AND LIABILITIES
CONTINUED
G2: MARKET RISK > CONTINUED
Currency risk
As at 31 December 2010, the Group held 18 per cent (2009: 19 per cent) and 14 per cent (2009: 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 70 per cent (2009: 74 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 28 per cent (2009: 34 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 gains recognised in the income statement in 2010, except for those arising on financial instruments
measured at fair value through profit and loss, is £82 million (2009: £201 million losses). This constitutes £16 million losses (2009:
£41 million losses) on Medium Term Notes (MTN) liabilities and £98 million of net gains (2009: £160 million net losses), 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 2010 were as follows:
Derivative assets
Derivative liabilities
Derivative assets
Derivative liabilities
2010 £m
UK insurance
operations
US insurance
operations
Asian
insurance
operations
Asset
management
Unallocated
to a segment
926
(792)
134
645
(799)
(154)
310
(222)
88
44
(78)
(34)
114
(146)
(32)
2009 £m
UK insurance
operations
US insurance
operations
Asian
insurance
operations
Asset
management
Unallocated
to a segment
910
(709)
201
519
(461)
58
150
(146)
4
48
(49)
(1)
153
(136)
17
Group
total
2,039
(2,037)
2
Group
total
1,780
(1,501)
279
The above derivative assets are included in ‘other investments’ in the primary statements.
Prudential plc Annual Report 2010
305
The notional amount of the derivatives, distinguishing between UK insurance and US operations, was as follows:
As at 31 December 2010
Cross-currency swaps*
Equity index put options
Swaptions
Futures
Forwards*
Inflation swaps
Credit default swaps
Credit derivatives
Put options
Equity options
Total return swaps
Interest rate swaps*
As at 31 December 2009
Cross-currency swaps*
Swaptions
Futures
Forwards*
Inflation swaps
Credit default swaps
Credit derivatives
Put options
Equity options
Total return swaps
Interest rate swaps*
2010 £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
–
–
3,068
19,668
3,032
1,148
–
–
34
215
4,035
921
1,458
18
7,150
19,793
2,945
20
–
–
–
215
4,403
379
–
13,093
–
–
–
26
–
8,048
3,514
–
7,185
173
–
3,832
2,701
–
–
–
134
–
867
192
8,495
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
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5,263
1,534
–
–
–
189
–
562
–
3,957
* 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 £492 million (2009: £819 million) and £209 million (2009: £122 million) respectively, forward currency contracts assets
and liabilities with notional amounts of £2,619 million (2009: £570 million) and £440 million (2009: £958 million) respectively, interest rate swaps
assets and liabilities of £832 million (2009: £793 million) and of £195 million (2009: £522 million), respectively, and cliquet options assets of £nil
(2009: £7 million).
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.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
G: FINANCIAL ASSETS
AND LIABILITIES
CONTINUED
G3: DERIVATIVES AND HEDGING > CONTINUED
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 used interest rate derivatives to hedge the interest rate exposures on its US$300 million, 6.5 per cent perpetual subordinated
capital securities until September 2010. The hedge terminated at this point. The impact on the Group’s income statement was
immaterial. Where the hedge relationship has been 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 2010, was an asset of £5 million (2009: asset
of £7 million and liability of £1 million). Movements in the fair value of the hedging instruments of a net loss of £1 million (2009: net loss
of £11 million) and the hedged items of a net gain of £1 million (2009: net gain of £11 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 has designated perpetual subordinated capital securities totalling US$2.3 billion (2009: US$1.55 billion) as a net investment
hedge to hedge the currency risks related to the net investment in Jackson. The carrying value of the subordinated capital securities was
£1,462 million as at 31 December 2010 (2009: £966 million). The foreign exchange loss of £45 million (2009: gain of £118 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.
This net investment hedge was 100 per cent effective.
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 2010, the Group had lent £8,708 million
(2009: £10,501 million) of which £6,488 million (2009: £7,910 million) was lent by the PAC with-profits fund of securities and held
collateral under such agreements of £9,334 million (2009: £10,669 million) of which £6,910 million (2009: £8,086 million) was held by
the PAC with-profits fund.
At 31 December 2010, 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 £1,208 million (2009: £1,587 million), together with accrued
interest.
Collateral and pledges under derivative transactions
At 31 December 2010, the Group had pledged £800 million (2009: £644 million) for liabilities and held collateral of £804 million
(2009: £586 million) in respect of over-the-counter derivative transactions.
Prudential plc Annual Report 2010
307
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 2010, impairment losses of £145 million (2009: £647 million) were recognised for available-for-
sale securities and loans and receivables. These were £124 million (2009: £630 million) in respect of available-for-sale securities held by
Jackson and £21 million (2009: £17 million) in respect of loans and receivables. The 2010 impairment charge for loans and receivables of
£21 million (2009: £17 million) relates to loans held by the UK with-profits fund and mortgage loans held by Jackson.
Impairment losses recognised on available-for-sale securities amounted to £124 million (2009: £630 million). Of this amount,
90 per cent (2009: 86 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 32 per cent (2009: 11 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 2010, the Group realised gross losses on sales of available-for-sale securities of £160 million (2009: £134 million) with 45 per cent
(2009: 60 per cent) of these losses related to the disposal of fixed maturity securities of 15 (2009: five) individual issuers, which were
disposed of as part of risk reduction programmes intended to limit future credit loss exposure. Of the £160 million (2009: £134 million),
£99 million (2009: £6 million) relates to losses on sales of impaired and deteriorating securities.
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 2010 the amounts of gross unrealised losses for fixed maturity securities classified as available-for-sale under IFRS in an
unrealised loss position was £370 million (2009: £966 million). Notes B1 and D3 provide further details on the impairment charges
and unrealised losses of Jackson’s available-for-sale securities.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
H: OTHER INFORMATION ON STATEMENT
OF FINANCIAL POSITION ITEMS
H1: INTANGIBLE ASSETS ATTRIBUTABLE TO SHAREHOLDERS
a Goodwill
COST
At 1 January
Disposal of Taiwan Agency business
Additional consideration paid on previously acquired businesses
Acquisition of UOB Life Assurance Limited in Singapore
Exchange differences
At 31 December
AGGREGATE IMPAIRMENT
At 1 January and 31 December
NET BOOK AMOUNT AT 31 DECEMBER
2010 £m
2009 £m
1,430
–
–
141
15
1,586
(120)
1,466
1,461
(44)
13
–
–
1,430
(120)
1,310
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:
M&G
Other
2010 £m
2009 £m
1,153
313
1,466
1,153
157
1,310
‘Other’ represents goodwill amounts allocated across CGUs in Asia and US operations. Other goodwill amounts are not individually
material. During 2010 £141 million (SGD313 million) of goodwill was recognised upon the acquisition of UOB Life Assurance Limited.
Upon translation at the year end exchange rate, the carrying value of this UOB Life Assurance goodwill at 31 December 2010 was
£156 million.
Assessment of whether goodwill may be impaired
Goodwill is tested for impairment by comparing the CGU’s carrying amount, including any goodwill, with its recoverable amount.
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. In particular at 31 December 2010,
the EEV of the CGU containing the UOB Life Assurance goodwill (being the Singapore insurance operations) materially exceeded its
IFRS net asset value and so no impairment was deemed to arise.
Prudential plc Annual Report 2010
309
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 three-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 three-year plan. The direct and secondary effects of recent
developments, e.g. changes 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 (2009: 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.
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 (2009: 12 per cent) has been applied to post-tax
cash flows. The pre-tax risk discount rate was 16 per cent (2009: 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.
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.
Japanese life company
The aggregate goodwill impairment of £120 million at 31 December 2010 and 2009 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 attributable to shareholders
The deferred acquisition costs and other intangible assets in the Group consolidated statement of financial position attributable to
shareholders comprise:
Deferred acquisition costs (DAC) related to insurance contracts as classified under IFRS 4
Deferred acquisition costs related to investment management contracts, including life
assurance contracts classified as financial instruments and investment management
contracts under IFRS 4
Present value of acquired in-force policies for insurance contracts as classified under IFRS 4
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
Distribution rights
2010 £m
2009 £m
4,316
3,823
110
4,426
70
–
113
183
107
3,930
52
1
66
119
Total of deferred acquisition costs and other intangible assets
4,609
4,049
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
H: OTHER INFORMATION ON STATEMENT
OF FINANCIAL POSITION ITEMS
CONTINUED
H1: INTANGIBLE ASSETS ATTRIBUTABLE TO SHAREHOLDERS > CONTINUED
Deferred acquisition costs
BALANCE AT 1 JANUARY
Additions
Acquisition of UOB Life Assurance Ltd
Amortisation to the income statement:
Operating profit
Amortisation related to short-term
fluctuations in investment returns
Exchange differences
Change in shadow DAC related to
movement in unrealised
appreciation of Jackson’s securities
classified as available-for-sale (see
note D3(g) for explanation)
Dilution of holding in PruHealth
DAC movement on sale of Taiwan
agency business
UK
£m
124
19
–
(20)
–
(20)
–
–
(7)
–
US(i)
£m
3,092
851
–
(334)
358
24
72
(496)
–
–
Asia
£m
706
210
–
(208)
–
(208)
50
–
–
–
BALANCE AT 31 DECEMBER
116
3,543
758
Asset
management
£m
Other
intangibles
£m
Total
2010
£m
4,049
1,135
12
(579)
358
(221)
137
(496)
(7)
–
119
50
12
(13)
–
(13)
15
–
–
–
183
4,609
Total
2009
£m
5,349
1,071
–
(469)
153
(316)
(550)
(1,069)
–
(436)
4,049
8
5
–
(4)
–
(4)
–
–
–
–
9
Note
i
The DAC amount in respect of US insurance operations includes £2,834 million (2009: £1,938 million) in respect of variable annuity business,
£1,229 million (2009: £1,164 million) in respect of other business and £(520) million (2009: £(10) million) in respect of cumulative shadow DAC.
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:
DEFERRED ACQUISITION COSTS AT 1 JANUARY
Additions
Amortisation
Exchange differences
Change in shadow DAC related to movement in unrealised appreciation of Jackson’s securities
classified as available-for-sale
Dilution of holding in PruHealth
DAC movement on sale of Taiwan agency business
DEFERRED ACQUISITION COSTS AT 31 DECEMBER
2010 £m
2009 £m
3,823
1,064
(190)
122
(496)
(7)
–
4,316
5,097
1,054
(286)
(537)
(1,069)
–
(436)
3,823
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.
Prudential plc Annual Report 2010
311
2010 £m
2009 £m
162
(55)
107
21
(18)
110
183
(73)
110
148
(40)
108
14
(15)
107
162
(55)
107
AT 1 JANUARY
Gross amount
Accumulated amortisation
NET BOOK AMOUNT
Additions (through internal development)
Amortisation
AT 31 DECEMBER
COMPRISING:
Gross amount
Accumulated amortisation
NET BOOK AMOUNT
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 investment management component of these contracts. These contracts are
accounted for under the provisions of IAS 18. The PVAIF balance relating to insurance contracts is accounted for under UK GAAP as
permitted by IFRS 4.
The present value of future profits of acquired investment management contracts which was fully amortised during the year related
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.
AT 1 JANUARY
Cost
Accumulated amortisation
NET BOOK AMOUNT
Acquisition of UOB Life Assurance Ltd(note I1)
Exchange differences
Amortisation charge
AT 31 DECEMBER
COMPRISING:
Cost
Accumulated amortisation
NET BOOK AMOUNT
2010 £m
2009 £m
Insurance
business
Investment
management
Insurance
business
Investment
management
175
(123)
52
12
10
(4)
70
203
(133)
70
12
(11)
1
–
–
(1)
–
–
–
–
184
(120)
64
–
(6)
(6)
52
175
(123)
52
12
(11)
1
–
–
–
1
12
(11)
1
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.
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
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S
P
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N
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312
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
H: OTHER INFORMATION ON STATEMENT
OF FINANCIAL POSITION ITEMS
CONTINUED
H1: INTANGIBLE ASSETS ATTRIBUTABLE TO SHAREHOLDERS > CONTINUED
AT 1 JANUARY
Gross amount
Accumulated amortisation
Additions(i)
Amortisation charge
Exchange differences
AT 31 DECEMBER
COMPRISING:
Gross amount
Accumulated amortisation
2010 £m
2009 £m
79
(13)
66
50
(8)
5
113
136
(23)
113
84
(5)
79
3
(9)
(7)
66
79
(13)
66
Note
i
In addition to the acquired assets and liabilities of UOB Life Assurance in 2010, as explained in note I1, the Group entered into distribution
agreements with UOB for consideration of SGD 110 million (£50 million). The distribution rights have been accounted for as an intangible asset.
H2: INTANGIBLE ASSETS ATTRIBUTABLE TO WITH-PROFITS FUNDS
a Goodwill in respect of acquired investment subsidiaries for venture fund and other investment purposes
AT 1 JANUARY
Additions in the year(note I8(iii))
Impairment
AT 31 DECEMBER
2010 £m
2009 £m
124
42
–
166
174
–
(50)
124
All the goodwill relates to the UK insurance operations segment.
The venture fund investments consolidated by the Group relates to investments by PAC with-profits fund managed by M&G.
The goodwill shown in the table above relates to these venture fund investments. Goodwill is tested for impairment for these investments by
comparing the investment’s carrying value including goodwill with its recoverable amount. The recoverable amount of the investments
is determined by calculating their fair value less costs to sell. The fair value is determined by using a discounted cash flow valuation.
The valuations are 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 calculations is the risk discount rate ranging from 10 to 14 per cent derived
by reference to risk-free rates and an equity premium risk. In 2010, no goodwill was deemed to be impaired following the impairment
testing carried out. In 2009, following the impairment testing carried out, £50 million of the goodwill was deemed to be impaired.
In 2009, the impairment charge was recorded under ‘acquisition costs and other expenditure’ but was 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 did 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:
Deferred acquisition costs related to insurance contracts attributable to the PAC with-profits fund
Distribution rights attributable to with-profits funds of the Asian insurance operations
2010 £m
2009 £m
13
97
110
9
97
106
Prudential plc Annual Report 2010
313
Deferred acquisition costs related to insurance contracts attributable to the PAC with-profits fund
The movement in deferred acquisition costs relating to insurance contracts attributable to the PAC with-profits fund is as follows:
AT 1 JANUARY
Additions
Amortisation charge
AT 31 DECEMBER
2010 £m
2009 £m
9
9
(5)
13
13
–
(4)
9
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.
AT 1 JANUARY
Gross amount
Accumulated amortisation
Additions
Amortisation charge
Exchange differences
AT 31 DECEMBER
COMPRISING:
Gross amount
Accumulated amortisation
2010 £m
2009 £m
103
(6)
97
–
(4)
4
97
108
(11)
97
115
(2)
113
–
(4)
(12)
97
103
(6)
97
F
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N
A
N
C
I
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L
S
T
A
T
E
M
E
N
T
S
H3: REINSURERS’ SHARE OF INSURANCE CONTRACT LIABILITIES
Insurance contract liabilities
Claims outstanding
The movement on reinsurers’ share of insurance contract liabilities is as follows:
AT 1 JANUARY
Movement in the year
Foreign exchange translation differences
AT 31 DECEMBER
2010 £m
2009 £m
1,167
177
1,344
1,114
73
1,187
2010 £m
2009 £m
1,114
31
22
1,167
1,176
24
(86)
1,114
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314
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
H: OTHER INFORMATION ON STATEMENT
OF FINANCIAL POSITION ITEMS
CONTINUED
H4: TAX ASSETS AND LIABILITIES
Assets
Of the £555 million (2009: £636 million) current tax recoverable, the majority is expected to be recovered in one year or less.
Deferred tax asset
Unrealised losses on investments
Balances relating to investment and insurance contracts
Short-term timing differences
Capital allowances
Unused deferred tax losses
Total
The deferred tax asset at 31 December 2010 and 2009 arises in the following parts of the Group:
UK insurance operations:
SAIF
PAC with-profits fund (including PAL)
Other
US insurance operations
Asian insurance operations
Other operations
Total
2010 £m
2009 £m
449
11
1,152
16
560
2,188
1,156
20
1,228
18
286
2,708
2010 £m
2009 £m
2
108
104
1,391
98
485
2,188
2
141
149
1,944
132
340
2,708
The decrease in deferred tax asset primarily relates to the reduction in unrealised losses on investments due to the improved investment
markets.
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 2010 results and statement of financial position at 31 December 2010, the possible tax benefit of
approximately £143 million (2009: £257 million), which may arise from capital losses valued at approximately £0.5 billion (2009:
£1.2 billion), is sufficiently uncertain that it has not been recognised. In addition, a potential deferred tax asset of £298 million (2009:
£607 million), which may arise from tax losses and other potential temporary differences totalling £1.2 billion (2009: £2.1 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 decreased to £831 million (2009: £1,215 million) due to an exceptional tax credit which primarily relates to the
impact of a settlement agreed with the UK tax authorities together with the ability to recognise a tax credit on costs incurred in relation
to the terminated AIA transaction.
Prudential plc Annual Report 2010
315
2010 £m
2009 £m
1,678
1,057
1,477
12
4,224
1,744
961
1,159
8
3,872
Deferred tax liability
Unrealised gains on investments
Balances relating to investment and insurance contracts
Short-term timing differences
Capital allowances
Total
The increase in deferred tax liability primarily relates to the rise in deferred acquisition costs (shown within short-term timing differences
above) as a result of the increase in insurance new business during the year.
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.
The UK government’s tax rate change to 27 per cent has had the effect of reducing the UK with-profits and shareholder-backed
business elements of the net deferred tax balances as at 31 December 2010 by £11 million. The tax change to 27 per cent is effective
from 1 April 2011 but enacted at 31 December 2010.The subsequent proposed phased rate changes to 24 per cent are expected
to have the effect of reducing the UK with-profits and shareholder-backed business elements of the net deferred tax balances at
31 December 2010 by £65 million.
H5: ACCRUED INVESTMENT INCOME AND OTHER DEBTORS
ACCRUED INVESTMENT INCOME
Interest receivable
Other
Total
OTHER DEBTORS
Premiums receivable:
From policyholders
From intermediaries
From reinsurers
Other
Total
2010 £m
2009 £m
1,844
824
2,668
141
28
27
707
903
1,718
755
2,473
148
17
82
515
762
F
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N
A
N
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I
A
L
S
T
A
T
E
M
E
N
T
S
TOTAL ACCRUED INVESTMENT INCOME AND OTHER DEBTORS
3,571
3,235
Of the £3,571 million (2009: £3,235 million) of accrued investment income and other debtors, £151 million (2009: £134 million) is
expected to be settled after one year or more.
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316
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
H: OTHER INFORMATION ON STATEMENT
OF FINANCIAL POSITION ITEMS
CONTINUED
H6: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprise Group occupied properties, development property (until 2009) 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:
AT 1 JANUARY 2009
Cost
Accumulated depreciation
NET BOOK AMOUNT
YEAR ENDED 31 DECEMBER 2009
Opening net book amount
Exchange differences
Depreciation charge
Additions
Disposals (including amounts disposed of with the Taiwan agency business)
Reclassified as investment property*
CLOSING NET BOOK AMOUNT
AT 1 JANUARY 2010
Cost
Accumulated depreciation
Net book amount
YEAR ENDED 31 DECEMBER 2010
Opening net book amount
Exchange differences
Depreciation charge
Additions
Arising on acquisitions of subsidiaries
Disposals
CLOSING NET BOOK AMOUNT
AT 31 DECEMBER 2010
Cost
Accumulated depreciation
NET BOOK AMOUNT
Group
occupied
property
£m
Development
property
£m
Tangible
assets
£m
292
(29)
263
263
(9)
(4)
2
(99)
–
153
173
(20)
153
153
5
(4)
19
–
–
173
197
(24)
173
131
–
131
131
–
–
–
–
(131)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
717
(476)
241
241
(31)
(70)
89
(15)
–
214
661
(447)
214
214
9
(68)
74
220
(10)
439
908
(469)
439
Total
£m
1,140
(505)
635
635
(40)
(74)
91
(114)
(131)
367
834
(467)
367
367
14
(72)
93
220
(10)
612
1,105
(493)
612
* In line with the 2008 IASB Annual Improvements Project, all development properties were reclassified as investment properties with effect from
1 January 2009.
The total property, plant and equipment relates to continuing operations only.
Prudential plc Annual Report 2010
317
2010 £m
2009 £m
23
25
28
2
1
4
83
10
93
5
12
65
–
1
2
85
6
91
Capital expenditure: property, plant and equipment by segment
Insurance operations:
UK
US
Asia
Asset management operations:
M&G
US
Asia
TOTAL SEGMENT
Unallocated corporate
TOTAL
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:
AT 1 JANUARY
Reclassification of development property*
Additions:
Resulting from acquisitions
Resulting from expenditure capitalised
Resulting from acquisitions through business combinations
Disposals (including amounts disposed of with the Taiwan agency business)
Net gain (loss) from fair value adjustments
Net foreign exchange differences
Transfers to held for sale assets
Transfers to owner occupied properties
AT 31 DECEMBER
2010 £m
2009 £m
10,905
11,992
–
131
267
44
–
(390)
636
38
(254)
1
184
133
1
(1,220)
(203)
(113)
–
–
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
11,247
10,905
* In line with changes issued by the IASB as part of its Annual Improvement Project in May 2008 (as shown in note H6) 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:
Rental income from investment properties
Direct operating expenses (including repairs and maintenance expenses)
arising from investment properties that generated rental income during the year
Further information on the investment property held by the UK insurance operations is included in note D2(a).
2010 £m
2009 £m
625
125
755
131
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I
T
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S
S
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
H: OTHER INFORMATION ON STATEMENT
OF FINANCIAL POSITION ITEMS
CONTINUED
H7: INVESTMENT PROPERTIES > CONTINUED
Investment properties of £3,435 million (2009: £3,177 million) are held under finance leases. A reconciliation between the total of future
minimum lease payments at the statement of financial position date and their present value is shown below:
Future minimum lease payments at 31 December
Future finance charges on finance leases
Present value of minimum lease payments
Future minimum lease payments are due as follows:
Less than 1 year
1 to 5 years
Over 5 years
Total
The present values of these minimum lease payments are:
Less than 1 year
1 to 5 years
Over 5 years
Total
2010 £m
2009 £m
1,107
(972)
135
7
28
1,072
1,107
7
24
104
135
1,683
(1,517)
166
9
38
1,636
1,683
8
38
120
166
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. There was no contingent rent recognised as income or expense in 2010 and 2009.
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:
Less than 1 year
1 to 5 years
Over 5 years
Total
2010 £m
2009 £m
601
2,121
5,616
8,338
662
2,282
7,792
10,736
The total minimum future rentals to be received on non-cancellable sub-leases for land and buildings at 31 December 2010 are £3,366
million (2009: £3,684 million).
H8: INVESTMENTS IN ASSOCIATES AND JOINT VENTURES
Investments in associates
The Group had three associates at 31 December 2010 (2009: three) that are accounted for using the equity method. The Group’s
associates are a 30 per cent interest in The Nam Khang, a Vietnamese property developer, a 30 per cent interest in Apollo Education and
Training Organisation Vietnam and a 25 per cent interest in PruHealth, following the loss of joint control in the period (see note I2).
OYO Developments Limited a 25 per cent associate was disposed during the year.
The Group also has investments in associates which meet the IAS 28 criteria for measurement at fair value through profit and loss in
accordance with IAS 39.
Prudential plc Annual Report 2010
319
Associates accounted for using the equity method
A summary of the movements in investments in associates accounted for using the equity method in 2010 and 2009 is set out below:
BALANCE AT 1 JANUARY 2009
Exchange translations and other movements
Share of loss for the year after tax
BALANCE AT 31 DECEMBER 2009
Transfer of PruHealth to associates (note I2)
Acquisition/capital injection in PruHealth
Exchange translation and other movements
Share of loss for the year after tax
BALANCE AT 31 DECEMBER 2010
Share of
capital
£m
Share of
reserves
£m
Share of
net assets
£m
Goodwill
£m
Total
carrying
value
£m
12
(7)
–
5
1
9
(3)
–
12
(4)
4
–
–
65
–
(1)
(6)
58
8
(3)
–
5
66
9
(4)
(6)
70
2
(1)
–
1
–
–
–
–
1
10
(4)
–
6
66
9
(4)
(6)
71
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.
The Group’s share of the assets, liabilities, revenues and profit and loss of associates accounted for using the equity method at
31 December 2010 and 2009 is as follows:
FINANCIAL POSITION
Total assets (excluding goodwill)
Total liabilities
Net assets
RESULTS OF OPERATIONS
Revenue*
Loss in the year*
2010 £m
2009 £m
70
–
70
39
(6)
5
–
5
1
–
F
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N
A
N
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A
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E
N
T
S
* The 2010 amounts include the Group’s share of PruHealth’s revenue and profit and loss for the five months ended 31 December 2010.
Prior to August 2010, PruHealth was accounted for as a joint venture (see note I2 and the note below).
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 2010 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 £5 billion (2009: £6 billion) at 31 December 2010.
The aggregate assets of these associates are approximately £6 billion (2009: £9 billion). Aggregate liabilities, excluding liabilities to
unit holders and shareholders for unit trusts and OEICs, are approximately £1 billion (2009: £2 billion). Fund revenues, with revenue
arising in unit trusts and OEICs deemed to constitute the investment return for these vehicles, were approximately £0.4 billion
(2009: £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 £0.1 billion (2009: profit of £0.2 billion).
P
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I
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320
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
H: OTHER INFORMATION ON STATEMENT
OF FINANCIAL POSITION ITEMS
CONTINUED
H8: INVESTMENTS IN ASSOCIATES AND JOINT VENTURES > CONTINUED
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
CITIC Prudential Life Insurance Company Limited
CITIC Prudential Fund Management Company Limited
Prudential ICICI Asset Management Company Limited
Prudential BSN Takaful Berhad
BOCI Prudential Asset Management Limited
ICICI Prudential Life Insurance Company Limited
50
49
49
49
36
26
Life assurance
Asset management
Asset management
General and life insurance
Asset management
Life assurance
China
China
India
Malaysia
China
India
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:
FINANCIAL POSITION
Current assets
Non-current assets
Total assets
Current liabilities
Non-current liabilities
Total liabilities
Net equity
RESULTS OF OPERATIONS
Revenues*
Expenses*
Net profit (loss)
2010 £m
2009 £m
327
3,386
3,713
(329)
(3,093)
(3,422)
291
1,195
(1,135)
60
386
2,462
2,848
(150)
(2,392)
(2,542)
306
974
(945)
29
* The 2010 amounts include the Group’s share of PruHealth’s results for the seven months ended 31 July 2010. On 1 August 2010 the Group’s interest in
PruHealth was diluted and the Group’s investment was reclassified as an associate (see note I2 and the note above).
There are several minor service agreements in place between the joint ventures and the Group. During 2010, the aggregate amount of
the transactions was £29.7 million (2009: £14.1 million) and the balance outstanding as at 31 December 2010 was £69.5 million
(2009: £54.6 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 2010 the value of assets held for sale was £257 million (2009: £3 million).
Gains on disposal of held for sale assets are recorded in ‘investment return’ within the income statement.
Prudential plc Annual Report 2010
321
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:
Cash
Cash equivalents
TOTAL CASH AND CASH EQUIVALENTS
2010 £m
2009 £m
6,167
464
6,631
5,071
236
5,307
Cash and cash equivalents held centrally are considered to be available for general use by the Group. These funds amount to
£523 million and £895 million at 31 December 2010 and 2009, 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.
H11: SHAREHOLDERS’ EQUITY: SHARE CAPITAL, SHARE PREMIUM AND RESERVES
SHARE CAPITAL AND SHARE PREMIUM
Share capital
Share premium
RESERVES
Retained earnings
Translation reserve
Available-for-sale reserve
TOTAL SHAREHOLDERS’ EQUITY
A summary of the ordinary shares in issue is set out below:
Share capital and share premium
Issued shares of 5p each fully paid:
At 1 January 2010
Shares issued under share option schemes
Shares issued in lieu of cash dividends
Reserve movements in respect of shares issued in lieu of cash dividends
At 31 December 2010
Issued shares of 5p each fully paid:
At 1 January 2009
Shares issued under share option schemes
Shares issued in lieu of cash dividends
Reserve movements in respect of shares issued in lieu of cash dividends
At 31 December 2009
2010 £m
2009 £m
127
1,856
4,982
454
612
8,031
127
1,843
3,964
203
134
6,271
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
2010
Number of
ordinary
shares
Share
capital
£m
Share
premium
£m
2,532,227,471
2,455,227
10,911,808
–
2,545,594,506
127
–
–
–
127
1,843
13
62
(62)
1,856
2009
Number of
ordinary
shares
Share
capital
£m
Share
premium
£m
2,496,947,688
605,721
34,674,062
–
2,532,227,471
125
–
2
–
127
1,840
3
136
(136)
1,843
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FINANCIAL STATEMENTS > 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 > CONTINUED
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. Shares issued in lieu
of cash dividends are considered to take the legal form of bonus issue shares and have been accounted for as such.
At 31 December 2010, there were options outstanding under Save As You Earn schemes to subscribe for 12,802,482
(2009: 12,230,833) shares at prices ranging from 288 pence to 572 pence (2009: 266 pence to 572 pence) and exercisable by the year
2016 (2009: 2016).
The cost of own shares of £75 million as at 31 December 2010 (2009: £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 2010, 4.5 million (2009: 5.3 million) Prudential plc shares with a market value of £30 million (2009: £34 million) were
held in such trusts. Of this total, 4.4 million (2009: 4.8 million) shares were held in trusts under employee incentive plans. In 2010,
the Company purchased 5.7 million (2009: 3.4 million) shares in respect of employee incentive plans at a cost of £32 million
(2009: £17 million). The maximum number of shares held in the year was 5.3 million which was at the beginning of the year.
Of the total shares held in trust, 0.1 million (2009: 0.5 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 shares purchased each month are as follows:
Number of
shares
9,338
11,638
3,908,274
11,129
14,638
190,991
13,457
10,016
13,727
11,634
385,321
1,153,611
5,733,774
Share Price
Low
£
6.38
5.68
5.16
5.63
5.59
5.26
5.14
5.86
5.25
6.37
5.74
6.04
High
£
6.38
5.68
6.09
5.63
5.59
5.66
5.14
5.86
5.84
6.37
6.49
6.65
Cost
£
59,530
66,046
20,884,460
62,601
81,753
1,075,712
69,102
58,644
78,539
74,108
2,244,770
7,445,358
32,200,623
2010
January
February
March
April
May
June
July
August
September
October
November
December
TOTAL
Prudential plc Annual Report 2010
323
Number of
shares
19,852
19,926
1,112,209
22,164
32,416
26,594
342,062
14,059
12,435
10,332
10,576
1,739,591
3,362,216
Share Price
Low
£
3.83
3.52
2.02
3.38
4.45
4.44
3.86
4.85
5.50
6.34
6.04
6.06
High
£
3.94
3.52
3.50
3.38
6.59
7.31
4.30
4.85
5.50
6.34
6.04
6.35
Cost
£
76,575
70,140
3,837,968
74,859
173,242
145,230
1,374,929
68,144
68,393
65,453
63,879
10,941,847
16,960,659
2009
January
February
March
April
May
June
July
August
September
October
November
December
TOTAL
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 2010 was 9.8 million
(2009: 10.6 million) and the cost of acquiring these shares of £47 million (2009: £50 million) is included in the cost of own shares.
The market value of these shares as at 31 December 2010 was £65 million (2009: £67 million).
During 2010 and 2009 respectively, these funds made 833,618 net disposals and 1,414,263 net acquisitions of Prudential shares
for a net decrease of £3 million and a net increase of £3 million to book cost.
All share transactions were made on an exchange other than the Stock Exchange of Hong Kong.
The Company did not buy back any of its own shares during 2010 or 2009.
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.
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H12: INSURANCE CONTRACT LIABILITIES AND UNALLOCATED SURPLUS OF WITH-PROFITS FUNDS
Movement in year
At 1 January 2009
Income and expense included in the income statement
Foreign exchange translation differences
Disposal of Taiwan agency business
AT 1 JANUARY 2010
Income and expense included in the income statement
Foreign exchange translation differences
Dilution of holding in PruHealth
AT 31 DECEMBER 2010
Insurance
contract
liabilities
£m
136,030
19,765
(6,574)
(3,508)
Unallocated
surplus
of with-
profits funds
£m
8,414
1,559
46
–
145,713
10,019
22,412
3,193
(27)
245
(11)
–
171,291
10,253
Notes B6, D2c, D3c and D4c 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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FINANCIAL STATEMENTS > 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
2010 £m
2009 £m
Innovative
Tier 1*
Innovative
Tier 2*
Senior†
Total
Total
CENTRAL OPERATIONS
Subordinated debt:
¤500m 5.75% Subordinated Notes 2021note i
¤20m Medium-Term Subordinated Notes 2023note ii
£435m 6.125% Subordinated Notes 2031
£400m 11.375% Subordinated Notes 2039
US$1,000m 6.5% Perpetual Subordinated Capital Securities
US$250m 6.75% Perpetual Subordinated Capital
Securitiesnote iii
US$300m 6.5% Perpetual Subordinated Capital
Securitiesnote iii
US$750m 11.75% Perpetual Subordinated Capital Securities
639
160
192
472
428
17
428
382
428
17
428
382
639
160
192
472
443
18
428
380
619
155
192
456
1,463
1,255
–
2,718
2,691
Senior debt:
£300m 6.875% Bonds 2023
£250m 5.875% Bonds 2029
TOTAL CENTRAL OPERATIONS
PRUCAP
£250m bank loan note iv
JACKSON
US$250m 8.15% Surplus Notes 2027 note v
TOTAL notes vi, vii
–
–
1,463
1,255
1,463
159
1,414
300
249
549
300
249
549
3,267
3,240
300
249
549
549
250
250
159
–
154
3,394
799
3,676
* 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 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.
iv The £250 million PruCap bank loan was made in two tranches: £135 million maturing in June 2014, currently drawn at a cost of six month £LIBOR
plus 1.2 per cent and £115 million maturing in August 2012, currently drawn at a cost of twelve month £LIBOR plus 1.41 per cent.
The Jackson borrowings are unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims of Jackson.
v
vi Maturity analysis
The following table sets out the contractual maturity analysis of the Group’s core structural borrowings:
Less than 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
Over 5 years
Total
Prudential plc Annual Report 2010
2010 £m
2009 £m
–
115
–
135
–
3,426
3,676
–
–
–
–
–
3,394
3,394
vii Management analyses the net core structural borrowings position as follows:
Total core structural borrowings (as above)
Less: Holding company cash and short-term investments
(recorded within the consolidated statement of financial position)
Net core structural borrowings of shareholder-financed operations
Operational borrowings attributable to shareholder-financed operations
BORROWINGS IN RESPECT OF SHORT-TERM FIXED INCOME SECURITIES PROGRAMMES
Commercial paper
Medium-Term Notes 2010
Bank Notes 2013
NON-RECOURSE BORROWINGS OF US OPERATIONSnote i
Jacksonnote ii
Investment subsidiaries
Piedmont and CDO fundsnote iii
OTHER BORROWINGS
Bank loans and overdrafts
Obligations under finance leases
Other borrowingsnote iv
325
2010 £m
2009 £m
3,676
3,394
(1,232)
2,444
(1,486)
1,908
2010 £m
2009 £m
2,311
–
249
2,560
10
20
60
90
5
2
347
354
2,031
7
–
2,038
–
20
183
203
148
3
359
510
TOTAL notes v, vi
3,004
2,751
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 Other borrowings represents amounts whose repayment to the lender is contingent on future surpluses emerging from certain contracts
v
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.
In addition to the listed debt above, £200 million Floating Rate Notes were issued by Prudential plc in October 2010 which mature in April 2011.
These Notes have been wholly subscribed by a Group subsidiary and accordingly have been eliminated on consolidation in the Group financial
statements. These Notes were originally issued in October 2008 and have been reissued upon their maturity.
vi Maturity analysis
The following table sets out the contractual maturity analysis of the Group’s operational borrowings attributable to shareholder-financed
operations:
Less than 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
Over 5 years
Total
2010 £m
2009 £m
2,496
98
401
–
–
9
3,004
2,183
121
239
172
6
30
2,751
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FINANCIAL STATEMENTS > 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
Non-recourse borrowings of consolidated investment funds note i
£100m 8.5% Undated Subordinated Guaranteed Bonds of Scottish Amicable Finance plc note ii
Other borrowings (predominantly obligations under finance leases)
TOTAL note iii
2010 £m
2009 £m
1,287
100
135
1,522
1,016
100
168
1,284
Notes
i
ii The interests of the holders of the bonds issued by Scottish Amicable Finance plc, a subsidiary of the Scottish Amicable Insurance Fund, are
In all instances the holders of the debt instruments issued by these funds do not have recourse beyond the assets of those funds.
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:
Less than 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
Over 5 years
Total
H14: PROVISIONS AND CONTINGENCIES
Provisions
Provision in respect of defined benefit pension schemes:I3
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)
Attributable to shareholder-financed operations (i.e. to shareholders’ equity)
Add back: Investments in Prudential insurance policies
Provision after elimination of investments in Prudential insurance policies and matching
policyholder liability from Group statement of financial position
Other provisions (see below)
TOTAL PROVISIONS
2010 £m
2009 £m
96
635
99
74
1
617
33
77
706
1
1
466
1,522
1,284
2010 £m
2009 £m
106
114
220
227
447
282
729
122
128
250
187
437
206
643
Prudential plc Annual Report 2010
327
2010 £m
2009 £m
206
182
(10)
(106)
10
282
20
26
236
282
155
148
(13)
(75)
(9)
206
15
17
174
206
Analysis of other provisions:
At 1 January
Charged to income statement:
Additional provisions
Unused amounts released
Used during the year
Exchange differences
At 31 December
Comprising:
Legal provisions
Restructuring provisions
Other provisions
TOTAL
Of the other provisions balance of £282 million (2009: £206 million), £141 million (2009: £148 million) is expected to be settled within
one year. Employer contributions expected to be paid into defined benefit pension schemes within one year are shown in note I3.
Legal provisions
Of the legal provisions of £20 million (2009: £15 million), £19 million (2009: £11 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 2010 and 2009, £1 million and £9 million was paid respectively. In 2010,
Jackson established an additional £9 million reserve for potential litigation. We expect the provision balance to be utilised over the next
six years.
Restructuring provisions
Restructuring provisions of £26 million (2009: £17 million) primarily relate to restructuring activities of UK insurance operations.
The provisions pertain to property liabilities resulting from the closure of regional sales centres and branches and staff terminations
and other transformation costs to enable streamlining of operations.
These activities resulted in additional provisions in 2010 of £14 million. During 2010, £2 million (2009: £1 million) of unused provision
was released, and £3 million (2009: £3 million) was paid.
We expect the provision balance to be paid out within the next six years.
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Other provisions
Other provisions of £236 million (2009: £174 million) include provisions of £200 million (2009: £143 million) relating to staff benefit
schemes which are mostly benefits that will generally be paid out within the next three years. During 2010, another £148 million (2009:
£112 million) was provided (including exchange movement of £2 million (2009: £6 million)), £6 million (2009: £10 million) of unused
provision was released and £92 million (2009: £54 million) was paid. Other provisions also include £28 million (2009: £27 million)
relating to various onerous contracts where, in 2010, an additional £10 million (2009: £15 million) was provided and £8 million (2009:
£4 million) was used. Other provisions also include £4 million (2009: £4 million) of regulatory provisions, where £nil (2009: £9 million)
was provided, £1 million (2009: £2 million) of unused provision was released and £nil (2009: £3 million) was paid.
Contingencies and related obligations
Litigation regarding the Prudential Staff Pension Scheme (PSPS) and other matters
The Company is currently awaiting the decision of the English High Court in a case that was heard in early 2011 involving PSPS. This case
relates to the defined benefit section of PSPS and was heard at the request of the trustees of the scheme who are seeking to clarify the
Company’s obligations relating to discretionary pension increases.
In the event that the English High Court decides that the obligations relating to discretionary pension increases are greater than the
Company currently believes, the assumptions applied for IAS 19 reporting purposes, and therefore the level of surplus of the Scheme
may be affected. The Court decision might also affect the level of future deficit funding agreed concurrently with the next actuarial
valuation as at 5 April 2011.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
H: OTHER INFORMATION ON STATEMENT
OF FINANCIAL POSITION ITEMS
CONTINUED
H14: PROVISIONS AND CONTINGENCIES > CONTINUED
The impact of such changes on the deficit funding obligations of the shareholders’ funds of the Group would be determined in the
context of the pre-existing features applicable to the PSPS scheme described below:
(i)
Although underlying surpluses of the scheme are not recognised for IAS 19 Group accounting purposes under IFRIC 14, the surplus
determined on the actuarial valuation basis would be considered in the context of setting altered levels of future deficit funding, and
(ii) the allocation of any such altered future deficit funding between the PAC life fund and shareholder-backed operations would be in a
70/30 ratio. This ratio was determined following detailed consideration in 2005 of the source of previous contributions and has been
applied from then when deficit funding has been required.
Additional details on the Prudential Staff Pension Scheme and these features are included in note I3.
Consistent with the Company’s expectations as to the decision of the Court, no amount has been provided in the 2010 financial
statements for this item.
In addition to the legal proceedings relating to Jackson mentioned under the legal provisions section above, and PSPS, the Group
is involved in other litigation and regulatory issues.
Whilst the outcome of each of the above 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
The pensions review by the UK insurance regulator of past sales of personal pension policies required all UK life insurance companies to
review their cases of potential mis-selling and 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 2010 and 2009.
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.
Balance at beginning of year
Changes to actuarial assumptions and method of calculation
Discount unwind
Redress to policyholders
Payment of administrative costs
Balance at end of year
2010 £m
2009 £m
322
37
2
(46)
(1)
314
345
20
3
(44)
(2)
322
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 2010 set out above of £314 million is stochastically determined on a discounted
basis. The average discount rate implied in the movement in the year is four per cent. The undiscounted amounts at 31 December 2010
expected to be paid in each of the years ending 31 December are as follows:
Year ended 31 December
2011
2012
2013
2014
2015
Thereafter
Total undiscounted amount
Aggregate discount
Discounted pension mis-selling provision at 31 December 2010
Prudential plc Annual Report 2010
2010 £m
40
10
9
10
9
441
519
(205)
314
329
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 including administration costs. 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.
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.
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 the
Scottish Amicable Life Assurance Society (SALAS) which were transferred into SAIF. At 31 December 2010, provisions of £2 million
(2009: £4 million) in respect of the SAL policies and £20 million (2009: £35 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, wholly attributable to the policyholders of the fund, this provision has no impact on
shareholders.
In addition, in the year ended 31 December 2010 Prudential Assurance’s main with-profits fund paid compensation of £2 million
(2009: £2 million) in respect of mortgage endowment products mis-selling claims and at 31 December 2010 held a provision of £32 million
(2009: £47 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.
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Guaranteed annuities
Prudential Assurance used to sell guaranteed annuity products in the UK and at 31 December 2010 held a provision of £24 million
(2009: £31 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 2010 a provision of £336 million (2009: £284
million) was held in SAIF to honour the guarantees. As SAIF is a separate sub-fund of the Prudential Assurance long-term business fund,
wholly attributable to the policyholders of the 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 insurance 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.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
H: OTHER INFORMATION ON STATEMENT
OF FINANCIAL POSITION ITEMS
CONTINUED
H14: PROVISIONS AND CONTINGENCIES > CONTINUED
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 attributable to the policyholders of the fund. 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.
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 £16 million at 31 December 2010 (2009: £15 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 2010, Jackson has unfunded commitments of £363 million (2009: £339 million) related to its investments in limited
partnerships and of £88 million (2009: £89 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 2010, 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 £332 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
Creditors arising from direct insurance and reinsurance operations
Interest payable
Other items
TOTAL
2010 £m
2009 £m
821
66
242
1,129
615
83
179
877
Prudential plc Annual Report 2010
I: OTHER NOTES
331
I1: ACQUISITION OF UNITED OVERSEAS BANK LIFE ASSURANCE LIMITED
On 1 February 2010, the Group acquired from United Overseas Bank (UOB) its 100 per cent interest in UOB Life Assurance Limited
in Singapore for total cash consideration, after post-completion adjustments of SGD67 million (£32 million), of SGD495 million
(£220 million). As part of the transaction the Group also entered into a long-term strategic partnership to develop a major regional
bancassurance business with UOB.
In addition to the amounts above, the Group incurred £2 million of acquisition-related costs (excluding integration costs). These
have been excluded from the consideration transferred and have been recognised as an expense in the period, in the consolidated
income statement.
Goodwill arising on acquisition
Cash consideration
Less: fair value of identifiable net assets acquired
Goodwill arising on acquisition
£m
220
(79)
141
Goodwill arose on the acquisition of UOB Life Assurance Limited in Singapore because the acquisition included revenue and cost
synergies. These synergies could not be recognised as assets separately from goodwill because they are not capable of being separated
from the Group and sold, transferred, licensed, rented or exchanged, either individually or together with any related contracts and did
not arise from contractual or other legal rights.
None of the goodwill arising on this transaction is expected to be deductible for tax purposes.
Assets acquired and liabilities assumed at the date of acquisition
Assets:
Intangible assets attributable to shareholders: present value of acquired in-force business
Other non-investment and non-cash assets
Investments of long-term business and other operations
Cash and cash equivalents
Total assets
Liabilities:
Policyholder liabilities
Other non-insurance liabilities
Total liabilities
FAIR VALUE OF IDENTIFIABLE NET ASSETS ACQUIRED
£m
12
16
1,004
89
1,121
968
74
1,042
79
Total assets include loans and receivables with a fair value of £15 million. This value represents the gross contractual amount and all
amounts have been collected.
The consolidated statement of cash flows contains a £133 million net cash outflow in respect of this acquisition representing cash
consideration of £220 million, acquisition related costs paid of £2 million less cash and cash equivalents acquired of £89 million.
Impact of acquisition on the results of the Group
Included in the Group’s consolidated profit before tax for the year is £8 million attributable to UOB Life Assurance Limited in Singapore.
Consolidated revenue, including investment returns, for the year includes £125 million in respect of UOB Life Assurance Limited in
Singapore.
Had the acquisition been effected at 1 January 2010, the revenue and profit of the Group from continuing operations for the year
ended 31 December 2010 would not have been materially different.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
I: OTHER NOTES
CONTINUED
I2: DILUTION OF THE GROUP’S HOLDING IN PRUHEALTH IN 2010 AND SALE OF TAIWAN AGENCY BUSINESS IN 2009
a Dilution of the Group’s holding in PruHealth in 2010
On 1 August 2010, Discovery Holdings of South Africa, the Group’s joint venture partner in its investment in PruHealth, completed
the acquisition of the entire share capital of Standard Life Healthcare, a wholly-owned subsidiary of the Standard Life Group, for
£138 million. Discovery funded the purchase of the Standard Life Healthcare transaction, and contributed Standard Life Healthcare to
PruHealth as a capital investment on completion. As a result of the transaction, Discovery have increased their shareholding in PruHealth
from the previous level of 50 per cent to 75 per cent, and Prudential’s shareholding has been reduced from 50 per cent of the previous
joint venture structure to 25 per cent of the new structure with the much enlarged business.
As a result of this dilution in holding and the consequential loss of control, PruHealth has been reclassified from a joint venture
to an associate and the entity is no longer proportionally consolidated from the date of the transaction. In accordance with IAS 31
‘Interests in joint ventures’ a gain of £30 million arises upon the dilution, representing the difference between the fair value of the
enlarged 25 per cent investment still held and the book value of the original 50 per cent investment holding.
b Sale of Taiwan agency business in 2009
In 2009, the Company sold 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. In addition, the Company invested £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. The sale was completed on 19 June 2009.
The Company retains its interest in life insurance business in Taiwan through its retained bank distribution partnerships and
its direct investment in China Life made in 2009. At 31 December 2010 the Company’s interest in China Life was 8.66 per cent
(2009: 9.99 per cent).
The effect on the IFRS income statement was a pre-tax loss of £621 million comprising a loss on sale of £559 million and trading
losses before tax up to the date of sale of £62 million. After allowing for tax and other adjustments, the reduction to shareholders’ equity
was £607 million.
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.
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.
I3: STAFF AND PENSION PLANS
a Staff and employment costs
The average number of staff employed by the Group during the year was:
Business operations:
Asian operations
US operations
UK 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
Prudential plc Annual Report 2010
2010
2009
17,988
3,545
4,459
25,992
19,502
3,371
4,516
27,389
2010 £m
2009 £m
1,052
69
95
26
121
1,242
878
61
95
138
233
1,172
333
Other pension costs comprises £58 million (2009: £57 million) relating to defined benefit schemes and £37 million (2009: £38 million)
relating to defined contribution schemes of continuing operations. Of the defined contribution scheme costs, £26 million (2009: £27 million)
related to overseas defined contribution schemes. The £58 million (2009: £57 million) relating to defined benefit schemes comprises
a charge of £27 million (2009: £29 million) relating to PSPS and a charge of £31 million (2009: £28 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 £27 million (2009: £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 £31 million (2009: £28 million) for
other schemes comprises £18 million (2009: £19 million) charge on an economic basis, reflecting the total assets of the schemes,
and a further £13 million (2009: £9 million) charge to adjust for amounts invested in Prudential insurance policies to arrive at the
IAS 19 basis charge.
The loss of £26 million (2009: £138 million) for actuarial and other gains comprises a loss of £15 million (2009: £155 million)
for actuarial and other losses on an economic basis and £11 million actuarial gains (2009: £17 million) to adjust for amounts invested
in Prudential insurance policies. The derivation of these amounts is shown in note (b)(i)7.
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 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 (2009: 86 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. No formal deficit funding plan was required. However, in recognition of the fall in value of the
Scheme’s investments between 5 April 2008 and the completion of the actuarial valuation, an additional funding akin to deficit funding
was agreed with the Trustees. This is subject to a reassessment when the next valuation is completed. The total contribution being currently
made by the Group into the scheme, representing the annual accrual cost and deficit fundings, are £50 million per annum. 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 2010, total contributions for the year including expenses and augmentations were £55 million at
31 December (2009: £67 million). The market value of scheme assets as at 5 April 2008 was £4,759 million.
The actuarial assumptions used in determining benefit obligations and the net periodic benefit costs for the purposes of the valuation
were as follows:
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
Nil
3.5%
3.5%
2.5%
Nil
4.55%
Mortality assumptions
The tables used for PSPS pensions in payment at 5 April 2008 were:
Base post retirement mortality:
For current male (female) pensioners 108.6 per cent (103.4 per cent) of the mortality rates of the 2000 series mortality tables, published
by the Continuous Mortality Investigation Bureau. For male (female) non-pensioners 113.4 per cent (97.4 per cent) of the 2000 series rates.
Allowance for future improvements to post retirement mortality:
For males (females) 100 per cent (75 per cent) of Medium Cohort subject to a minimum rate of improvement of 1.75 per cent (1 per cent)
up to the age of 90, decreasing linearly to zero by age of 120.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
I: OTHER NOTES
CONTINUED
I3: STAFF AND PENSION PLANS > CONTINUED
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. Since the
valuation date, there has been deterioration in the funding level. During 2010, the Group agreed to pay additional funding of £5.8 million
per annum from October 2010 until conclusion of the next formal valuation, or until the funding level reaches 90 per cent, whichever is
the earlier. The IAS 19 deficit of the Scottish Amicable Pension Scheme at 31 December 2010 of £146 million (2009: £139 million) has
been allocated approximately 50 per cent to the PAC with-profits fund and 50 per cent to the shareholders’ fund.
The valuation of the M&G Pension Scheme as at 31 December 2008 was finalised in January 2010 and demonstrated the scheme to
be 76 per cent funded. 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. The IAS 19 deficit of the M&G Pension Scheme on an economic basis at 31 December 2010 was £27 million (2009: £36 million)
and is wholly attributable to shareholders.
The next triennial valuations for the PSPS, Scottish Amicable and M&G pension schemes are scheduled to take place by 5 April 2011,
31 March 2011 and 31 December 2011.
Under the IAS 19 valuation basis, the Group applies IFRIC 14, ‘IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding
Requirements and their Interaction’. Under IFRIC 14, for PSPS, where the Group does not have unconditional right of refund to any
surplus in the scheme, the surplus is not recognised. Additionally, the Group has to recognise a liability for committed deficit funding
obligation to PSPS. At 31 December 2010, the Group has not recognised the underlying PSPS surplus of £485 million gross of deferred
tax (2009: £513 million) and has recognised a liability for deficit funding to 30 June 2012 for PSPS of £47 million, gross of deferred tax
(2009: £75 million).
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 2010, 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 £83 million liability net of related tax
relief (2009: £92 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 2010, a £27 million (2009:
£32 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 £10 million (2009: £74 million) for shareholders’ share of actuarial and other
gains and losses.
In addition, also on the economic basis, the PAC with-profits sub-fund was charged £18 million (2009: charge of £16 million) for its
share of the pension charge of PSPS and Scottish Amicable and charged with £5 million (2009: £81 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 2010, 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 £99 million
(2009: £110 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.
Prudential plc Annual Report 2010
335
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
2010 %
2009 %
5.45
5.55
3.55
3.55
2.5
2.5
5.9
5.8
5.7
3.7
3.7
2.5
2.5
4.5
* The discount rate 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
3.55 per cent in 2010 (2009: 3.7 per cent).
The calculations are based on current actuarially calculated mortality estimates with a specific allowance made for future improvements
in mortality. The 2010 specific allowance is in line with custom calibration of the 2009 mortality model from the Continuous Mortality
Investigation Bureau of the Institute and Faculty of Actuaries (‘CMI’). The 2009 specific allowance was broadly based on adjusted
versions of the medium cohort projections prepared by the CMI.
The tables used for PSPS immediate annuities in payment at 31 December 2010 were:
Male: 108.6 per cent PNMA00 with improvements in line with a custom calibration of the CMI’s 2009 mortality model, with a long-term
mortality improvement rate of 1.75 per cent per annum; and
Female: 103.4 per cent PNFA00 with improvements in line with a custom calibration of the CMI’s 2009 mortality model, with a long-term
mortality improvement rate of 1.00 per cent per annum.
The tables used for PSPS immediate annuities in payment at 31 December 2009 were:
Male: 108.6 per cent PNMA00 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 PNFA00 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 assumed life expectancies on retirement at age 60, based on the mortality table used was:
Retiring today
Retiring in 20 years’ time
2010 years
2009 years
Male
27.7
30.3
Female
29.0
31.1
Male
27.4
30.1
Female
28.6
30.8
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The mean term of the current PSPS liabilities is around 18 years.
Using external actuarial advice provided by the scheme actuaries being Towers Watson for the valuation of PSPS, Aon Consulting
Limited for the M&G scheme, and Xafinity Consulting for the Scottish Amicable scheme, the most recent full valuations have been
updated to 31 December 2010, applying the principles prescribed by IAS 19.
336
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
I: OTHER NOTES
CONTINUED
I3: STAFF AND PENSION PLANS > CONTINUED
In July 2010, the UK Government announced plans to use the Consumer Price Index (CPI) in place of the Retail Price Index (RPI) in
its determination of the statutory minimum pension increases for private sector occupational pension schemes. In December 2010, the
Government published the statutory revaluation order for 2011 which confirms the change to use CPI. In addition, the Government has
also published in December 2010 a consultation paper which sets out the Government’s views on the impact that the switch from RPI to
CPI will have on the private sector occupational pension schemes. The consultation period closed on 2 March 2011.
For the Group’s UK defined benefit schemes, the pensions in deferment and/or pensions in payment for certain tranches of these
schemes are subject to statutory increases in accordance with the schemes’ rules and may therefore be affected by the Government’s
decision to change the indexation from RPI to CPI. Other tranches, where RPI is specified in the scheme rules, are unaffected.
The above has no impact on the results for the year ended 31 December 2010. The impact of this change, if and when made, will
be recognised in a future period. Using the underlying information as at 31 December 2010, the estimated effect of such a change would
give rise to an accounting benefit of approximately £30 million to the Group’s operating profit based on longer-term investment returns
and profit attributable to shareholders before tax and £20 million shareholders’ equity.
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
2010 £m
2009 £m
(106)
(114)
(220)
(227)
(447)
(122)
(128)
(250)
(187)
(437)
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 on an economic basis 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 2010, the investments
in Prudential policies comprise £118 million (2009: £101 million) for PSPS and £227 million (2009: £187 million) for the M&G scheme.
Separately, the economic financial position also includes the effect of the application of IFRIC 14, ‘IAS 19 – The Limit on a Defined
Benefit Asset, Minimum Funding Requirements and their Interaction’. 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 is established (as described earlier).
Prudential plc Annual Report 2010
337
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:
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
2010 £m
(Charge) credit to
income statement
Operating
results
(based on
longer-term
investment
returns)
note a
Surplus (deficit)
in scheme at
1 January 2010
Actuarial and
other gains
and losses
note b
Contributions
paid
Surplus (deficit)
in scheme at
31 Dec 2010
note c
338
(285)
53
(15)
38
(588)
407
(181)
51
(130)
(250)
122
(128)
36
(92)
(7)
(11)
(18)
5
(13)
(38)
29
(9)
2
(7)
(45)
18
(27)
7
(20)
(109)
71
(38)
11
(27)
94
(66)
28
(9)
19
(15)
5
(10)
2
(8)
90
(39)
51
(14)
37
–
–
–
–
–
90
(39)
51
(14)
37
312
(264)
48
(13)
35
(532)
370
(162)
44
(118)
(220)
106
(114)
31
(83)
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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.
2009 £m
(Charge) credit to
income statement
Operating
results
(based on
longer-term
investment
returns)
note a
Surplus (deficit)
in scheme at
1 January 2009
Actuarial and
other gains
and losses
note b
Contributions
paid
Disposal of
Taiwan
agency
business*
Surplus (deficit)
in scheme at
31 Dec 2009
note c
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)
a 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
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
Prudential plc Annual Report 2010
2010 £m
2009 £m
(38)
(294)
325
(7)
(38)
(45)
(34)
(277)
240
(71)
23
(48)
339
The net charge to operating profit (gross of the share attributable to the PAC with-profits fund) of £45 million (2009: £48 million) is
made up of a charge of £27 million (2009: £29 million) relating to PSPS and a charge of £18 million (2009: £19 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
2010 £m
2009 £m
(18)
(23)
(4)
(45)
(19)
(25)
(4)
(48)
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.
b 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 on changes of assumptions for plan liabilities
Experience (losses) 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
2010 £m
2009 £m
306
(411)
(4)
(109)
94
(15)
108
(521)
76
(337)
182
(155)
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 2010 actuarial losses of £109 million primarily reflects the effect of decrease in risk discount rates and the change in economic
assumptions underlying PSPS commutation factors partially offset by the effect of decreases in inflation rates and the excess of market
returns over long-term assumptions.
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 2010 in relation to this provision recognised above as other gains and losses on defined benefit pension
schemes was £nil (2009: £48 million).
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c 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
2010
2009
Other
schemes
note iii
£m
277
339
29
8
PSPS
£m
548
3,864
199
740
Total
£m
825
4,203
228
748
5,351
(4,866)
653
(826)
6,004
(5,692)
485
(173)
312
%
14
70
4
12
100
Other
schemes
note iii
£m
266
280
15
2
PSPS
£m
830
3,406
272
441
Total
£m
1,096
3,686
287
443
4,949
(4,436)
513
563
(738)
(175)
5,512
(5,174)
338
%
20
67
5
8
100
Effect of the application of IFRIC 14 for pension schemes:
Derecognition of PSPS surplus
Adjust for deficit funding for PSPS
(485)
(47)
–
–
(485)
(47)
(513)
(75)
–
–
(513)
(75)
Pre-tax deficitnote ii
(47)
(173)
(220)
(75)
(175)
(250)
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 2010, the nominal value of the interest and inflation-linked swaps amounted to
£1.1 billion (2009: £1.1 billion) and £1.8 billion (2009: £1.9 billion) respectively.
ii The resulting scheme deficit arising from the excess of liabilities over assets at 31 December 2010 of £220 million (2009: £250 million)
iii
comprised a deficit of £106 million (2009: £122 million) attributable to the PAC with-profits fund and deficit of £114 million (2009: £128 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 2010 of £173 million (2009: £175 million), gross of tax. There is also a small scheme in Taiwan, with a negligible
amount of deficit at 31 December 2010 and 2009. 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.
The movements in the deficit on the ‘economic basis’ between scheme assets and liabilities were:
Current service cost
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 increase (decrease) in deficit
2010 £m
2009 £m
(13)
(5)
(27)
90
(15)
–
30
(11)
(8)
(29)
85
(155)
17
(101)
Prudential plc Annual Report 2010
341
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
2010 £m
Other schemes
Provision
for deficit
funding
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
376
187
563
376
187
563
25
15
20
(10)
13
1
20
11
(5)
38
1
35
31
(15)
426
227
653
(738)
(738)
(13)
(43)
(1)
(46)
15
(826)
(75)
(75)
55
(27)
(47)
Total
Economic
basis:
net
obligations
563
(738)
(75)
(250)
(13)
(43)
38
–
90
(15)
(27)
653
(826)
(47)
(220)
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
Fair value of plan assets, end of year
Present value of benefit obligation, end of year
Provision for deficit funding of PSPS
Economic basis deficit
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
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I3: 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
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
Fair value of plan assets, end of year
Present value of benefit obligation, end of year
Provision for deficit funding of PSPS
Economic basis deficit
PSPS
2009 £m
Other schemes
Provision
for deficit
funding
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
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)
(65)
(65)
67
(29)
(48)
(75)
Total
Economic
basis:
net
obligations
514
(598)
(65)
(149)
(11)
(35)
27
–
85
(107)
–
(29)
(48)
17
563
(738)
(75)
(250)
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
2010 £m
2009 £m
2008 £m
2007 £m
2006 £m
5,659
(5,438)
5,224
(4,951)
5,057
(4,493)
5,150
(4,826)
4,988
(5,023)
221
(254)
(33)
(485)
(47)
118
(447)
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)
* 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.
Prudential plc Annual Report 2010
343
2010 £m
2009 £m
(38)
(294)
325
(21)
304
(28)
(30)
(58)
(109)
(20)
(129)
103
(26)
(34)
(277)
240
(16)
224
(87)
30
(57)
(337)
8
(329)
191
(138)
COMPONENTS OF NET PERIODIC PENSION COST
Current service cost
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 note I3a)
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 note I3a)
Net periodic pension cost (included within acquisition and other operating expenditure
in the income statement)
(84)
(195)
* 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 2010, the 5.9 per cent (2009: 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:
2010
2009
2008
2007
2006
£m
%
£m
%
£m
%
£m
%
£m
%
SCHEME ASSETS (IAS 19 BASIS
BEFORE EFFECT OF IFRIC 14)
Equity
Bonds
Properties
Cash-like investments
Total
610
4,095
206
748
5,659
11
72
4
13
917
3,587
278
442
18
69
5
8
875
2,619
290
1,273
17
52
6
25
1,332
1,299
583
1,936
26
25
11
38
1,432
2,185
621
750
29
44
12
15
100
5,224
100
5,057
100
5,150
100
4,988
100
LONG-TERM EXPECTED RATE OF RETURN
Equity
Bonds
Properties
Cash-like investments
Weighted average long-term expected rate of return
Prospectively for 2011 %
2010 %
2009 %
8.2
4.6
6.9
4.75
5.1
8.5
5.3
6.75
4.75
5.9
6.8
4.8
6.05
2.0
4.5
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The expected rates of return have been determined by reference to long-term expectations, the carrying value of the assets and equity
and other market conditions at the statement of financial position date.
The actual return on scheme assets was a gain of £631 million (2009: £348 million) on an IAS 19 basis.
344
FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
I: OTHER NOTES
CONTINUED
I3: 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
5,659
(5,692)
5,224
(5,174)
5,057
(4,673)
5,150
(5,015)
4,988
(5,210)
2010 £m
2009 £m
2008 £m
2007 £m
2006 £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
(33)
50
384
135
(222)
(4)
(0.07)%
287
5.07%
76
1.47%
100
1.91%
145
3.10%
(277)
(5.48)%
(14)
0.28%
(7)
(0.14)%
18
(0.35)%
140
2.81%
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 2011
amounts to £94 million (2010: £88 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
2010 of £4,866 million, £572 million and £254 million respectively (2009: £4,436 million, £515 million and £223 million) to changes in
discount rates and inflation rates. In addition, the table below shows the sensitivity of the underlying PSPS, Scottish Amicable and M&G
pension scheme liabilities at 31 December 2010 to changes to mortality rate assumptions.
Assumption
Discount rate
Change in assumption
Impact on scheme liabilities on IAS 19 basis
Decrease by 0.2% from 5.45% to 5.25%
Increase in scheme liabilities by:
2010
Discount rate
Increase by 0.2% from 5.45% to 5.65%
Rate of inflation
Decrease by 0.2% from 3.55% to 3.35% with
consequent reduction in salary increases
Mortality rate
Increase life expectancy by one year
PSPS
Scottish Amicable
M&G
Decrease in scheme liabilities by:
PSPS
Scottish Amicable
M&G
Decrease in scheme liabilities by:
PSPS
Scottish Amicable
M&G
Increase 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 5.8% to 5.6%
Increase in scheme liabilities by:
2009
Discount rate
Increase by 0.2% from 5.8% to 6.0%
Rate of inflation
Decrease by 0.2% from 3.7% to 3.5% with
consequent reduction in salary increases
Prudential plc Annual Report 2010
PSPS
Scottish Amicable
M&G
Decrease in scheme liabilities by:
PSPS
Scottish Amicable
M&G
Decrease in scheme liabilities by:
PSPS
Scottish Amicable
M&G
3.6%
5.2%
5.1%
3.5%
4.9%
4.8%
1.0%
5.0%
4.5%
2.1%
2.5%
2.9%
3.5%
5.2%
4.9%
3.2%
4.8%
4.9%
0.9%
4.9%
4.5%
345
The sensitivity of the underlying pension scheme liabilities to changes in discount, inflation and mortality 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 above.
The sensitivity to the changes in the key variables as shown in the table above has no significant impact on the pension costs included
in the Group’s operating results. This is due to the pension costs charged in each of the periods presented being derived largely from
market conditions at the beginning of the period. After applying IFRIC 14 and to the extent attributable to shareholders, any residual
impact from the changes to these variables is reflected as actuarial gains and losses on defined benefit pension schemes within the
supplementary analysis of profits. The relevance of this to each of the three UK schemes is described further below.
For PSPS, the underlying surplus of the scheme of £485 million (2009: £513 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. Based on the underlying financial position of PSPS as at
31 December 2010, none of the changes to the underlying scheme liabilities for the changes in the variables shown in the table above
have had an impact on the Group’s 2010 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.
The deficit of the Scottish Amicable pension scheme has been allocated approximately 50 per cent to the PAC with-profits fund and
50 per cent to the shareholders. Accordingly, half of the changes to the scheme liabilities for the changes in the variables shown in the
table above would have had an impact on the Group’s shareholder results and financial position. The M&G pension scheme is wholly
attributable to shareholders.
9 Transfer value of PSPS scheme
At 31 December 2010, 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. The cost of the Group’s
contributions for continuing operations to these schemes in 2010 was £37 million (2009: £38 million).
I4: 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. Beginning in 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.
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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. Since the year ended
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. Beginning in 2010, newly issued shares will
be used in settling the awards that vest and are released. During 2009, the Remuneration Committee decided that future BUPP awards
for the UK business unit would be based on the same relative TSR measure applied to GPSP awards. As a result, 2010 awards made
under the UK BUPP reflect those TSR conditions applied to 2010 GPSP awards.
The Group maintains four share option schemes satisfied by the issue of new shares. 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. Dublin-based employees are eligible to
participate in the Prudential International Assurance Sharesave Plan, and Hong Kong-based agents can participate in the Non-employee
Savings Related Share Option Scheme. The schemes allow participants to save towards the exercise of options over Prudential plc
shares, at an option price set at the beginning of the savings period as determined by reference to the average market value of the
ordinary shares on the three business days immediately preceding the invitation at a discount of 20 per cent to the market price.
Participants 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. The exercise period
of the options granted may be advanced to an earlier date in certain circumstances, for example on retirement, and may be extended in
certain circumstances, for example on the death of the participant the personal representative may exercise the options beyond
the normal exercise period. 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.
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.
Prudential plc Annual Report 2010
347
Options outstanding under SAYE schemes
Beginning of year:
Granted
Exercised
Forfeited
Cancelled
Lapsed
End of year
Options immediately exercisable, end of year
2010
2009
Number
of options
millions
Weighted
average
exercise
price
£
Number
of options
millions
Weighted
average
exercise
price
£
12.2
2.2
(0.6)
(0.2)
(0.5)
(0.3)
12.8
0.2
3.20
4.61
3.15
3.44
3.37
3.89
3.40
5.52
6.8
10.7
(0.4)
(0.5)
(3.8)
(0.6)
12.2
0.3
4.54
2.96
3.98
3.87
4.58
4.42
3.20
4.45
The weighted average share price of Prudential plc for the year ended 31 December 2010 was £5.68 compared to £4.17 for the year
ended 31 December 2009.
Movements in share awards outstanding under the Group’s share-based compensation plans relating to Prudential plc shares at
31 December 2010 and 2009 were as follows:
Awards outstanding under incentive plans including conditional options
Beginning of year:
Granted
Exercised
Forfeited
Expired
End of year
2010
2009
Number of
awards
millions
Number of
awards
millions
19.2
11.2
(4.7)
(1.2)
(0.6)
23.9
14.5
11.1
(3.4)
(1.0)
(2.0)
19.2
The following table provides a summary of the range of exercise prices for Prudential plc options outstanding at 31 December 2010.
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
£
–
–
9.0
0.1
3.3
0.4
–
–
12.8
–
–
2.6
1.3
3.3
1.0
–
–
2.8
–
–
2.88
3.59
4.51
5.59
–
–
3.40
–
–
–
–
–
0.2
–
–
0.2
–
–
–
3.67
4.07
5.63
–
–
5.52
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
I: OTHER NOTES
CONTINUED
I4: SHARE-BASED PAYMENTS > CONTINUED
The following table provides a summary of the range of exercise prices for Prudential plc 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
£
–
–
10.0
0.1
1.5
0.6
–
–
12.2
–
–
3.6
1.0
3.0
1.9
–
–
3.4
–
–
2.88
3.62
4.37
5.60
–
–
3.20
–
–
–
0.1
0.2
0.0
–
–
0.3
–
–
–
3.43
4.73
5.65
–
–
4.45
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:
2010 £
2009 £
Weighted average fair value
Weighted average fair value
GPSP
2.74
SAYE
Options
2.91
Awards
5.14
GPSP
3.52
SAYE
Options
1.55
Awards
4.67
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:
Dividend yield (%)
Expected volatility (%)
Risk-free interest rate (%)
Expected option life (years)
Weighted average exercise price (£)
Weighted average share price (£)
2010
2009
GPSP
3.43
42.69
1.70
3.00
–
5.70
SAYE
Options
3.43
64.65
1.07
3.49
4.61
6.38
GPSP
4.41
56.21
1.92
3.00
–
4.83
SAYE
Options
4.41
60.55
2.15
3.67
2.96
3.82
Under IFRS, compensation costs for all share-based compensation plans are determined using either the Black-Scholes model or 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 and five-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
Prudential plc Annual Report 2010
349
between Prudential and an index constructed from a simple average of the TSR growth of 11 companies is required. For grants in 2010,
an average index volatility and correlation of 35 per cent and 82 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
I5: KEY MANAGEMENT REMUNERATION
2010 £m
2009 £m
47
37
17
6
37
29
13
7
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 £21,677,000 (2009: £20,989,000). This comprises salaries and short-term benefits
of £9,594,000 (2009: £11,570,000), post-employment benefits of £926,000 (2009: £1,132,000), leaving benefits of £ nil (2009: £915,000)
and share-based payments of £11,157,000 (2009: £7,372,000).
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 £7,320,000 (2009: £5,270,000), which is determined in accordance with IFRS 2,
‘Share-Based Payments’ (see note I4) and £3,837,000 (2009: £2,102,000) of deferred share awards.
Total key management remuneration includes total directors’ emoluments of £14,225,000 (2009: £15,090,000) 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.
I6: 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 other corporate finance transactions
All other services
Services relating to the AIA transaction
Total
In addition, there were fees incurred of £0.1 million (2009: £0.2 million) for the audit of pension schemes.
2010 £m
2009 £m
1.9
6.1
2.4
0.4
0.1
0.1
1.0
5.5
1.8
5.5
2.7
0.6
0.1
0.7
1.0
–
17.5
12.4
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
I: OTHER NOTES
CONTINUED
I6: FEES PAYABLE TO AUDITOR > CONTINUED
The fees for services relating to the AIA transaction of £5.5 million were primarily comprised of the following services:
• Accountants’ Report on historical financial information on Prudential Group
• Consulting Actuaries’ Report on AIA EEV information
• Technical accounting advice
• Financial due diligence
• Working capital review
• Synergies review
• Extraction comfort
All services were specifically approved by the Prudential Group Audit Committee.
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.
I7: 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 I5.
In 2010 and 2009, other transactions with directors were not deemed to be significant both by virtue of their size and in the context
of the directors’ financial positions. As indicated above, all of these transactions are on terms broadly equivalent to those that prevail in
arm’s length transactions.
I8: SUBSIDIARY UNDERTAKINGS
i Principal subsidiaries
The principal subsidiary undertakings of the Company at 31 December 2010, 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
Insurance
Insurance
Insurance
Asset management
Insurance
Insurance
Country of
incorporation
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.
Details of all Prudential subsidiaries, joint ventures and associates will be annexed to the next Annual Returns of Prudential plc filed
with the UK Registrar of Companies and the Registrar of Companies in Hong Kong.
Prudential plc Annual Report 2010
351
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 could be paid by Jackson without prior
regulatory approval is US$377 million (£241 million) (in 2009: US$454 million (£281 million)). The Group’s Asian subsidiaries 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
During 2010, the Group acquired a 100 per cent interest in United Overseas Bank Life Assurance Limited (UOB) in Singapore. Further
details are set out in note I1.
On 1 October 2010, the PAC with-profits fund, via its venture fund holdings and as part of its investment portfolio, acquired control
of Meterserve (North West) Limited and Meterserve (North East) Limited (together referred to as ‘Meterserve’), increasing its 50 per
cent stake to 100 per cent.
As this transaction is within the with-profits fund it has no impact on shareholders’ profit or equity for the period ended 31 December
2010. The impact on the Group’s consolidated revenue, including investment returns, is not material. Had the acquisition been effected
at 1 January 2010, the revenue and profit of the Group from continuing operations for the year ended 31 December 2010 would not have
been materially different.
A summary of the consideration, goodwill and net assets acquired relating to Meterserve is provided in the table below:
Cash consideration paid
Fair value of existing stake
Total consideration
Net assets acquired:
Property, plant and equipment
Derivative assets
Other non-investment and non-cash assets
Cash and cash equivalents
Borrowings attributable to with-profits funds
Other non-insurance liabilities
Fair value of net assets acquired
Total goodwill arising on acquisition attributable to the with-profits fund
2010 £m
22
25
47
219
(35)
11
10
(194)
(6)
5
42
The acquisition costs associated with this transaction were expensed as incurred and totalled less than £1 million. Goodwill represents
management’s expectation of future income streams and is not allowable for tax.
As noted above the transaction increased the previously held stake from 50 per cent to 100 per cent. The fair value of the existing
stake at the date of the transaction was £25 million. As the investment was held in the Group’s balance sheet as a financial instrument
classified as at fair value through profit and loss no gain or loss arises as a result of the transaction.
There were no new acquisitions or disposals by the PAC with-profits fund in 2009. However, during 2009, the holding in the voting
equity interest of Red Funnel increased from 90 per cent to 100 per cent. Red Funnel is a venture capital holding owned by the PAC
with-profits fund managed by M&G.
Other than the above there were no other material acquisitions or disposals of subsidiaries during 2010 or 2009.
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FINANCIAL STATEMENTS > NOTES ON THE GROUP FINANCIAL STATEMENTS
I: OTHER NOTES
CONTINUED
I9: 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
2010 £m
2009 £m
70
236
120
63
178
104
The total minimum future sublease rentals to be received on non-cancellable operating leases for land and buildings for the year ended
31 December 2010 were £nil (2009: £nil).
Minimum lease rental payments for the year ended 31 December 2010 of £92 million (2009: £105 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. The contractual obligations to purchase or develop investment properties
at 31 December 2010 was £28 million (2009: £nil).
I10: DISCONTINUED OPERATIONS
The charge of £14 million in 2009, which is net of £nil tax, reflects completion adjustments for a previously disposed business.
I11: CASH FLOWS
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 the Scottish Amicable Insurance fund (SAIF) a ring-fenced sub-fund of the PAC
with-profits fund. Cash flows in respect of other borrowings of with-profits funds, which principally relate to consolidated investment
funds, are included within cash flows from operating activities.
I12: POST BALANCE SHEET EVENTS
In January 2011, the Company issued US$550 million 7.75 per cent Tier 1 subordinated debt, primarily to retail investors. The proceeds, net
of costs, were US$539 million and are intended to finance the repayments of the ¤500 million Tier 2 subordinated notes in December 2011.
Prudential plc Annual Report 2010
INDEX TO THE ADDITIONAL UNAUDITED
FINANCIAL INFORMATION
Selected historical financial information of Prudential
I.
354 Selected historical financial information of Prudential
II.
357
IFRS profit and loss information
(a)
Analysis of long-term insurance business pre-tax IFRS
operating profit based on longer-term investment returns
by driver
Asian operations – analysis of IFRS operating profit
by territory
Analysis of asset management operating profit based
on longer-term investment returns
362
(b)
363
(c)
III.
365
IFRS balance sheet information
(a)
367
(b)
Memorandum fair value of Jackson's GMDB and
GMWB liabilities
IFRS shareholders' funds summary by business unit
and net asset value per share
IV. Other information
368
368
371
(a)
(b)
(c)
Funds under management
Effect of foreign currency rate movements on results
Option schemes
353
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FINANCIAL STATEMENTS > ADDITIONAL UNAUDITED FINANCIAL INFORMATION
ADDITIONAL UNAUDITED
FINANCIAL INFORMATION
I: SELECTED HISTORICAL FINANCIAL INFORMATION OF PRUDENTIAL
The following table sets forth Prudential’s selected consolidated financial data for the periods indicated. Certain data is derived from
Prudential’s audited consolidated financial statements prepared in accordance with International Financial Reporting Standards (‘IFRS’)
as issued by the International Accounting Standards Board (‘IASB’) and as adopted by the European Union (‘EU’) and European Embedded
Value (EEV).
This table is only a summary and should be read in conjunction with Prudential’s consolidated financial statements and the related
notes included elsewhere in this document.
Income statement data
IFRS basis results
Gross premium earned
Outward reinsurance premiums
Earned premiums, net of reinsurance
Investment return
Other income
Total revenue, net of reinsurance
Benefits and claims and movement in unallocated surplus of
with-profits funds, net of reinsurance
Acquisition costs and other expenditure
Finance costs: interest on core structural borrowings of
shareholder-financed operations
Loss on sale of Taiwan agency business
Year Ended 31 December
2010 £m
2009 £m
2008 £m
2007 £m
2006 £m
24,568
(357)
24,211
21,769
1,666
47,646
20,299
(323)
19,976
26,889
1,234
48,099
18,993
(204)
18,789
(30,202)
1,146
(10,267)
18,359
(171)
18,188
12,225
2,457
32,870
16,157
(171)
15,986
17,141
1,917
35,044
(40,518)
(4,799)
(41,195)
(4,572)
10,824
(2,459)
(26,785)
(4,859)
(28,267)
(4,489)
(257)
–
(209)
(559)
(172)
–
(168)
–
(177)
–
Total charges, net of reinsurance
(45,574)
(46,535)
8,193
(31,812)
(32,933)
Profit (loss) before tax (being tax attributable to shareholders’
and policyholders’ returns) 1
Tax (charge) credit attributable to policyholders’ returns
Profit (loss) before tax attributable to shareholders
Tax (charge) credit attributable to shareholders’ returns
Profit (loss) from continuing operations after tax
Discontinued operations (net of tax)
Profit (loss) for the year
Based on profit (loss) for the year attributable to the equity
holders of the Company:
Basic earnings per share (in pence)
Diluted earnings per share (in pence)
Dividend per share declared and paid in reporting period
2,072
(611)
1,461
(25)
1,436
–
1,436
1,564
(818)
(2,074)
1,624
746
(55)
691
(14)
677
(450)
59
(391)
–
(391)
1,058
5
1,063
(354)
709
241
950
2,111
(830)
1,281
(365)
916
(105)
811
56.7p
56.6p
27.0p
27.0p
(16.0)p
(16.0)p
38.7p
38.6p
33.6p
33.6p
(in pence)
20.17p
19.2p
18.29p
17.42p
16.44p
Prudential plc Annual Report 2010
355
Supplementary IFRS income statement data
Operating profit based on longer-term investment returns2
Short-term fluctuations in investment returns on shareholder-
backed business
Shareholders’ share of actuarial and other gains and losses on
defined benefit pension schemes
Costs of terminated AIA transaction
Gain on dilution of holding in PruHealth
Loss on sale and results of Taiwan agency business
Profit (loss) from continuing operations before tax attributable
2010 £m
2009 £m
2008 £m
2007 £m
2006 £m
1,941
1,564
1,212
1,152
1,068
(123)
(10)
(377)
30
–
(123)
(1,650)
(74)
–
–
(621)
(13)
–
–
1
(51)
(1)
–
–
(37)
88
76
–
–
49
to shareholders2
1,461
746
(450)
1,063
1,281
Operating earnings per share (reflecting operating profit based
on longer-term investment returns after related tax and
non-controlling interests and excluding 2010 exceptional
tax credit) (in pence)
Operating earnings per share (reflecting operating profit based
on longer-term investment returns after related tax and
non-controlling interests and including 2010 exceptional
tax credit) (in pence)
Supplementary EEV income statement data
Operating profit based on longer-term investment returns2
Short-term fluctuations in investment returns on shareholder-
backed business
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
Costs of terminated AIA transaction
Gain on dilution of holding in PruHealth
Profit on sale and results of Taiwan agency business
Profit (loss) from continuing operations before tax attributable
62.0p
47.5p
38.1p
31.3p
28.8p
68.3p
47.5p
38.1p
31.3p
28.8p
2010 £m
2009 £m
2008 £m
2007 £m
2006 £m
3,696
3,090
2,865
2,353
1,998
(30)
(164)
(11)
(10)
(377)
3
–
351
(795)
(84)
(910)
–
–
91
(4,967)
656
(14)
(398)
–
–
(248)
200
223
(5)
632
–
–
267
692
85
207
163
–
–
77
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
to shareholders
3,107
1,743
(2,106)
3,670
3,222
Operating earnings per share (reflecting operating profit based
on longer-term investment returns after related tax and
non-controlling interests and excluding 2010 exceptional
tax credit) (in pence)
Operating earnings per share (reflecting operating profit based
on longer-term investment returns after related tax and
non-controlling interests and including 2010 exceptional
tax credit) (in pence)
106.9p
88.8p
85.1p
69.2p
58.2p
113.2p
88.8p
85.1p
69.2p
58.2p
A
D
D
I
T
I
O
N
A
L
U
N
A
U
D
I
T
E
D
F
I
N
A
N
C
I
A
L
I
N
F
O
R
M
A
T
I
O
N
356
FINANCIAL STATEMENTS > ADDITIONAL UNAUDITED FINANCIAL INFORMATION
ADDITIONAL UNAUDITED
FINANCIAL INFORMATION
CONTINUED
I: SELECTED HISTORICAL FINANCIAL INFORMATION OF PRUDENTIAL > CONTINUED
New business data
New business3 excluding Japan and Taiwan.
Annual premium equivalent (APE) sales:
– Asia
– US
– UK
– Total APE sales
EEV new business profit (NBP)
NBP margin (% APE)
Statement of financial position data
2010 £m
2009 £m
2008 £m
2007 £m
2006 £m
AER
1,501
1,164
820
3,485
2,028
58%
1,209
912
723
2,844
1,619
57%
1,174
716
947
2,837
1,205
42%
1,044
671
910
2,625
1,103
42%
814
613
900
2,327
975
42%
As of and for the Year Ended 31 December
2010 £m
2009 £m
2008 £m
2007 £m
2006 £m
IFRS basis results
Total assets
Total policyholder liabilities and unallocated surplus of
with-profits funds
Core structural borrowings of shareholder –
financed operations
Total liabilities
Total equity
Other data
260,806
227,754
215,542
219,382
216,528
224,980
196,417
182,391
190,317
178,539
3,676
252,731
8,075
3,394
221,451
6,303
2,958
210,429
5,113
2,492
213,218
6,164
3,063
210,972
5,556
As of and for the Year Ended 31 December
2010 £bn
2009 £bn
2008 £bn
2007 £bn
2006 £bn
Funds under management4
EEV shareholders’ equity, excluding non-controlling interests
Insurance Groups Directive capital surplus (as adjusted) 5
340
18.2
4.3
290
15.3
3.4
249
15.0
1.5
267
14.6
1.9
251
11.9
1.2
Notes
1
2 Operating profits are determined on the basis of including longer-term investment returns. EEV and IFRS operating profits are stated after
This measure is the formal profit (loss) before tax measure under IFRS but is not the result attributable to shareholders.
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, transaction costs arising from business combinations in the period, costs associated
with the terminated AIA transaction, and the effect of disposal and results of the Taiwan agency business, for which the sale process was
completed in June 2009. In 2010, the Group amended the presentation of IFRS operating profit for its US insurance operations to remove the net
equity hedge accounting effect (incorporating related amortisation of deferred acquisition costs) and include it in short-term fluctuations. The
prior period comparatives for 2009 and 2008 have been amended accordingly.
In addition, for EEV basis results, operating profit excludes the effect of changes in economic assumptions and the market value movement on
core borrowings.
3 New business sales exclude the results of the Japanese life operation which ceased writing new business in February 2010, and the results of the
4
5
Taiwan agency business for which the sale process was completed in June 2009.
Funds under management comprise funds of the Group held in the statement of financial position and external funds that are managed by
Prudential asset management operations.
The surpluses shown are before allowing for the final dividends for each year, which are paid in the following year. The 2010 surplus is estimated.
Since 2007, following the sale of Egg Banking, Prudential has been subject to the capital adequacy requirements of the Insurance Groups
Directive (IGD) which applies to groups whose activities are mainly in the insurance sector. Prior to the sale of Egg Banking, Prudential was
subject to the capital adequacy requirements of the Financial Conglomerates Directive (FCD) which applies to groups with significant cross-
sector activities in insurance and banking/investment services. Prudential was classified as an insurance conglomerate under the FCD. As the
requirements for insurance conglomerates under the FCD are closely aligned to the requirements for insurance groups under the IGD, the move
for Prudential from FCD to IGD did not result in a significant impact.
Prudential plc Annual Report 2010
357
II(a): ANALYSIS OF LONG-TERM INSURANCE BUSINESS PRE-TAX IFRS OPERATING PROFIT BASED ON LONGER-TERM
INVESTMENT RETURNS 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
Spread income 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. It excludes the longer-term investment return on assets in excess
of those covering shareholder-backed policyholder liabilities, which has been separately disclosed as expected return on
shareholder assets.
ii
Fee income represents profits driven by net investment performance, being asset management fees that vary with the size of the
underlying policyholder funds net of investment management expenses.
iii With-profits business represents the shareholders’ transfer from the with-profits fund in the period.
iv
Insurance margin primarily represents profits derived from the insurance risks of mortality, morbidity and persistency.
v
vi
Margin on revenues primarily represents amounts deducted from premiums to cover acquisition costs and administration expenses.
Acquisition costs and administration expenses represent expenses incurred in the period attributable to shareholders. It excludes
items such as restructuring costs and Solvency II costs which are not included in the segment profit for insurance as well as items that
are more appropriately included in other source of earnings lines (e.g. investment expenses are netted off investment income as part
of spread income or fee income as appropriate).
vii
DAC adjustments comprises DAC amortisation for the period, excluding amounts related to short-term fluctuations, net of costs
deferred in respect of new business.
Analysis of pre-tax IFRS operating profit by source
Spread income
Fee income
With-profits
Insurance margin
Margin on revenues
Expenses
Acquisition costs
Administration expenses
DAC adjustments
Expected return on shareholder assets
Long-term business operating profit
Asset management operating profit
GI commission
Other income and expenditure*
Total operating profit based on longer-term investment returns
* Including restructuring and Solvency II implementation costs.
Asia
70
122
32
392
1,018
(656)
(467)
2
19
532
72
–
–
604
2010 £m
UK
Unallocated
251
60
310
12
223
(167)
(113)
(1)
98
673
284
46
–
1,003
–
–
–
–
–
–
–
–
–
–
–
–
(521)
(521)
US
692
506
–
188
–
(851)
(344)
517
125
833
22
–
–
855
Total
1,013
688
342
592
1,241
(1,674)
(924)
518
242
2,038
378
46
(521)
1,941
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
A
D
D
I
T
I
O
N
A
L
U
N
A
U
D
I
T
E
D
F
I
N
A
N
C
I
A
L
I
N
F
O
R
M
A
T
I
O
N
358
FINANCIAL STATEMENTS > ADDITIONAL UNAUDITED FINANCIAL INFORMATION
ADDITIONAL UNAUDITED
FINANCIAL INFORMATION
CONTINUED
II(a): ANALYSIS OF LONG-TERM INSURANCE BUSINESS PRE-TAX IFRS OPERATING PROFIT BASED ON LONGER-TERM
INVESTMENT RETURNS BY DRIVER > CONTINUED
Spread income
Fee income
With-profits
Insurance margin
Margin on revenues
Expenses
Acquisition costs
Administration expenses
DAC adjustments
Expected return on shareholder assets
Non-recurrent release of reserves for Malaysia life operations
Long-term business operating profit
Asset management operating profit
GI commission
Other income and expenditure*
Total operating profit based on longer-term investment returns
Spread income
Fee income
With-profits
Insurance margin
Margin on revenues
Expenses
Acquisition costs
Administration expenses
DAC adjustments
Expected return on shareholder assets
Long-term business operating profit
Asset management operating profit
GI commission
Other income and expenditure*
Total operating profit based on longer-term investment returns
* Including restructuring and Solvency II implementation costs.
Asia
31
80
29
253
766
(605)
(382)
150
25
63
410
55
–
–
465
Asia
38
54
30
198
672
(619)
(331)
173
16
231
52
–
–
283
2009i £m
UK
Unallocated
198
54
281
41
275
(192)
(173)
(3)
125
–
606
238
51
–
895
–
–
–
–
–
–
–
–
–
–
–
–
–
(418)
(418)
Total
753
458
310
448
1,041
(1,487)
(814)
614
248
63
1,634
297
51
(418)
1,564
2008i £m
UK
Unallocated
Total
35
57
395
(12)
314
(172)
(212)
32
108
545
286
44
–
875
–
–
–
–
–
–
–
–
–
–
–
–
(288)
(288)
534
403
425
347
986
(1,242)
(760)
205
213
1,111
345
44
(288)
1,212
US
524
324
–
154
–
(690)
(259)
467
98
–
618
4
–
–
622
US
461
292
–
161
–
(451)
(217)
–
89
335
7
–
–
342
Note
i
During 2010 the Group amended its presentation of operating profit for its US insurance operations to remove the net equity hedge accounting
effect associated with Jackson’s variable annuity and fixed index annuity products, which are now classified in the Group’s supplementary
analysis of profit before tax attributable to shareholders as part of short-term fluctuations in investment returns. 2009 and 2008 operating profit
have been amended accordingly and so net equity hedge effects of £159 million negative and £71 million positive have been removed from the
previously stated operating profits of £1,405 million and £1,283 million to give restated values of £1,564 million and £1,212 million, respectively.
Prudential plc Annual Report 2010
359
Margin analysis of long-term insurance business
The following analysis expresses certain of the Group’s sources of operating profit as a margin of policyholder liabilities or other suitable
driver. Details of the Group’s average policyholder liability balances are given in note B6(e).
Long-term business
Spread income
Fee income
With-profits
Insurance margin
Margin on revenues
Expenses
Acquisition costs*
Administration expenses
DAC adjustments
Expected return on shareholder assets
Non-recurrent release of reserve for Malaysia Life
2010
Average
Liability
£m
Profit
£m
1,013 53,858
688 57,496
342 89,693
592
1,241
(1,674) 3,492
(924) 111,354
518
242
–
Total
2009
Average
Liability
£m
Margin
bps
Profit
£m
2008
Average
Liability
£m
Margin
bps
Profit
£m
188
120
38
753 51,000
458 43,373
310 84,063
448
1,041
148
106
37
534 44,281
403 38,850
425 89,075
347
986
(48)% (1,487)
(51)% (1,242)
(83)
(86)
2,896
(814) 94,373
614
248
63
2,879
(760) 83,131
205
213
–
Margin
bps
121
104
48
(43)%
(91)
Operating profit
2,038
1,634
1,111
Long-term business
Spread income
Fee income
With-profits
Insurance margin
Margin on revenues
Expenses
2010
Average
Liability
£m
Profit
£m
Margin
bps
Profit
£m
70
4,393
122 11,222
32 10,135
159
109
32
392
1,018
31
80
29
253
766
Asia
2009
Average
Liability
£m
3,152
8,107
8,371
Acquisition costs*
Administration expenses
(656) 1,508
(467) 15,615
(44)%
(299)
DAC adjustments
Expected return on shareholder assets
Non-recurrent release of reserve for Malaysia Life
Operating profit
2
19
–
532
(605)
1,261
(382) 11,259
150
25
63
410
Margin
bps
Profit
£m
98
99
35
(48)%
(339)
38
54
30
198
672
(619)
(331)
173
16
–
231
2008
Average
Liability
£m
2,421
6,419
7,168
Margin
bps
157
84
42
1,216
8,840
(51)%
(374)
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
* The ratio for acquisition costs is calculated as a percentage of APE including with-profits sales and Japan (2010: £7 million; 2009: £52 million).
Acquisition costs include only those relating to shareholders.
A
D
D
I
T
I
O
N
A
L
U
N
A
U
D
I
T
E
D
F
I
N
A
N
C
I
A
L
I
N
F
O
R
M
A
T
I
O
N
360
FINANCIAL STATEMENTS > ADDITIONAL UNAUDITED FINANCIAL INFORMATION
ADDITIONAL UNAUDITED
FINANCIAL INFORMATION
CONTINUED
II(a): ANALYSIS OF LONG-TERM INSURANCE BUSINESS PRE-TAX IFRS OPERATING PROFIT BASED ON LONGER-TERM
INVESTMENT RETURNS BY DRIVER > CONTINUED
Analysis of Asian operating profit drivers:
• Spread income has increased from £31 million in 2009 to £70 million in 2010. This increase arises primarily as a result of improved
investment return in Vietnam (where the return in 2009 was particularly low compared to both 2008 and 2010) and additional
dividend income received in Japan.
• Fee income has increased both in absolute terms by £42 million and as an improvement in margin, which has increased 10 bps to
109 bps. This primarily relates in a change in mix towards those countries with a higher asset management fee margin (e.g. Indonesia)
from countries where fees charged are lower.
• Insurance margin has increased by £139 million from £253 million in 2009 to £392 million in 2010. This reflects the continued growth
in the in-force book, which has a relatively high proportion of risk-based products. 2010 includes £19 million relating to reserving
changes in India and China.
• Margin on revenues has increased by £252 million, reflecting the growth in the size of the portfolio and changes in country mix.
• Acquisition costs – the costs as a percentage of APE new business sales has fallen over the period 2008-2010, reflecting
management’s continued focus on capital management activities, such as the closure of Japan to new business in the first quarter
of 2010 and changes to business and country mix. The analysis above uses shareholder acquisition costs as a proportion of total
APE, excluding with-profits sales from the denominator the margin would become 2010: 53 per cent, 2009: 56 per cent and
2008: 58 per cent.
• Administration expenses – margin has reduced from 339 bps in 2009 in part reflecting operational leverage benefit and a shift in mix
towards countries with highly efficient business models (e.g. Indonesia).
2010
Average
Liability
£m
Profit
£m
Margin
bps
Profit
£m
US
2009
Average
Liability
£m
Margin
bps
Profit
£m
2008
Average
Liability
£m
692 28,496
506 25,921
243
195
524 29,248
324 17,589
179
184
461 25,322
292 14,783
Margin
bps
182
198
–
188
–
–
154
–
–
161
–
(73)%
(63)
(851) 1,164
(344) 54,417
517
125
833
(690)
912
(259) 46,837
467
98
618
(76)%
(55)
(451)
716
(217) 40,105
(63)%
(54)
–
89
335
Spread income
Fee income
With-profits
Insurance margin
Margin on revenues
Expenses
Acquisition costs
Administration expenses
DAC adjustments
Expected return on shareholder assets
Operating profit
Analysis of US operating profit drivers:
• Spread income benefited from the effect of transactions to more closely match the overall asset and liability duration in 2010.
Excluding this effect (£108 million), spread margin in 2010 would have been 205 bps. The increase over the 2009 margin of 179 bps is
due in part to decreased crediting rates on fixed annuities.
• Fee income margins are based on the average of the opening and closing separate account balances. In normal years this is expected
to be a reasonable proxy for the average balances throughout the year. In 2009 separate account flows were weighted towards the
end of the year artificially lowering the 2009 margin. Using an average based on end of month balances, margins show little movement
between years, (2010: 200 bps; 2009: 203 bps; 2008: 200 bps) indicating that absolute revenue amounts are growing in line with
separate accounts values. Separate account values increased between 2008 and 2010 both as a result of strong sales and improving
equity markets.
• Insurance margin represents operating profits from insurance risks, including variable annuity guarantees and other sundry net
income. Positive net flows into variable annuity business with life contingent and other guarantees have helped to improve the margin
from £154 million in 2009 to £188 million in 2010.
Prudential plc Annual Report 2010
361
• Acquisition costs have increased in 2010 in absolute terms compared to 2009 following an increase in sales volumes. However,
acquisition costs as a percentage of APE has fallen from 76 per cent in 2009 to 73 per cent in 2010 as more advisers are electing to take
asset-based commission, which is paid over the life of the policy based on fund value. This asset-based commission is treated as an
administration expense in this analysis as opposed to a cost of acquisition, resulting in a lower acquisition cost ratio but a higher
administration expenses margin.
2008 acquisition costs as a percentage of APE sales were 63 per cent, lower than 2009 and 2010. This is primarily because sales of
GICs in 2008 (APE £120 million), on which no acquisition costs are incurred, reduces the margin for that year. Excluding GIC APE sales
the acquisition cost ratio for 2008 becomes 76 per cent, in line with 2009.
• Administration expenses margin has increased to 63 bps in 2010, partly as a result of higher asset based commission, which lowers
acquisition costs but increases the expenses classified as administration expenses in the table above.
Spread income
Fee income
With-profits
Insurance margin
Margin on revenues
Expenses
2010
Average
Liability
£m
Profit
£m
Margin
bps
Profit
£m
UK
2009
Average
Liability
£m
Margin
bps
Profit
£m
2008
Average
Liability
£m
251 20,969
60 20,353
310 79,558
120
29
39
198 18,600
54 17,677
281 75,692
106
31
37
12
223
41
275
35 16,538
57 17,648
395 81,907
(12)
314
Margin
bps
21
32
48
Acquisition costs*
Administration expenses
DAC adjustments
Expected return on shareholder assets
Operating profit
(167)
(113) 41,322
820 (20)%
(27)
(192)
723
(173) 36,277
(27)%
(48)
(172)
947
(212) 34,186
(18)%
(62)
(1)
98
673
(3)
125
606
32
108
545
* The ratio for acquisition costs is calculated as a percentage of APE including with-profits sales. Acquisition costs include only those relating to
shareholders.
Analysis of UK operating profit drivers:
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
• Spread income has increased by £53 million to £251 million in 2010, reflecting in a higher margin of 120 bps, up from 106 bps in 2009.
The improved margin primarily reflects the beneficial impacts of the bulk annuity deal written in 2010, improved margins on retail
annuity new business and improved spread on equity release business following its closure to new business. Spread income was lower
in 2008 due to lower margins on new business and the establishment of credit default and deflation reserves in that year in light of the
credit crisis offset by the impact of actions to rebalance the credit portfolio.
• Fee income has increased by 11 per cent to £60 million broadly in line with the value of unit-linked liabilities following the
improvement in equity markets.
• Margin on revenues represents premiums charges for expenses and other sundry net income received by the UK. Lower amounts
were recorded in 2010 (£223 million) compared to 2009 (£275 million) reflecting, in part, lower premiums from shareholder-backed
retail business in 2010 as compared to 2009.
• Insurance margin has fallen by £29 million to £12 million in 2010, reflecting that 2009 included a one-off benefit of £34 million in
respect of a longevity swap on certain aspects of the UK’s annuity back-book liabilities, which was not repeated in 2010.
• Acquisition costs as a percentage of new business sales has fallen from 27 per cent in 2009 to 20 per cent in 2010. This reflects in part
the impact of the bulk annuity deal which contributed £88 million APE in the period with a relatively low level of acquisition costs,
together with the closure of equity release to new business as well as on-going cost saving initiatives.
The ratio above expresses the percentage of shareholder acquisition costs as a percentage of total APE sales. It is therefore impacted
by the level of with-profits sales in the year. Acquisition costs as a percentage of shareholder-backed new business sales were
36 per cent in 2010 (49 per cent in 2009), with the most significant impact being the effect of the bulk annuity deal.
• Administration expenses have fallen by £60 million to £113 million and the ratio from 48 bps in 2009 to 27 bps in 2010.
This is primarily the result of cost savings initiatives initiated by the UKIO in line with the business’ stated objectives.
A
D
D
I
T
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362
FINANCIAL STATEMENTS > ADDITIONAL UNAUDITED FINANCIAL INFORMATION
ADDITIONAL UNAUDITED
FINANCIAL INFORMATION
CONTINUED
II(b): ASIAN OPERATIONS – ANALYSIS OF IFRS OPERATING PROFIT BY TERRITORY
Operating profit based on longer-term investment returns for Asian operations is analysed as follows:
Chinanote ii
Hong Kong
India note iii
Indonesia
Japan
Korea
Malaysia
– Underlying results
– Exceptional creditnote i
Philippines
Singapore
Taiwan bancassurance businessnote iv
Thailand
Vietnam
Other
TOTAL INSURANCE OPERATIONSnote v
Development expenses
TOTAL LONG-TERM BUSINESS OPERATING PROFIT
Asset management
TOTAL ASIAN OPERATIONS
2010 £m
2009 £m
(12)
51
60
157
(6)
12
97
2
129
(4)
2
43
5
536
(4)
532
72
604
4
48
12
102
(18)
6
65
63
2
112
(7)
(1)
30
(2)
416
(6)
410
55
465
Notes
i
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 re-measured 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.
ii China’s operating loss of £12 million is after a net charge of £17 million for local reserving changes and associated impacts that have been
reflected in the Group’s IFRS accounts. Excluding this effect, China’s underlying result is a £5 million profit.
iii The operating profit of £60 million from India, a joint venture, includes £36 million arising from changes that improve the reserving estimation
technique.
iv 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 excluded from analysis of
operating profit.
v Analysis of operating profit between new and in-force business
The result for insurance operations comprises amounts in respect of new business and business in-force as follows:
New business strain (excluding Japan)
Japan
New business strain (including Japan)
Business in force
Total
2010 £m
2009 £m
(56)
(1)
(57)
593
536
(72)
(6)
(78)
494
416
The IFRS new business strain corresponds to approximately four per cent of new business APE premiums for 2010 (2009: approximately
six per cent of new business APE).
The strain reflects the aggregate of the pre-tax regulatory basis strain to net worth after IFRS adjustments for deferral of acquisition costs and
deferred income where appropriate.
Prudential plc Annual Report 2010
363
II(c): ANALYSIS OF ASSET MANAGEMENT OPERATING PROFIT BASED ON LONGER-TERM INVESTMENT RETURNS
Operating income before performance-related fees
Performance-related fees
Operating income*
Operating expense
Operating profit based on longer-term investment returns
M&Gi
615
17
632
(386)
246
2010 £m
PruCap
88
–
88
(50)
38
Asiai
185
6
191
(119)
72
US
229
–
229
(207)
22
Total
1,117
23
1,140
(762)
378
Average funds under management (FUM)†
Margin based on operating income†
Cost/income ratio‡
£186.5 bn
34 bps
63%
£47.2 bn
40 bps
64%
Operating income before performance-related fees
Performance-related fees
Operating income*
Operating expense
Operating profit based on longer-term investment returns
M&Gi
470
12
482
(305)
177
2009 £m
PruCap
89
–
89
(28)
61
Asiai
157
3
160
(105)
55
Average funds under management (FUM)†
Margin based on operating income†
Cost/income ratio‡
£157.5 bn
31 bps
65%
£39.6 bn
40 bps
67%
Operating income before performance-related fees
Performance-related fees
Operating income*
Operating expense
Operating profit based on longer-term investment returns
M&Gi
480
43
523
(295)
228
2008 £m
PruCap
123
–
123
(65)
58
Asiai
144
3
147
(95)
52
Average funds under management (FUM)†
Margin based on operating income†
Cost/income ratio‡
£154.0 bn
34 bps
61%
£36.9 bn
40 bps
66%
US
183
–
183
(179)
4
US
139
–
139
(132)
7
Total
899
15
914
(617)
297
Total
886
46
932
(587)
345
* Operating income is net of commissions and includes performance related fees.
† Margin represents operating income as a proportion of the related funds under management (FUM). Opening and closing internal and external funds
managed by the respective entity have been used to derive the average. Any funds held by the Group’s insurance operations which are managed by
third parties outside of the Prudential Group are excluded from these amounts.
‡ Cost/income ratio is calculated as a percentage of income excluding performance-related fees.
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364
FINANCIAL STATEMENTS > ADDITIONAL UNAUDITED FINANCIAL INFORMATION
ADDITIONAL UNAUDITED
FINANCIAL INFORMATION
CONTINUED
II(c): ANALYSIS OF ASSET MANAGEMENT OPERATING PROFIT BASED ON LONGER-TERM INVESTMENT
RETURNS > CONTINUED
i M&G and Asia asset management businesses can be further analysed as follows:
2010
2009
2008
2010
2009
2008
M&G
Operating income*
Margin of
FUM†
bps
Institutional §
£m
Margin of
FUM†
bps
93
102
122
287
227
280
19
17
21
Asia
Operating income*
Margin of
FUM†
bps
Institutional §
£m
Margin of
FUM†
bps
62
60
59
71
62
56
26
27
26
Retail
£m
345
255
243
Retail
£m
120
98
91
Total
£m
632
482
523
Total
£m
191
160
147
Margin of
FUM†
bps
34
31
34
Margin of
FUM†
bps
40
40
40
* Operating income is net of commissions and includes performance-related fees.
† Margin represents operating income as a proportion of the related funds under management (FUM). Opening and closing internal and external
funds managed by the respective entity have been used to derive the average. Any funds held by the Group’s insurance operations which are
managed by third-parties outside of the Prudential Group are excluded from these amounts.
§ Institutional includes internal funds.
Prudential plc Annual Report 2010
365
III(a): MEMORANDUM FAIR VALUE OF JACKSON’S GMDB AND GMWB LIABILITIES
The IFRS accounting for minimum death and withdrawal benefits guarantees of the Group’s US insurance operations has a mixed
measurement approach.
‘Not for life’ Guaranteed Minimum Withdrawal Benefits (GMWB) are accounted for as ‘embedded derivatives’. Where the economic
characteristics and risks of embedded derivatives are not closely related to the economic characteristics and risks of the host insurance
contract, and where the contract 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 Jackson, the embedded
derivative liabilities for GMWB liabilities are fair valued using the economic assumptions shown below, in line with IAS 39 (FAS 157 –
‘Fair Value Measurements’.)
Where a significant insurance element is present, such as for Guaranteed Minimum Death Benefit (GMDB) and ‘for life’ GMWB,
the guarantees are accounted for as part of the accounting applied to the host insurance contracts. Under IFRS 4, the insurance
contract accounting applied prior to IFRS adoption has continued to be applied. Accordingly for US variable annuity business the
US GAAP standards applicable to insurance contract accounting are applied. Consistent with that approach, the GMDB and ‘for life’
GMWB guarantees are valued under FASB Accounting Standards codification Topic 944 (sub-topics 944-20, 944-40 and 944-80),
formerly known as ‘SOP 03-1’ (Statement of Position 03-1: ‘Accounting and Reporting by Insurance Enterprises Contracts and for
Separate Accounts’).
The two reserving methodologies typically produce quite different patterns of results. It is the variation in assumptions, and the
way the two reserving methods react to emerging experience, that produces potentially significant differences in reserve patterns
through time.
Both methods determine a hypothetical fee or charge (referred to in the rest of this note as ‘fee assessment’) that is anticipated to
fund future projected benefit payments arising using the assumptions applicable for that method. After determination at issue, the
FAS 157 fee assessment is fixed for the life of the policy, so that variations in experience from that assumed at issue, as well as cash flow
timing issues, will create a liability or asset as the value of future benefits becomes more or less, respectively, than the value of the
fee assessments.
The SOP 03-1 fee assessment, on the other hand, is recomputed at each valuation date to take into account emerging experience
and cash flow timing differences. After redetermination based on valuation date parameters, the new fee assessment is applied
retrospectively from issue date to recompute the current reserve provision. This retrospective aspect of the calculation is not present
in the FAS 157 methodology.
The chart below compares the assumption bases for the two methods in general terms as well as showing representative
comparative values as of 31 December 2010. The comparative values for the projected earned rate and AA corporate bond rate are the
10-year rate in both cases, and the comparative value for volatility is the 5-year rate.
Assumption
Fund earned rate
Discount rate
Equity volatility
SOP 03-1
8.4% before fees
8.4%
15%
IAS 39 (FAS 157)
Quoted rate swap curve
(10-year rate: 3.4% before fees)
AA corporate rate curve
(10-year rate: 4.8%)
Implied curve
(5-year volatility: 24%)
To provide an approximate translation of values from the SOP 03-1 basis to the IAS 39 basis, the table below shows estimates of the
impact of changing each primary economic assumption from the SOP 03-1 values to the IAS 39 values.
Two other items are shown in addition: a reconciling item to account for the difference in how each method adjusts for emerging
economic experience (labelled as the ‘method’ component below), and a further adjustment to recognise the impact of additional fees
collected over and above those considered for reserving purposes (i.e. the difference between fees actually collected and the
hypothetical fee assessment referenced earlier).
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366
FINANCIAL STATEMENTS > ADDITIONAL UNAUDITED FINANCIAL INFORMATION
ADDITIONAL UNAUDITED
FINANCIAL INFORMATION
CONTINUED
III(a): MEMORANDUM FAIR VALUE OF JACKSON’S GMDB AND GMWB LIABILITIES > CONTINUED
Guaranteed benefit liability supplemental disclosure as of 31 December 2010
As recorded in the 31 December 2010 financial statements:
Note
– SOP 03-1
– IAS 39 fair value
Total per 31 December 2010 financial statements
Change in assumed fund earned rate
Change in discount rate
Change in equity volatility assumption
Change in method
Hypothetical IAS 39 basis fair value
Adjustment to full fees
Hypothetical fair value with full fee recognition
1
1
2
3
4
5
6
7
8
GMDB
£m
220
375
200
225
(150)
870
(200)
670
GMWB
‘for life’
£m
GMWB
‘not for life’
£m
29
25
50
0
(25)
201
n/a
n/a
n/a
n/a
280
(600)
(320)
Total
£m
249
201
450
400
250
225
(175)
700
1,150
(800)
350
Notes
1
2
Note GMWB benefits have reported components on both an SOP 03-1 and IAS 39 basis.
Change in fund earned rate: 8.4 per cent to 3.4 per cent, producing significantly higher values of future benefit payments due to lower future
assumed fund growth and therefore greater potential for future guaranteed benefit payouts. For GMWBs, future fee income is less dramatically
affected, given that for most benefit forms fee income is based on a more stable benefit base rather than a current account value.
Change in discount rate: 8.4 per cent to 4.8 per cent, producing significantly higher values, both for future benefit payments and future fees,
with a net increase in liability. The absolute impact of this item will be influenced not only by the rate difference, but also by current market
conditions, as the proportional impact of a particular rate change will be diluted if applied to a lower absolute value of future cash flows.
Change in equity volatility assumption: 15 per cent to 24 per cent, producing higher values, primarily for future benefit payments. The impact
is muted for GMWBs due primarily to the length of time until benefit payments occur, and also by the SOP 03-1 methodology itself.
3
4
5 Generally, it is expected that the SOP 03-1 methodology will ‘lag’ market events in terms of reflecting their impact in the reserve calculation.
This is because of the retrospective aspect of the calculation described above. This line item is also the balancing item in the reconciliation so
contains any cross-effects from other variables.
6 Representation of an approximate hypothetical IAS 39 (FAS 157) value were all guaranteed benefits to be reported on this basis.
7 Value of actual fees collected, on an IAS 39 assumption basis, over and above those already considered in the reserve calculation. The reserve
calculation restricts the level of future guarantee fees to a level that is sufficient to meet the expected benefit payments at issue using at issue
assumptions to avoid profit recognition at inception.
8 Resulting modified hypothetical IAS 39 value including adjustment for the value of fees in excess of those considered in the reserve calculation.
In all cases, values shown above, were they to be reflected in actual financial statements, would be significantly offset by an adjustment
to deferred acquisition costs, which is impacted by changes in gross profit elements of the variable annuity product. Thus, for example,
it might be expected that the GMDB impacts shown would be offset by some 70 to 75 per cent of the change illustrated, and the GMWB
impacts shown would be offset by some 50 to 55 per cent of the change illustrated. The table below illustrates the approximate impact
on shareholders’ equity.
Estimated impact on shareholders’ equity
Estimated increase/(decrease) in liability
Related adjustments to:
DAC
Deferred tax
Estimated decrease/(increase) in shareholders’ equity
All numbers rounded to the nearest £25 million.
Prudential plc Annual Report 2010
Accounts
carrying value
to hypothetical
IAS 39 basis
fair value
£m
Accounts
carrying value
to hypothetical
fair value
with full fee
recognition
£m
700
(475)
(75)
150
(100)
(50)
50
(100)
367
2010 £m
2009 £m
1,913
236
2,149
197
61
258
1,382
80
1,462
161
61
222
2,407
1,684
3,815
3,011
106
16
122
95
16
111
3,937
3,122
2,115
33
2,148
254
1,153
1,407
3,555
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1,902
37
1,939
173
1,153
1,326
3,265
III(b): IFRS SHAREHOLDERS’ FUNDS SUMMARY BY BUSINESS UNIT AND NET ASSET VALUE PER SHARE
i Shareholders’ funds summary
ASIAN OPERATIONS
Insurance operations
Net assets of operation
Acquired goodwill
Total
Asset management
Net assets of operation
Acquired goodwill
Total
Total
US OPERATIONS
Jackson (net of surplus note borrowings)
Broker-dealer and asset management operations:
Net assets of operation
Acquired goodwill
Total
Total
UK OPERATIONS
Insurance operations:
Long-term business operations
Other
Total
M&G
Net assets of operation
Acquired goodwill
Total
Total
OTHER OPERATIONS
Holding company net borrowings
Shareholders' share of provision for future deficit funding of the Prudential Staff Pension Scheme
(net of tax)
Other net assets (liabilities)
Total
TOTAL OF ALL OPERATIONS
ii Net asset value per share
Closing equity shareholders' funds
Net asset value per share attributable to equity shareholdersnote i
Note
i
Based on the closing issued share capital as at 31 December 2010 of 2,546 million shares (2009: 2,532 million shares).
(2,035)
(1,754)
(10)
177
(16)
(30)
(1,868)
(1,800)
8,031
6,271
2010 £m
2009 £m
8,031
315p
6,271
248p
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368
FINANCIAL STATEMENTS > ADDITIONAL UNAUDITED FINANCIAL INFORMATION
ADDITIONAL UNAUDITED
FINANCIAL INFORMATION
CONTINUED
IV(a): FUNDS UNDER MANAGEMENT
i Summary
Business area
Asian operations
US operations
UK operations
Internal funds under management
External fundsnote i
Total funds under management
2010 £bn
2009 £bn
30.9
63.6
145.2
239.7
100.4
340.1
23.7
49.6
135.6
208.9
80.9
289.8
Note
i
External funds shown above for 2010 of £100.4 billion (2009: £80.9 billion) comprise £111.4 billion (2009: £89.8 billion) in respect of investment
products, as published in the New Business schedules (see Note B5) less £11.0 billion (2009: £8.9 billion) that are classified within internal funds.
ii Internal funds under management – analysis by business area
Investment propertiesnote i
Equity securities
Debt securities
Loans and receivables
Other investments
Total
Asian operations
US operations
UK operations
Total
2010
£bn
–
14.5
14.1
1.3
1.0
2009
£bn
–
11.4
10.0
1.2
1.1
2010
£bn
0.1
31.5
26.4
4.2
1.4
2009
£bn
0.1
21.0
22.8
4.3
1.4
2010
£bn
11.5
40.7
75.9
3.8
13.3
2009
£bn
11.0
37.0
69.1
3.3
15.2
2010
£bn
2009
£bn
11.6
86.7
116.4
9.3
15.7
11.1
69.4
101.9
8.8
17.7
30.9
23.7
63.6
49.6
145.2
135.6
239.7
208.9
Note
i
As included in the investments section of the consolidated statement of financial position at 31 December 2010 except for £0.4 billion
(2009: £0.2 billion) investment properties which are held-for-sale or occupied by the Group and, accordingly under IFRS, are included in
other statement of financial position captions.
IV(b): EFFECT OF FOREIGN CURRENCY RATE MOVEMENTS ON RESULTS
i Rates of exchange
The profit and loss accounts of foreign subsidiaries are translated at average exchange rates for the year. Assets and liabilities of foreign
subsidiaries are translated at closing exchange rates. Foreign currency borrowings that have been used to provide a hedge against Group
equity investments in overseas subsidiaries are also translated at closing exchange rates. The impact of these translations is recorded as a
component of the movement in shareholders’ equity.
The following translation rates have been applied:
Closing
Average
Closing
Average
2010
2010
2009
2009
12.17
14,106.51
4.83
2.01
70.01
30,526.26
1.57
12.01
14,033.41
4.97
2.11
70.66
29,587.63
1.55
12.52
15,171.52
5.53
2.27
75.15
29,832.74
1.61
12.14
16,173.28
5.51
2.27
75.70
27,892.39
1.57
Local currency: £
Hong Kong
Indonesia
Malaysia
Singapore
India
Vietnam
USA
Prudential plc Annual Report 2010
369
As published
2010
note i
£m
Memorandum
2009
note i and ii
£m
536
(4)
532
72
604
833
22
855
673
46
719
284
1,003
2,462
(450)
(26)
(45)
1,941
8,031
451
(6)
445
58
503
626
4
630
606
51
657
238
895
2,028
(396)
(23)
–
1,609
6,473
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ii Effect of rate movements on results
IFRS basis results
Asian operations:
Long-term operations
Development expenses
Total Asian insurance operations after development costs
Asset management
Total Asia operations
US operations
Jacksonnote iii
Broker-dealer, asset management and Curian operations
Total US operations
UK operations
Long-term business
General insurance commission
Total UK insurance operations
M&G
Total UK operations
Total segment profit
Other income and expenditure
Restructuring costs
Solvency II costs
Operating profit from continuing operations based on longer-term investment returns
Shareholders’ funds
Notes
i
The ‘as published’ operating profit for 2010 and ‘memorandum’ operating profit for 2009 have been calculated by applying average 2010
exchange rates (CER).
The ‘as published’ shareholders’ funds for 2010 and 'memorandum’ shareholders’ funds for 2009 have been calculated by applying closing
period end 2010 exchange rates.
ii The 2009 operating profit of Asian long-term operations excludes the results of the Taiwan agency business for which the sale process was
completed in June 2009.
iii The Company has amended the presentation of IFRS operating profit for its US insurance operations to remove the net equity hedge accounting
credit/charge (incorporating related amortisation of deferred acquisition costs) and include it in short-term fluctuations.
The 2009 ‘memorandum’ operating profit amounts have been amended accordingly.
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370
FINANCIAL STATEMENTS > ADDITIONAL UNAUDITED FINANCIAL INFORMATION
ADDITIONAL UNAUDITED
FINANCIAL INFORMATION
CONTINUED
IV(b): EFFECT OF FOREIGN CURRENCY RATE MOVEMENTS ON RESULTS > CONTINUED
EEV basis results
Asian operations:
New business:
Excluding Japan
Japan
Total
Business in force
Long-term operations
Asset management
Development expenses
Total Asia operations
US operations
New business
Business in force
Jackson
Broker-dealer, asset management and Curian operations
Total US operations
UK operations
New business
Business in force
Long-term business
General insurance commission
Total insurance
M&G
Total UK operations
Other income and expenditure
Restructuring costs
Solvency II costs
Operating profit from continuing operations based on longer-term investment returns
Shareholders’ funds
As published
2010
note i
£m
Memorandum
2009
note i and ii
£m
902
(1)
901
549
1,450
72
(4)
1,518
761
697
1,458
22
1,480
365
571
936
46
982
284
783
(13)
770
420
1,190
58
(6)
1,242
673
576
1,249
4
1,253
230
640
870
51
921
238
1,266
1,159
(494)
(28)
(46)
(434)
(27)
–
3,696
3,193
18,207
15,904
Notes
i
The ‘as published’ operating profit for 2010 and ‘memorandum’ operating profit for 2009 have been calculated by applying average 2010
exchange rates (CER).
The ‘as published’ shareholders’ funds for 2010 and ‘memorandum’ shareholders’ funds for 2009 have been calculated by applying closing
period end 2010 exchange rates.
ii The 2009 operating profit of Asian long-term operations excludes the results of the Taiwan agency business for which the sale process was
completed in June 2009.
Prudential plc Annual Report 2010
371
IV(c): OPTION SCHEMES
The Group maintains four share option schemes satisfied by the issue of new shares. UK-based executive directors are eligible to
participate in the UK Savings Related Share Option Scheme, and Asia-based executives can participate in the International Savings
Related Share Option Scheme. Dublin-based employees are eligible to participate in the Prudential International Assurance Sharesave
Plan, and Hong Kong-based agents can participate in the Non-employee Savings Related Share Option Scheme. Further details of the
schemes and accounting policies are detailed in Note I4 of the IFRS basis condensed consolidated financial statements.
All options were granted at £nil consideration. No options have been granted to substantial shareholders, suppliers of goods or
services (excluding options granted to agents under the Non-employee Savings Related Share Option Scheme) or in excess of the
individual limit for the relevant scheme.
The options schemes will terminate as follows, unless the directors resolve to terminate the plans at an earlier date:
• UK Savings Related Share Option Scheme: 8 May 2013
• International Savings Related Share Option Scheme: 19 May 2011
• Prudential International Assurance Sharesave Plan: 19 May 2011
• Non-employee Savings Related Share Option Scheme: 9 May 2012
The weighted average share price of Prudential plc for the year ended 31 December 2010 was £5.68 (2009: £4.17).
Particulars of options granted to directors are included in the Directors’ Remuneration Report on page 124.
The closing price of the shares immediately before the dates on which the options were granted during the current period was £6.16.
The following analyses show the movement in options for each of the option schemes for the year ended 31 December 2010.
F
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372
FINANCIAL STATEMENTS > ADDITIONAL UNAUDITED FINANCIAL INFORMATION
ADDITIONAL UNAUDITED
FINANCIAL INFORMATION
CONTINUED
IV(c): OPTION SCHEMES > CONTINUED
UK Savings Related Share Option Scheme
Exercise period
Number of options
Date of grant
09 Oct 2002
17 Apr 2003
01 Oct 2003
15 Apr 2004
15 Apr 2004
30 Sep 2004
30 Sep 2004
12 Apr 2005
12 Apr 2005
12 Apr 2005
29 Sep 2005
29 Sep 2005
20 Apr 2006
20 Apr 2006
20 Apr 2006
28 Sep 2006
28 Sep 2006
28 Sep 2006
26 Apr 2007
26 Apr 2007
26 Apr 2007
27 Sep 2007
27 Sep 2007
27 Sep 2007
25 Apr 2008
25 Apr 2008
25 Apr 2008
25 Sep 2008
25 Sep 2008
25 Sep 2008
27 Apr 2009
27 Apr 2009
27 Apr 2009
25 Sep 2009
25 Sep 2009
28 Sep 2010
28 Sep 2010
Exercise
price £
3.29
2.66
3.62
3.46
3.46
3.43
3.43
3.87
3.87
3.87
4.07
4.07
5.65
5.65
5.65
4.75
4.75
4.75
5.72
5.72
5.72
5.52
5.52
5.52
5.51
5.51
5.51
4.38
4.38
4.38
2.88
2.88
2.88
4.25
4.25
4.61
4.61
Beginning
01 Dec 2009
01 Jun 2010
01 Dec 2010
01 Jun 2009
01 Jun 2011
01 Dec 2009
01 Dec 2011
01 Jun 2008
01 Jun 2010
01 Jun 2012
01 Dec 2010
01 Dec 2012
01 Dec 2009
01 Jun 2011
01 Jun 2013
01 Dec 2009
01 Dec 2011
01 Dec 2013
01 Jun 2010
01 Jun 2012
01 Jun 2014
01 Dec 2010
01 Dec 2012
01 Dec 2014
01 Jun 2011
01 Jun 2013
01 Jun 2015
01 Dec 2011
01 Dec 2013
01 Dec 2015
01 Jun 2012
01 Jun 2014
01 Jun 2016
01 Dec 2012
01 Dec 2014
01 Dec 2013
01 Dec 2015
End
Beginning
of period
Granted
Exercised
Cancelled
Forfeited
Lapsed
End of
period
27,010
31 May 2010
273,250
30 Nov 2010
4,343
31 May 2011
942
30 Nov 2009
17,946
30 Nov 2011
15,014
31 May 2010
8,430
31 May 2012
8,121
30 Nov 2008
49,694
30 Nov 2010
12,222
30 Nov 2012
37,483
31 May 2011
11,172
31 May 2013
661
31 May 2010
15,933
30 Nov 2011
8,169
30 Nov 2013
83,095
31 May 2010
55,381
31 May 2012
13,325
31 May 2014
48,685
30 Nov 2010
10,284
30 Nov 2012
1,118
30 Nov 2014
53,257
31 May 2011
19,960
31 May 2013
5,249
31 May 2015
63,326
30 Nov 2011
35,835
30 Nov 2013
4,836
30 Nov 2015
181,003
31 May 2012
62,042
31 May 2014
23,161
31 May 2016
30 Nov 2012 3,454,462
30 Nov 2014 2,099,760
212,170
30 Nov 2016
299,769
31 May 2013
109,447
31 May 2015
31 May 2014
31 May 2016
–
20,231
– 273,250
1,568
–
–
–
–
–
6,543
–
–
–
–
–
45,256
–
–
–
26,426
–
–
–
661
–
678
–
–
–
42,821
–
–
–
–
–
11,119
–
–
–
–
–
25,015
–
–
–
–
–
3,187
–
1,595
–
–
–
–
4,055
2,054
–
–
2,341
–
–
–
–
–
– 317,521
– 138,655
–
–
–
–
–
–
–
8,121
–
–
–
1,680
–
569
605
21,690
1,033
–
132
1,374
615
1,874
874
2,653
5,145
3,128
–
9,642
4,207
–
54,222 124,900
44,054
13,349
3,637
1,040
22,705
2,444
1,463
442
2,730
–
4,017
–
–
–
–
–
–
191
–
–
–
–
–
–
–
–
–
–
3,449
–
1,653
–
–
695
–
928
2,455
–
3,166
1,140
765
–
52,437
1,735
113
3,157
4,390
234
–
6,779
–
–
942
–
8,280
–
–
4,438
–
460
–
–
802
–
18,584
2,896
–
32,223
573
–
640
1,216
–
1,587
2,892
–
12,168
5,980
5,963
–
–
2,775
–
17,946
–
8,430
–
–
12,222
10,597
9,492
–
13,884
7,564
–
48,003
13,325
3,558
8,337
503
25,033
17,870
1,668
50,952
28,220
1,670
153,998
49,036
14,857
84,581 3,138,322
47,092 1,993,530
202,734
264,812
101,327
314,557
134,638
4,646
6,651
1,825
–
–
7,326,555 456,176 538,297 266,848
76,508 251,218 6,649,860
The total number of securities available for issue under the scheme is 6,649,860, which represents 0.261 per cent of the issued share
capital at 31 December 2010.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the
current period was £5.70.
The fair value of options granted under the Plan in the period was £2.91.
Prudential plc Annual Report 2010
373
International Savings Related Share Option Scheme
Exercise period
Number of options
Date of grant
30 Sep 2004
12 Apr 2005
20 Apr 2006
20 Apr 2006
28 Sep 2006
28 Sep 2006
26 Apr 2007
26 Apr 2007
27 Sep 2007
25 Apr 2008
25 Apr 2008
25 Sep 2008
25 Sep 2008
27 Apr 2009
27 Apr 2009
25 Sep 2009
25 Sep 2009
28 Sep 2010
28 Sep 2010
Exercise
price £
3.43
3.87
5.65
5.65
4.75
4.75
5.72
5.72
5.52
5.51
5.51
4.38
4.38
2.88
2.88
4.25
4.25
4.61
4.61
Beginning
01 Dec 2009
01 Jun 2010
01 Jun 2009
01 Jun 2011
01 Dec 2009
01 Dec 2011
01 Jun 2010
01 Jun 2012
01 Dec 2010
01 Jun 2011
01 Jun 2013
01 Dec 2011
01 Dec 2013
01 Jun 2012
01 Jun 2014
01 Dec 2012
01 Dec 2014
01 Dec 2013
01 Dec 2015
End
Beginning
of period
Granted
Exercised
Cancelled
Forfeited
Lapsed
End of
period
741
31 May 2010
758
30 Nov 2010
5,732
30 Nov 2009
820
30 Nov 2011
26,951
31 May 2010
968
31 May 2012
93,401
30 Nov 2010
17,847
30 Nov 2012
44,517
31 May 2011
32,754
30 Nov 2011
4,192
30 Nov 2013
252,450
31 May 2012
6,951
31 May 2014
30 Nov 2012 2,105,236
116,072
30 Nov 2014
141,426
31 May 2013
3,529
31 May 2015
31 May 2014
31 May 2016
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– 176,353
6,501
–
–
–
–
–
20,387
–
3,179
–
2,584
–
–
11,410
–
47,332
6,490
–
–
–
–
–
–
–
–
–
–
1,612
–
1,108
5,686
–
4,340
–
83,676
14,246
5,595
847
1,303
–
–
–
4,021
–
4,435
259
–
–
360
–
–
–
–
68,123
5,307
2,994
–
–
–
–
741
758
–
–
1,711
820
–
–
2,129
709
–
88,610
–
17,847
–
40,465
–
27,068
–
4,192
–
236,700
–
–
6,951
– 1,906,105
90,029
–
132,837
–
2,682
–
175,050
–
6,501
–
2,854,345 182,854
91,382 118,413
85,499
4,581 2,737,324
The total number of securities available for issue under the scheme is 2,737,324, which represents 0.108 per cent of the issued share
capital at 31 December 2010.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the
current period was £5.83.
The fair value of options granted under the Plan in the period was £2.91.
Prudential International Assurance Sharesave Plan
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Exercise period
Number of options
Date of grant
29 Sep 2005
20 Apr 2006
28 Sep 2006
27 Sep 2007
25 Sep 2008
27 Apr 2009
27 Apr 2009
25 Sep 2009
Exercise
price £
4.07
5.65
4.75
5.52
4.38
2.88
2.88
4.25
Beginning
01 Dec 2008
01 Jun 2009
01 Dec 2009
01 Dec 2010
01 Dec 2011
01 Jun 2012
01 Jun 2014
01 Dec 2012
End
Beginning
of period
Granted
Exercised
Cancelled
Forfeited
Lapsed
31 May 2009
30 Nov 2009
31 May 2010
31 May 2011
31 May 2012
30 Nov 2012
30 Nov 2014
31 May 2013
495
1,469
1,110
618
1,520
34,125
6,567
4,327
50,231
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,184
–
–
1,184
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,621
–
1,901
495
1,469
1,110
–
–
–
–
–
End of
period
–
–
–
618
1,520
30,320
6,567
2,426
4,522
3,074
41,451
The total number of securities available for issue under the scheme is 41,451, which represents 0.002 per cent of the issued share capital
at 31 December 2010.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the
current period was £5.47.
The fair value of options granted under the Plan in the period was £2.91.
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374
FINANCIAL STATEMENTS > ADDITIONAL UNAUDITED FINANCIAL INFORMATION
ADDITIONAL UNAUDITED
FINANCIAL INFORMATION
CONTINUED
IV(c): OPTION SCHEMES > CONTINUED
Non-employee Savings Related Share Option Scheme
Date of grant
15 Apr 2004
12 Apr 2005
29 Sep 2005
20 Apr 2006
28 Sep 2006
28 Sep 2006
26 Apr 2007
26 Apr 2007
27 Sep 2007
27 Sep 2007
25 Apr 2008
25 Apr 2008
25 Sep 2008
25 Sep 2008
27 Apr 2009
27 Apr 2009
25 Sep 2009
25 Sep 2009
28 Sep 2010
28 Sep 2010
Exercise
price £
3.46
3.87
4.07
5.65
4.75
4.75
5.72
5.72
5.52
5.52
5.51
5.51
4.38
4.38
2.88
2.88
4.25
4.25
4.61
4.61
Exercise period
Number of options
Beginning
End
1 Jun 2009 30 Nov 2009
1 Jun 2010 30 Nov 2010
1 Dec 2008 31 May 2009
1 Jun 2009 30 Nov 2009
1 Dec 2009 31 May 2010
1 Dec 2011 31 May 2012
1 Jun 2010 30 Nov 2010
1 Jun 2012 30 Nov 2012
1 Dec 2010 31 May 2011
1 Dec 2012 31 May 2013
1 Jun 2011 30 Nov 2011
1 Jun 2013 30 Nov 2013
1 Dec 2011 31 May 2012
1 Dec 2013 31 May 2014
1 Jun 2012 30 Nov 2012
1 Jun 2014 30 Nov 2014
1 Dec 2012 31 May 2013
1 Dec 2014 31 May 2015
1 Dec 2013 31 May 2014
1 Dec 2015 31 May 2016
Beginning
of period
Granted
Exercised
Cancelled
Forfeited
Lapsed
End of
period
11,538
3,876
3,659
8,305
49,824
8,577
16,947
15,557
19,595
5,748
20,951
6,934
42,913
17,135
919,475
785,662
51,289
11,717
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– 1,136,477
382,504
–
–
3,876
–
–
6,051
–
3,414
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,739
172
21,627
35,754
677
–
–
3,251
–
–
3,659
8,305
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
11,538
–
–
–
–
–
–
–
43,773
–
–
8,577
–
13,533
–
15,557
–
19,595
–
5,748
–
20,951
–
4,195
–
42,741
–
17,135
–
897,848
–
749,908
–
50,612
11,717
–
– 1,136,477
379,253
–
1,999,702 1,518,981
13,341
64,220
11,964
55,311 3,373,847
The total number of securities available for issue under the scheme is 3,373,847, which represents 0.133 per cent of the issued share
capital at 31 December 2010.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the
current period was £5.59.
The fair values of options granted under the Plan in the period was £2.91.
Prudential plc Annual Report 2010
FINANCIAL STATEMENTS > PARENT COMPANY
375
BALANCE SHEET OF THE
PARENT COMPANY
31 December 2010
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
Commercial paper
Other borrowings
Derivative liabilities
Amounts owed to subsidiary undertakings
Tax payable
Sundry creditors
Accruals and deferred income
NET CURRENT ASSETS (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
2010 £m
2009 £m
5
5
8
7
7
8
7
7
7
9
10
10
11
11
9,410
849
10,259
10,071
899
10,970
4,244
345
6
112
162
4,869
(2,311)
(200)
(146)
(1,084)
(169)
(19)
(59)
(3,988)
881
2,760
180
7
151
360
3,458
(2,031)
(207)
(136)
(1,279)
(379)
(4)
(41)
(4,077)
(619)
11,140
10,351
(2,718)
(549)
(249)
(3,398)
(6,914)
4,226
41
4,267
127
1,856
2,284
4,267
(2,687)
(549)
–
(3,326)
(6,562)
3,789
37
3,826
127
1,843
1,856
3,826
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The financial statements of the parent company on pages 375 to 386 were approved by the Board of directors on
8 March 2011 and signed on its behalf.
HARVEY MCGRATH
CHAIRMAN
TIDJANE THIAM
GROUP CHIEF EXECUTIVE
NIC NICANDROU
CHIEF FINANCIAL OFFICER
376
FINANCIAL STATEMENTS > NOTES ON THE PARENT COMPANY FINANCIAL STATEMENTS
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.
The Group also has operations in Hong Kong, Malaysia, Singapore, Indonesia and other Asian countries. 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.
The amendments to FRS 20 ‘Group cash settled share-based payment transactions’ which expanded FRS 2 to bring into scope
group cash-settled share-based payment transactions became effective for the Company in 2010. These amendments incorporated
the guidance in UITF 41, ‘Scope of FRS 20’ and UITF 44, ‘Group and Treasury Share Transactions’ which were withdrawn as a result.
In particular, the amendments specify that the entity which has the obligation to settle the share-based payment arrangement shall
recognise it as an ‘equity-settled transaction’ if it is settled in its own equity instruments and as ‘cash-settled transaction’ otherwise, no
matter which entity in the Group receives the goods or service in the arrangement. The Company’s share-based payment accounting
treatment prior to 2010 was consistent with these amendments and accordingly, there was no impact on the Company’s results and
financial position upon the adoption of these amendments.
In addition, following the UK Government’s announcement in July 2010 of the use of the Consumer Price Index (CPI) rather than the
Retail Price Index (RPI) in its determination of the statutory minimum pension increases for private sector occupational pension schemes,
in December 2010, the ASB’s Urgent Issues Task Force (UITF) published its abstract UITF 48 providing guidance on the accounting
implications of the change. See note 9 for further details.
Further, in 2010, the Company adopted the Improvements to Financial Reporting Standards 2009, the Amendment to FRS 25
‘Financial Instruments: Presentation’ – Puttable Financial Instruments and Obligations Arising On Liquidation. Their adoption had no
material impact on the financial statements of the Company.
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.
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.
Prudential plc Annual Report 2010
377
Dividends
Interim dividends are recorded in the period in which they are paid. Final dividends are recorded in the period in which they are
approved by shareholders.
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 9.
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.
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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 FRS 20, where the Company, as the parent company, has the obligation to settle the 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.
378
FINANCIAL STATEMENTS > NOTES ON THE PARENT COMPANY FINANCIAL STATEMENTS
NOTES ON THE PARENT COMPANY
FINANCIAL STATEMENTS
CONTINUED
4: RECONCILIATION FROM UK GAAP TO IFRS
The Company financial statements are prepared in accordance with UK GAAP and the consolidated financial statements are prepared
in accordance with IFRS as issued by the IASB and endorsed by the EU. The tables below provide a reconciliation between UK GAAP
and IFRS.
PROFIT AFTER TAX
Profit for the financial year of the Company in accordance with UK GAAP
IFRS adjustment
Profit for the financial year of the Company (including dividends from subsidiaries) in
accordance with IFRS
Share in the IFRS profit (loss) of the Group, net of distributions to the Company
PROFIT AFTER TAX OF THE GROUP ATTRIBUTABLE TO SHAREHOLDERS IN
ACCORDANCE WITH IFRS
NET EQUITY
Shareholders’ equity of the Company in accordance with UK GAAP
IFRS adjustment
Shareholders’ equity of the Company in accordance with IFRS
Share in the IFRS net equity of the Group
SHAREHOLDERS’ EQUITY OF THE GROUP IN ACCORDANCE WITH IFRS
2010 £m
2009 £m
881
(8)
873
558
913
(5)
908
(232)
1,431
676
2010 £m
2009 £m
4,267
(51)
4,216
3,815
8,031
3,826
(53)
3,773
2,498
6,271
The profit for the financial year of the Company in accordance with UK GAAP and IFRS includes dividends declared in the year from
subsidiary undertakings of £1,318 million and £1,039 million for the years ended 31 December 2010 and 2009, respectively.
The ‘IFRS adjustment’ lines in the above tables represent the difference in the accounting treatment for pension schemes between
UK GAAP and IFRS. Under UK GAAP, the parent company’s interest in the surplus of one of the pension schemes recognised on the
balance sheet represents the element which is recoverable through reduced future contributions. Under IFRS, as the terms of the
relevant trust deed restrict shareholders’ access to any underlying surplus, not only is the underlying IAS 19 basis surplus not recognised,
but the Company’s share of the obligation for deficit funding has also to be recognised on the balance sheet.
The shares in the IFRS profit and net equity of the Group represent the Company’s equity in the earnings and net assets of its
subsidiaries and associates.
As stated in note 3, under UK GAAP, the Company accounts for its investments in subsidiary undertakings at the lower of cost and
estimated realisable value. For the purpose of this reconciliation, no adjustment is made to the Company in respect of any valuation
adjustments to shares in subsidiary undertakings which would be eliminated on consolidation.
Prudential plc Annual Report 2010
379
2010 £m
Shares in
subsidiary
undertakings
Loans to
subsidiary
undertakings
10,071
(667)
6
–
–
9,410
899
–
–
16
(66)
849
5: INVESTMENTS OF THE COMPANY
At 1 January
Transfer of investment in subsidiary undertaking
Additional investment in subsidiary undertakings
Foreign exchange movement
Loan repayment
At 31 December
The transfer of investment in subsidiary undertaking relates to the sale of shares in a central finance subsidiary to another such company.
The additional investment in subsidiary undertakings relates to share-based payments reflecting the value of payments settled by
the Company for the employees of its subsidiary undertakings in 2010.
6: SUBSIDIARY UNDERTAKINGS
The principal subsidiary undertakings of the Company at 31 December 2010, 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.
Details of all Prudential subsidiaries, joint ventures and associates will be annexed to the Company’s next Annual Returns filed with
the UK Registrar of Companies and the Registrar of Companies in Hong Kong.
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380
FINANCIAL STATEMENTS > NOTES ON THE PARENT COMPANY FINANCIAL STATEMENTS
NOTES ON THE PARENT COMPANY
FINANCIAL STATEMENTS
CONTINUED
7: BORROWINGS
Core structural borrowings:
¤500m 5.75% Subordinated Notes 2021note i
£300m 6.875% Bonds 2023
¤20m Medium-Term Subordinated Notes
2023note ii
£250m 5.875% Bonds 2029
£435m 6.125% Subordinated Notes 2031
£400m 11.375% Subordinated Notes 2039
US$1,000m 6.5% Perpetual Subordinated
Capital Securities
US$250m 6.75% Perpetual Subordinated
Capital Securitiesnote iii
US$300m 6.5% Perpetual Subordinated
Capital Securitiesnotes iii, iv
US$750m 11.75% Perpetual Subordinated
Capital Securities
Total core structural borrowings
Other borrowings:
Commercial papernote v
Medium-Term Notes 2010
Floating Rate Notes 2011note vi
Medium-Term Notes 2013note v
Core structural borrowings
Other borrowings
Total
2010 £m
2009 £m
2010 £m
2009 £m
2010 £m
2009 £m
428
300
17
249
428
382
639
160
192
472
443
300
18
249
428
380
619
155
188
456
3,267
3,236
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2,311
–
200
249
2,760
2,511
249
–
2,760
–
–
–
–
–
–
–
–
–
–
–
2,031
7
200
–
2,238
2,238
–
–
2,238
428
300
17
249
428
382
639
160
192
472
443
300
18
249
428
380
619
155
188
456
3,267
3,236
2,311
–
200
249
6,027
2,511
249
3,267
6,027
2,031
7
200
–
5,474
2,238
–
3,236
5,474
Total borrowings
3,267
3,236
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 vii
Debenture loans
–
–
3,267
3,267
2,718
549
3,267
–
–
3,236
3,236
2,687
549
3,236
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 borrowings have been swapped
into borrowings of £14 million with interest payable at three month £LIBOR plus 1.2 per cent.
iv
iii 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 until September 2010. Upon the maturity of the floating to fixed swap in September 2010, the fixed to floating swap was
also cancelled. Hedge accounting was applied at both the Group consolidated level and Company level until the cancellation of the fixed to
floating interest rate of swap of the US$300 million 6.5 per cent borrowings in September 2010. Due to different dates of commencement of this
accounting treatment, the hedge values differed between these two levels.
v These borrowings support a short-term fixed income securities programme.
vi The Company issued £200 million Floating Rate Notes in 2010 which mature in April 2011. All Notes have been subscribed to by a Group
subsidiary and accordingly have been eliminated on consolidation in the Group financial statements. These Notes were originally issued in
October 2008 and have been reissued upon their maturity.
vii 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.
Prudential plc Annual Report 2010
381
8: DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments held to manage interest rate and currency
profile:
Interest rate swaps
Cross-currency swaps
Inflation-linked swap
Total
2010 £m
2009 £m
Fair value
assets
Fair value
liabilities
Fair value
assets
Fair value
liabilities
13
99
–
112
–
–
146
146
33
118
–
151
8
–
128
136
The change in fair value of the derivative financial instruments of the Company was a loss before tax of £33 million (2009: gain before tax
of £83 million).
The Company had a US$300 million fair value hedge in place which hedged the interest rate exposure on the US$300 million
6.5 per cent perpetual subordinated capital securities until the hedge was cancelled in September 2010.
The derivative financial instruments are 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.
9: 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 (the ‘Scheme’) which is primarily a closed defined benefit scheme. At 31 December 2010, on the FRS 17, ‘Retirement Benefits’
basis of valuation, the underlying pension liabilities of the Scheme accounted for 86 per cent (2009: 86 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. Under IFRS, the Group applies IFRIC 14, interpretation guidance to IAS 19 with the effect of derecognising the
Group’s interest in the Scheme’s surplus and recognising an additional liability for the deficit funding obligation for the Scheme in the
Group financial statements. Further details are described in note I3 ‘Staff and pension plans’ of the notes on the financial statements of
the Group.
At 31 December 2005, the allocation of surpluses and deficits attaching to the Scheme 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
2010. 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. The Scheme was last actuarially valued as at 5 April 2008 using the projected
unit method. The next triennial valuation of the Scheme is scheduled to take place as at 5 April 2011.
The 2008 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,
representing the annual accrual cost and deficit funding, 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 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, an additional funding akin to deficit funding was agreed with the Scheme Trustees subject
to a reassessment when the next valuation is completed.
In 2010, total contributions for the year, including expenses and augmentations, were £55 million (2009: £67 million).
Using external actuarial advice provided by the professionally qualified actuaries, Towers Watson, for the valuation of the Scheme,
the most recent full valuations have been updated to 31 December 2010 applying the principles prescribed by FRS 17.
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FINANCIAL STATEMENTS > NOTES ON THE PARENT COMPANY FINANCIAL STATEMENTS
NOTES ON THE PARENT COMPANY
FINANCIAL STATEMENTS
CONTINUED
9: 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
2010 %
2009 %
3.55
5.55
3.55
2.5
2.5
5.45
3.7
5.7
3.7
2.5
2.5
5.8
Prospectively
for 2011 %
2010 %
2009 %
8.2
4.6
6.9
4.75
5.1
8.5
5.3
6.75
4.75
5.9
6.8
4.8
6.1
2.0
4.5
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.
In July 2010, the UK Government announced plans to use the Consumer Price Index (CPI) in place of the Retail Price Index (RPI) in
its determination of the statutory minimum pension increases for private sector occupational pension schemes. In December 2010, the
Government published the statutory revaluation order for 2011 which confirms the change to use CPI. In addition, the Government has
also published in December 2010 a consultation paper which sets out the Government’s views on the impact that the switch from RPI
to CPI will have on the private sector occupational pension schemes. The consultation period closed on 2 March 2011.
Only those tranches of the Scheme which are subject to statutory increases in accordance with the Scheme rules may be affected
by the Government’s decision to change the indexation from RPI to CPI. Other tranches of the Scheme are unaffected.
In line with the guidance of UITF 48, the above has no impact on the results for the year ended 31 December 2010. For the
Government’s announcement to have had an effect on the 2010 results, it would have been necessary for communication of the altered
arrangement to have been made to the members of the schemes for which benefits are paid by reference to RPI, as a constructive
obligation. No such communication has been completed. Accordingly, the Company has not recognised this change for the year ended
31 December 2010. The impact of the change, if and when made, will be recognised in a future period. However, as the Company is only
able to recognise a restricted FRS 17 surplus for the Scheme, any reduction in the underlying Scheme liabilities has no effect on the profit
or shareholders’ funds of the Company.
Further details of the Scheme, including mortality assumptions, are shown in note I3 ‘Staff and pension plans’ of the notes on the
financial statements of the Group.
Prudential plc Annual Report 2010
383
The assets and liabilities of the Scheme 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
Amount reflected in the balance sheet of
the Company, net of deferred tax
31 Dec 2010
31 Dec 2009
31 Dec 2008
31 Dec 2007
31 Dec 2006
£m
%
£m
%
£m
%
£m
%
£m
%
16.8
68.8
5.5
8.9
100.0
10.3
72.2
3.7
13.8
100.0
548
3,864
199
740
5,351
4,866
485
56
41
830
3,406
272
441
4,949
4,436
513
52
37
28.3
43.8
12.2
15.7
100.0
26.1
23.2
11.2
39.5
100.0
17.1
50.6
5.9
26.4
100.0
823
2,430
283
1,267
4,803
4,075
728
50
36
1,278
1,134
545
1,932
4,889
4,361
528
163
117
1,346
2,077
580
745
4,748
4,607
141
48
34
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.
Underlying Scheme liabilities and assets
The change in the present value of the underlying Scheme liabilities and the change in the fair value of the underlying Scheme assets are
as follows:
Present value of Scheme liabilities, at 1 January
Service costs
Interest costs
Employee contributions
Actuarial losses
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
Benefit payments
Fair value of Scheme assets, at 31 December
* The contributions include deficit funding, ongoing service contributions, expenses and augmentations.
2010 £m
2009 £m
4,436
25
251
1
369
(216)
4,866
4,075
23
242
2
315
(221)
4,436
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2010 £m
2009 £m
4,949
287
1
55
275
(216)
5,351
4,803
213
2
67
85
(221)
4,949
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FINANCIAL STATEMENTS > NOTES ON THE PARENT COMPANY FINANCIAL STATEMENTS
NOTES ON THE PARENT COMPANY
FINANCIAL STATEMENTS
CONTINUED
9: PENSION SCHEME FINANCIAL POSITION > CONTINUED
Pension credit (charge) and actuarial (losses) gains of the Scheme
The pension credit (charge) recognised in the Company’s profit and loss account is as follows:
Pension credit (charge):
Operating charge:
Service costs
Finance income (expense):
Interest on Scheme liabilities
Expected return on Scheme assets
Total pension credit (charge) of the Scheme
Pension charge attributable to the Company
2010 £m
2009 £m
(25)
(251)
287
36
11
(6)
(23)
(242)
213
(29)
(52)
(25)
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.
2010 £m
2009 £m
2008 £m
2007 £m
2006 £m
Actuarial gains (losses):
Actual less expected return on Scheme assets (5% (2009: 2%)
(2008: 5%) (2007: 0%) (2006: 3%) of assets)
Experience gains (losses) on Scheme liabilities (0% (2009: 1%)
(2008: 3%) (2007: 0%) (2006: 0%) of liabilities)
Changes in assumptions underlying the present value of
Scheme liabilities
Total actuarial (losses) gains (2% (2009: 5%) (2008: 2%)
(2007: 7%) (2006: 8%) of Scheme liabilities)
Actuarial (losses) gains attributable to the Company
275
1
85
59
(370)
(374)
(94)
(14)
(230)
(3)
(259)
127
200
68
(143)
(12)
(10)
324
302
91
141
17
232
390
118
The total actual return on Scheme assets was a gain of £562 million (2009: £298 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 2008 triennial valuation.
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 in the balance sheet of the Company. In 2010, the actuarial losses attributable to the Company included an
amount credited of £14 million (2009: £66 million) for the adjustment to the unrecognised portion of surplus which has not been
deducted from the pension charge.
The actuarial losses before tax of £14 million (2009: £3 million) attributable to the Company are recorded in the statement of total
recognised gains and losses. Cumulative actuarial gains as at 31 December 2010 amount to £74 million (2009: £88 million).
Total employer contributions expected to be paid into the Scheme for the year ending 31 December 2011 amount to £54 million,
reflecting the annual accrual cost and deficit funding, and expenses.
Prudential plc Annual Report 2010
385
10: 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
Reserve movements in respect of shares issued in lieu of cash dividends
At 31 December
2010
Number of
ordinary
shares
Share
capital
£m
Share
premium
£m
2,532,227,471
2,455,227
10,911,808
–
2,545,594,506
127
–
–
–
127
1,843
13
62
(62)
1,856
At 31 December 2010, there were options to subscribe for 12,802,482 (2009: 12,230,833) shares at prices ranging from 288 pence to
572 pence (2009: 266 pence to 572 pence) and exercisable by the year 2016 (2009: 2016). Further information on the Group’s employee
share options is given in note I4 ‘Share-based payments’ of the notes on the financial statements of the Group.
11: PROFIT OF THE COMPANY AND RECONCILIATION OF THE MOVEMENT IN SHAREHOLDERS’ FUNDS
The profit after tax of the Company for the year was £881 million (2009: £913 million). After dividends of £511 million (2009:
£481 million), actuarial losses net of tax in respect of the pension scheme of £10 million (2009: £2 million), share-based payment credits
of £6 million (2009: £10 million) and scrip dividends of £62 million (2009: £136 million), retained profit at 31 December 2010 amounted
to £2,284 million (2009: £1,856 million).
A reconciliation of the movement in shareholders’ funds of the Company for the years ended 31 December 2010 and 2009 is given
below:
Profit for the year note 4
Dividends
Actuarial losses recognised in respect of the pension scheme net of related tax note 9
Share-based paymentsnote 5
New share capital subscribednote 10
Net increase in shareholders’ funds
Shareholders’ funds at beginning of year
Shareholders’ funds at end of year
2010 £m
2009 £m
881
(511)
370
(10)
6
75
441
3,826
4,267
913
(481)
432
(2)
10
141
581
3,245
3,826
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FINANCIAL STATEMENTS > NOTES ON THE PARENT COMPANY FINANCIAL STATEMENTS
NOTES ON THE PARENT COMPANY
FINANCIAL STATEMENTS
CONTINUED
12: OTHER INFORMATION
a
b
Information on directors’ remuneration is given in the directors’ remuneration report section of this Annual Report and note I5 ‘Key
management remuneration’ of the notes on the financial statements of the Group.
Information on transactions of the directors with the Group is given in note I7 ‘Related party transactions’ of the notes on the financial
statements of the Group.
c The Company employs no staff.
d
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts were £0.1 million (2009: £0.1 million).
In addition, the Company paid fees for other services of £6.0 million (2009: £0.2 million).
In certain instances the Company has guaranteed that its subsidiaries will meet their obligations when they fall due for payment.
e
13: POST BALANCE SHEET EVENTS
In January 2011, the Company issued US$550 million 7.75% Tier 1 subordinated debt, primarily to retail investors. The proceeds, net
of costs, were US$539 million and are intended to finance the repayment of the ¤500m Tier 2 subordinated debt in December 2011.
Following the Board’s decision to rebase the dividend upwards and subject to shareholders’ approval, a final dividend for 2010 of
17.24 pence per ordinary share will be paid on 26 May 2011 in sterling to shareholders on the principal and Irish branch registers at
6.00pm BST on Friday, 1 April 2011 (the Record Date), and in Hong Kong dollars to shareholders on the Hong Kong branch register
at 4.30pm Hong Kong time on the Record Date (HK Shareholders).
Holders of US American Depositary Receipts will be paid their dividend in US dollars on or about five days after the payment date
of the dividend to shareholders on the principal register. The dividend will be paid on or about 2 June 2011 in Singapore dollars to
shareholders with shares standing to the credit of their securities accounts with The Central Depository (Pte) Limited (CDP) at 5.00pm
Singapore time on the Record Date (SG Shareholders).
The dividend payable to the HK Shareholders will be translated at the exchange rate ruling at the close of business on 8 March 2011.
The exchange rate at which the dividend payable to the SG Shareholders will be translated will be determined by the CDP.
The dividend will distribute an estimated £439 million of shareholders’ funds. The scrip dividend alternative is not being offered in
respect of this dividend. In its place, shareholders will be offered a Dividend Reinvestment Plan (DRIP).
Prudential plc Annual Report 2010
FINANCIAL STATEMENTS > STATEMENT OF DIRECTORS’ RESPONSIBILITIES
387
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;
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 100 to 103 confirm that to the best of their knowledge:
• make judgements and estimates that are reasonable and
• The financial statements, prepared in accordance with the
prudent;
• for the Group financial statements, state whether they have
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.
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388
FINANCIAL STATEMENTS > INDEPENDENT AUDITOR’S REPORT
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 2010 set out on pages
153 to 352 and 375 to 386. 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).
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.
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 auditor’s 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 auditor
As explained more fully in the Directors’ Responsibilities
Statement set out on page 387, 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,
and express an opinion on, 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 website at www.frc.org.uk/apb/scope/
private.cfm
Opinion on financial statements
In our opinion:
• the financial statements give a true and fair view of the state
of the Group’s and of the parent company’s affairs as at
31 December 2010 and of the Group’s profit for the year
then ended;
• the Group financial statements have been properly prepared
in accordance with IFRSs as adopted by the EU;
• the parent company financial statements have been properly
prepared in accordance with UK Generally Accepted
Accounting Practice;
• the financial statements have been prepared in accordance with
the requirements of the Companies Act 2006; and, as regards
the group financial statements, Article 4 of the IAS Regulation.
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 121, in relation to going
concern;
• 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; and
• certain elements of the report to shareholders by the Board on
directors’ remuneration.
G BAINBRIDGE
SENIOR STATUTORY AUDITOR
for and on behalf of KPMG Audit Plc, Statutory Auditor
Chartered Accountants
London
8 March 2011
Prudential plc Annual Report 2010
FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
389
EUROPEAN EMBEDDED VALUE
(EEV) BASIS RESULTS
OPERATING PROFIT BASED ON LONGER-TERM INVESTMENT RETURNS i
Results analysis by business area
Note
2010 £m
2009 £mv
ASIAN OPERATIONS
New business:
Excluding Japan
Japaniv
Total
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 management
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
Charge for share-based payments for Prudential schemes
Charge for expected asset management marginii
Total
Solvency II implementation costsiii
Restructuring costsiii
OPERATING PROFIT BASED ON LONGER-TERM INVESTMENT RETURNSi
Analysed as profits (losses) from:
New business:
Excluding Japan
Japaniv
Total
Business in force
Long-term business
Asset management
Other results
Total
2
3
2
3
2
3
2
3
902
(1)
901
549
1,450
72
(4)
1,518
761
697
1,458
22
1,480
365
571
936
46
982
284
725
(12)
713
392
1,105
55
(6)
1,154
664
569
1,233
4
1,237
230
640
870
51
921
238
1,266
1,159
30
(257)
(220)
(3)
(44)
(494)
(46)
(28)
22
(209)
(203)
(5)
(38)
(433)
–
(27)
3,696
3,090
2,028
(1)
2,027
1,817
3,844
378
(526)
3,696
1,619
(12)
1,607
1,601
3,208
297
(415)
3,090
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FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
EUROPEAN EMBEDDED VALUE
(EEV) BASIS RESULTS
CONTINUED
Notes
i
EEV basis operating profit based on longer-term investment returns excludes the recurrent items of 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. In addition, for 2010, operating profit excludes costs associated
with the terminated AIA transaction and the gain arising upon the dilution of the Group’s holding in PruHealth. For 2009, operating profit
excluded the non-recurrent cost of hedging the Group IGD capital surplus included within short-term fluctuations in investment returns and
the profit on sale and results of the sold Taiwan agency business.
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.
ii 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 margins for the period 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.
iii Restructuring costs comprise the charge of £(26) million recognised on an IFRS basis and an additional £(2) million recognised on the EEV basis
for the shareholders’ share of restructuring costs incurred by the PAC with-profits fund (2009: £(23) million on an IFRS basis and an additional
£(4) million on the EEV basis). For 2010, Solvency II implementation costs comprise the charge of £(45) million recognised on an IFRS basis and
an additional £(1) million recognised on the EEV basis.
iv New business profits for the Group’s Japanese insurance subsidiary, which ceased selling new business with effect from 15 February 2010, have
v
been presented separately from those of the remainder of the Group.
Exchange translation
The comparative results have been prepared using previously reported average exchange rates for the year.
Prudential plc Annual Report 2010
391
Note
2010 £m
2009 £m
4
9
5
6
18
19
11
1,518
1,480
982
284
1,266
(494)
(46)
(28)
3,696
(30)
(164)
(11)
(10)
(377)
3
–
3,107
(530)
2,577
–
2,577
2,573
4
2,577
1,154
1,237
921
238
1,159
(433)
–
(27)
3,090
351
(795)
(84)
(910)
–
–
91
1,743
(481)
1,262
(14)
1,248
1,245
3
1,248
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SUMMARISED CONSOLIDATED INCOME STATEMENT
OPERATING PROFIT BASED ON LONGER-TERM INVESTMENT RETURNS
Asian operations
US operations
UK operations:
UK insurance operations
M&G
Other income and expenditure
Solvency II implementation costs
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
Costs of terminated AIA transaction
Gain on dilution of holding in PruHealth
Profit on sale and results for Taiwan agency business
PROFIT FROM CONTINUING OPERATIONS BEFORE TAX (INCLUDING ACTUAL
INVESTMENT RETURNS)
Tax attributable to shareholders’ profit
PROFIT FROM CONTINUING OPERATIONS AFTER TAX BEFORE
NON-CONTROLLING INTERESTS
Discontinued operations (net of tax)
PROFIT FOR THE YEAR
Attributable to:
Equity holders of the Company
Non-controlling interests
PROFIT FOR THE YEAR
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FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
EUROPEAN EMBEDDED VALUE
(EEV) BASIS RESULTS
CONTINUED
EARNINGS PER SHARE (IN PENCE)
From operating profit based on longer-term investment returns, after related tax and
non-controlling interests of £2,700m* (2009: £2,221m)
Based on profit after tax and non-controlling interests of £2,573m (2009: £1,245m)
Note
2010
2009
12
12
106.9p
101.9p
88.8p
49.8p
* Excluding an exceptional tax credit of £158 million which primarily relates to the impact of a settlement agreed with the UK tax authorities
– see note 11.
DIVIDENDS PER SHARE (IN PENCE)
Dividends relating to reporting year:
Interim dividend (2010 and 2009)
Final/second interim dividend (2010 and 2009)
Total
Dividends declared and paid in reporting year:
Current year interim dividend
Second interim/final dividend for prior year
Total
2010
2009
6.61p
17.24p
23.85p
6.61p
13.56p
20.17p
6.29p
13.56p
19.85p
6.29p
12.91p
19.20p
MOVEMENT IN SHAREHOLDERS’ EQUITY (EXCLUDING NON-CONTROLLING INTERESTS)
Profit 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 (including shares issued in lieu of cash dividends)
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
Note
2010 £m
2009 £m
2,573
1,245
659
34
(511)
75
37
(4)
3
105
(37)
(761)
11
(481)
141
29
3
(3)
205
(72)
Net increase in shareholders’ equity
Shareholders’ equity at beginning of year (excluding non-controlling interests)
10
7,10
2,934
15,273
317
14,956
SHAREHOLDERS’ EQUITY AT END OF YEAR (EXCLUDING
NON-CONTROLLING INTERESTS)
7,10
18,207
15,273
Prudential plc Annual Report 2010
COMPRISING:
Asian operations:
Net assets of operations
Acquired goodwill
US operations:
Net assets of operations
Acquired goodwill
UK insurance operations:
Net assets of operations
M&G:
Net assets of operations
Acquired goodwill
Other operations:
Holding company net
borrowings at market value
Other net assets (liabilities)
SHAREHOLDERS’ EQUITY AT
END OF YEAR (EXCLUDING
NON-CONTROLLING INTERESTS)
Representing:
Net assets
Acquired goodwill
7
7
7
9
7
7
393
Total
5,942
141
6,083
4,217
16
4,233
2009 £m
Asset
management
and other
operations
Long-term
business
operations
5,781
80
5,861
4,122
–
4,122
161
61
222
95
16
111
Total
7,642
297
7,939
4,905
16
4,921
Long-term
business
operations
Note
2010 £m
Asset
management
and other
operations
7,445
236
7,681
4,799
–
4,799
197
61
258
106
16
122
5,970
33
6,003
5,439
37
5,476
–
–
–
5,970
254
1,153
1,407
1,440
254
1,153
1,407
7,410
–
–
–
5,439
173
1,153
1,326
1,363
173
1,153
1,326
6,802
–
–
–
(2,212)
149
(2,212)
149
(2,063)
(2,063)
–
–
–
(1,780)
(65)
(1,780)
(65)
(1,845)
(1,845)
18,450
(243)
18,207
15,422
(149)
15,273
18,214
236
18,450
(1,473)
1,230
16,741
1,466
(243)
18,207
15,342
80
15,422
(1,379)
1,230
13,963
1,310
(149)
15,273
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FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
EUROPEAN EMBEDDED VALUE
(EEV) BASIS RESULTS
CONTINUED
NET ASSET VALUE PER SHARE (IN PENCE)
Based on EEV basis shareholders’ equity of £18,207 million (2009: £15,273 million)
Number of issued shares at year end (millions)
RETURN ON EMBEDDED VALUE*
2010
715p
2,546
18%
2009
603p
2,532
15%
* Return on embedded value is based on EEV operating profit after tax and non-controlling interests (adjusted to exclude an exceptional tax credit
of £158 million (as shown in note 11)) as a percentage of opening EEV basis shareholders’ equity.
SUMMARY STATEMENT OF FINANCIAL POSITION
TOTAL ASSETS LESS LIABILITIES, BEFORE DEDUCTION FOR 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
SHAREHOLDERS’ EQUITY (EXCLUDING NON-CONTROLLING INTERESTS)
* Including liabilities in respect of insurance products classified as investment contracts under IFRS 4.
Note
2010 £m
2009 £m
231,667
201,501
(223,636)
10,176
(195,230)
9,002
(213,460)
(186,228)
7,10
18,207
15,273
127
1,856
6,048
8,031
10,176
18,207
127
1,843
4,301
6,271
9,002
15,273
7
7
7,10
The supplementary information on pages 389 to 433 was approved by the Board of directors on 8 March 2011 and signed on its behalf.
HARVEY MCGRATH
CHAIRMAN
TIDJANE THIAM
GROUP CHIEF EXECUTIVE
NIC NICANDROU
CHIEF FINANCIAL OFFICER
Prudential plc Annual Report 2010
NOTES ON THE EEV BASIS RESULTS
395
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 deductions for:
− the cost of locked-in required capital;
− the time value of cost of options and guarantees;
• locked-in required capital; and
• shareholders’ net worth in excess of required 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 in-force and new 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.
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.
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FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
NOTES ON THE EEV BASIS RESULTS
CONTINUED
1 BASIS OF PREPARATION, METHODOLOGY AND ACCOUNTING PRESENTATION > CONTINUED
Principal economic assumptions
For the Group’s UK and US operations, the 2010 and 2009 EEV basis results have been determined using economic assumptions where
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 income securities (the ‘active’ basis).
For Asian operations, the 2009 EEV basis results for Japan, Korea and US dollar denominated business written in Hong Kong were
determined on the ‘active’ basis. For other Asian countries the investment return assumptions and risk discount rates for 2009 were
based on an assessment of longer-term economic conditions (the ‘passive’ basis).
In 2010, the approach has been altered to determine the EEV basis results for all Asian territories on an active basis of economic
assumption setting, in line with the Group’s other operations, and reflecting the fact that markets in a number of Asian countries are
becoming increasingly developed.
For those Asian operations whose EEV basis results were previously determined on the ‘passive’ basis of economic assumption
setting, the effect of the change in 2010 to move to an ‘active’ basis is as follows:
Pre-tax operating profits from:
New businessnote 2
Business in forcenote 3
Total
Effect on short-term fluctuations in investment returns and changes in economic assumptions
Total profit before tax
Shareholders’ funds as at 31 December 2010
£m
5
(58)
(53)
16
(37)
(39)
For 2010 and 2009, for all the Group’s operations, expected returns on equity and property asset classes are derived by adding a risk
premium, based on the long-term view of Prudential’s economists to the risk free rate.
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.
New business
The contribution from new business represents profits determined by applying operating 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 year (to the extent that changes in capital
values do not directly match changes in liabilities) are included directly in the profit for the year 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.
Prudential plc Annual Report 2010
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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 required 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 required 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 required 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 and also are a feature of the UOB in-force book acquired in 2010. The
amounts of these policies written in these operations are much smaller than the amounts of similar policies written by the Taiwan Life
business which was sold in the first half of 2009, as detailed in note 19.
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 (2009: 1.5 per cent to 5.5 per cent),
depending on the particular product, jurisdiction where issued, and date of issue. At 31 December 2010, 83 per cent (2009: 82 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 2.9 per
cent (2009: 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)), as death benefits (Guaranteed Minimum Death Benefits (GMDB)) or as income benefits
(Guaranteed Minimum Income Benefits (GMIB)). Jackson reinsures and 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.
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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 £24 million (2009: £31 million) at 31 December 2010 to honour guarantees on a small amount
of guaranteed annuity option products.
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.
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
£336 million (2009: £284 million) was held in SAIF at 31 December 2010 to honour the guarantees. As SAIF is a separate sub-fund of the
Prudential Assurance Company long-term fund which is attributable to policyholders of the fund, the movement in the provision has no
direct impact on shareholders.
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FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
NOTES ON THE EEV BASIS RESULTS
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 required capital
In adopting the EEV Principles, Prudential has based required capital on its internal targets for economic capital subject to it being
at least the local statutory minimum requirements. Economic capital is assessed using internal models but, when applying the EEV
Principles, Prudential does not take credit for the significant diversification benefits that exist within the Group. For with-profits business
written in a segregated life fund, as is the case in Asia and the UK, the capital available in the fund is sufficient to meet the required
capital requirements. For shareholder-backed business the following capital requirements apply:
• Asian operations: the level of required capital has been set at the higher of local statutory requirements and the economic capital
requirement;
• US operations: the level of required capital has been set to an amount at least equal to 235 per cent of the risk-based capital required
by the National Association of Insurance Commissioners (NAIC) at the Company Action Level (CAL); and
• 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 2010 and 2009 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 beta multiplied by an 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.
Prudential plc Annual Report 2010
399
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.
The risk discount rate incorporates an additional allowance for credit risk premium and short-term defaults for general account
business of 150 basis points and for variable annuity business of 30 basis points 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.
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 the basis for determining the aggregate allowance for credit risk is consistent with that applied
for UK shareholder-backed annuity business and includes provision for short-term defaults and credit risk premium. 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.
The assumed earned rate for with-profit holdings of corporate bonds is defined as the risk-free rate plus an assessment of the long-term
spread over gilts, net of expected long-term defaults. This approach is similar to that applied for equities and properties for which the
projected earned rate is defined as the risk-free rate plus a long-term risk premium.
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.
A base level allowance of 50 basis points is applied to cover the non-diversifiable non-market risks associated with the Group’s
businesses. For the Group’s US business and UK business for other than shareholder-backed annuity, no additional allowance is
necessary. For UK shareholder-backed annuity business, an additional allowance of 50 basis points is used to reflect the longevity risk
which is of particular relevance. For the Group’s Asian operations in China, India, Indonesia, Philippines, Taiwan, Thailand and Vietnam,
additional allowances are applied for emerging market risk ranging from 100 to 250 basis points.
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 investment allocation decisions,
levels of reversionary and terminal bonuses and credited rates. 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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FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
NOTES ON THE EEV BASIS RESULTS
CONTINUED
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.
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, 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 1c(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 the recurrent items of 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.
In addition, for 2010, the Company incurred costs associated with the terminated AIA transaction and the Group’s holding in
PruHealth was diluted. The effect of both of these items has been shown separately from operating profits based on longer-term
investment returns.
In 2009, during the severe equity market conditions experienced in the first quarter, coupled with historically high equity volatility,
the Group incurred non-recurrent costs from an exceptional short-dated hedge to protect against potential tail events on the Group IGD
capital position in addition to regular operational hedging programmes. These costs incurred in 2009 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, asset values at the
beginning of the reporting period are adjusted to remove the effects of short-term market movements as explained in note 1c (iv) below.
Prudential plc Annual Report 2010
401
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.
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.
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 investment 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.
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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 includes 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 based on longer-term investment returns.
vi Effect of changes in economic assumptions
Movements in the value of in-force business at the beginning of the period caused by changes in economic assumptions, net of the
related change in the time value of cost of option and guarantees, are recorded in non-operating results.
vii Taxation
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 applied for 2010 is 27 per cent (2009: 28 per cent). For Jackson, the US federal tax rate of 35 per cent is
applied to gross up movements on the value of in-force business. The overall tax rate includes the impact of tax effects determined
on a local regulatory basis. For Asia, similar principles apply subject to the availability of taxable profits.
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FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
NOTES ON THE EEV BASIS RESULTS
CONTINUED
1 BASIS OF PREPARATION, METHODOLOGY AND ACCOUNTING PRESENTATION > CONTINUED
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.
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: £
China
Hong Kong
India
Indonesia
Korea
Malaysia
Singapore
Taiwan
US
Closing rate
at 31 Dec 2010
Average rate
for 2010
Closing rate
at 31 Dec 2009
Average rate
for 2009
Opening rate
at 1 Jan 2009
10.32
12.17
70.01
14,106.51
1,776.86
4.83
2.01
45.65
1.57
10.46
12.01
70.66
14,033.41
1,786.23
4.97
2.11
48.65
1.55
11.02
12.52
75.15
15,171.52
1,880.45
5.53
2.27
51.65
1.61
10.70
12.14
75.70
16,173.28
1,989.75
5.51
2.27
51.65
1.57
9.86
11.14
70.05
15,799.22
1,810.92
5.02
2.07
47.28
1.44
x Discontinued operations
The charge of £(14) million in 2009, which is net of £nil tax, reflected completion adjustments for a previously disposed business.
2 ANALYSIS OF NEW BUSINESS CONTRIBUTION note iv
New business premiums
Single
£m
1,104
11,417
5,656
18,177
Regular
£m
1,391
22
254
1,667
Year ended 31 December 2010
Annual
premium and
contribution
equivalents
(APE)
note i
£m
Present value
of new
business
premiums
(PVNBP)
note i
£m
Pre-tax new
business
contribution
note ii,iii
£m
1,501
1,164
820
7,493
11,572
6,842
902
761
365
3,485
25,907
2,028
New business premiums
Single
£m
785
8,885
4,768
14,438
Regular
£m
1,131
24
246
1,401
Year ended 31 December 2009
Annual
premium and
contribution
equivalents
(APE)
note i
£m
Present value
of new
business
premiums
(PVNBP)
note i
£m
Pre-tax new
business
contribution
notes ii,iii
£m
1,209
912
723
2,844
5,982
9,048
5,902
725
664
230
20,932
1,619
New business margin
note i
(APE)
%
(PVNBP)
%
60
65
45
58
12.0
6.6
5.3
7.8
New business margin
note i
(APE)
%
(PVNBP)
%
60
73
32
57
12.1
7.3
3.9
7.7
Asian operationsnotes v, vi
US operationsnote vii
UK insurance operationsnote viii
Total
Asian operationsnote v
US operationsnote vii
UK insurance operationsnote viii
Total
Prudential plc Annual Report 2010
403
New business margin (APE) %
2010
2009
47
74
20
75
31
13
79
60
50
70
19
73
44
18
87
60
Asian operations:note v
China
Hong Kong
India
Indonesia
Korea
Taiwan
Other
Weighted average for all Asian operations
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. APE are calculated as the
aggregate of regular new business amounts and one-tenth of single new business amounts. PVNBP 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
iii New business contributions represent profits determined by applying operating 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 business. For other business within the
Group end of period economic assumptions are used.
iv The amounts shown in the tables are translated at average exchange rates for the period.
v The tables above include new business for the Taiwan bank distribution operation. New business excludes the Taiwan Agency business, which
was sold in June 2009 (as explained in note 19) and the Japanese insurance operations, in which the Company ceased selling new business from
15 February 2010.
vi The new business contribution in 2010 of £902 million for Asian operations includes a benefit of around £5 million arising from the application of
the ‘active’ basis of economic assumption setting rather than the previously applied basis of an assessment of longer-term economic conditions,
as described in note 1b.
vii The decrease in new business margin for US operations from 2009 to 2010 primarily reflects the changes to the assumed new business spread
margins for Fixed Annuity and Fixed Index Annuity business as described in note 16a.
viii The increase in new business margin for UK operations from 2009 to 2010 primarily reflects the signing of a bulk annuity buy-in insurance
agreement.
3 OPERATING PROFIT FROM BUSINESS IN FORCE
Group summary
Unwind of discount and other expected returns
Effect of change in operating assumptions
Experience variances and other items
Total
Unwind of discount and other expected returns
Effect of change in operating assumptions
Experience variances and other items
Total
Year ended 31 December 2010 £m
Asian
operations
note i
US
operations
note ii
UK
operations
note iii
573
(23)
(1)
549
369
3
325
697
550
(3)
24
571
Year ended 31 December 2009 £m
Asian
operations
note i
US
operations
note ii
UK
operations
note iii
489
(12)
(85)
392
344
101
124
569
588
–
52
640
Total
1,492
(23)
348
1,817
Total
1,421
89
91
1,601
F
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N
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I
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L
S
T
A
T
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M
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T
S
I
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O
R
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A
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I
O
N
E
E
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404
FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
NOTES ON THE EEV BASIS RESULTS
CONTINUED
3 OPERATING PROFIT FROM BUSINESS IN FORCE > CONTINUED
Notes
Analysis by business unit
Asian operations
i
Unwind of discount and other expected returnsa
Effect of change in operating assumptions:
Mortality and morbidityb
Expensec
Persistencyd
Othere
Experience variance and other items:
Mortality and morbidityf
Expenseg
Persistencyh
Otheri
Total Asian operationsj
Notes
2010 £m
2009 £m
573
89
(62)
(75)
25
(23)
45
(39)
(48)
41
(1)
549
489
26
(32)
(78)
72
(12)
52
(43)
(76)
(18)
(85)
392
a
b
c
d
e
f
g
h
i
j
The increase in unwind of discount and other expected returns from £489 million for 2009 to £573 million for 2010 mainly arises from the
growth in the opening value of the in-force book.
The credit of £89 million (2009: £26 million) for mortality and morbidity assumption changes mainly arises in Indonesia of £72 million
comprising £36 million for relaxation of morbidity assumptions and £36 million to reflect recent experience in relation to protection
benefits provided by unit-linked policies. The favourable effect of £26 million in 2009 primarily arises in Indonesia of £24 million reflecting
recent experience.
The charge of £(62) million in 2010 for expense assumption changes includes a charge in Korea of £(40) million, to reflect higher policy
maintenance costs. Also included for 2010 is a charge of £(16) million in Malaysia relating to altered maintenance expense assumptions.
The charge of £(32) million for strengthened expense assumptions in 2009 arises principally in Hong Kong of £(23) million with the balance
arising across the regions.
The charge of £(75) million in 2010 for the effect of changes in persistency assumptions mainly arises in Indonesia (£(33) million), Malaysia
(£(26) million) and India (£(24) million) partly offset by a credit in Hong Kong (£16 million). The charge in Indonesia of £(33) million primarily
relates to Shariah and single premium policies for which lower renewal rates have been experienced. The charge in Malaysia of £(26) million
reflects altered premium holiday and other lapse assumptions and the charge in India of £(24) million represents changes in the paid-up
assumption on linked business.
The negative effect of the change in persistency assumptions of £(78) million in 2009 is mainly a direct consequence of the impact
on policyholders’ savings behaviour from adverse economic and market conditions, arising mostly with investment related products,
principally in Korea (£(25) million), Indonesia (£(24) million) and Hong Kong (£(12) million).
The credit of £72 million for other assumption changes in 2009 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.
The favourable effect of £45 million in 2010 (2009: £52 million) for mortality and morbidity experience variances reflects better than
expected experience, most significantly in Hong Kong, Singapore and Malaysia.
The expense experience variance of £(39) million in 2010 (2009: £(43) million) includes a charge of £(18) million (2009: £(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. Also included in 2010 is £(9) million arising in Taiwan (2009: £(8) million) reflecting over-runs whilst the
business rebuilds scale following the sale of the Agency business and in 2009, an expense variance of £(10) million arose in Korea, reflecting
the lower level of sales in the period.
The negative persistency experience variance of £(48) million in 2010 mainly arises in India of £(27) million relating to higher paid-ups and
surrenders on unit-linked business and in Malaysia of £(26) million for higher partial withdrawals on unit-linked business as customers
sought to monetise a proportion of their funds following two years of exceptional returns.
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).
The credit of £41 million in 2010 for other experience and other items includes a credit of £24 million arising in Indonesia for the impact
of additional riders being added to in-force policies during the year, funded from the policyholder unit linked account balances.
The in-force operating profit for 2010 of £549 million reflects the effect of setting economic assumptions on an ‘active’ basis rather than the
previously applied ‘passive’ basis as described in note 1(b), the impact of which was to lower in-force operating profits in 2010 by £58 million,
principally for altered unwind of discount.
Prudential plc Annual Report 2010
405
2010 £m
2009 £m
369
–
10
27
(34)
3
158
82
32
21
23
9
325
697
344
156
33
(13)
(75)
101
(3)
59
40
32
7
(11)
124
569
ii US operations
Unwind of discount and other expected returnsa
Effect of changes in operating assumptions:
Guaranteed Minimum Withdrawal Benefit (GMWB) policyholder behaviourb
Mortalityc
Variable Annuity (VA) feesd
Othere
Experience variances and other items:
Spread experience variancef
Amortisation of interest-related realised gains and lossesg
Expenseh
Mortalityi
Persistencyj
Other
Total US operations
Notes
a
b
c
d
e
f
g
h
i
j
The increase in unwind of discount and other expected returns from £344 million for 2009 to £369 million for 2010 primarily represents an
increase in the return on net worth arising from a higher opening value between 1 January 2009 and 1 January 2010.
The positive impact of the change in GMWB policyholder behaviour assumptions of £156 million for 2009 reflects the altered assumptions
relating to the utilisation of withdrawal features available to policyholders on Variable Annuity (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
was altered to take account of recent experience which shows that the attained age of the policyholder is the key factor in determining
utilisation levels.
The credit of £10 million for updates to mortality assumptions in 2010 represents a credit of £29 million for business other than variable
annuity, reflecting recent experience, partially offset by a negative effect on variable annuity business of £(19) million for a change in the
modelling of mortality rates. The £33 million credit for mortality in 2009 primarily reflects lower mortality rates for the Life of Georgia
business, based upon actual experience since the acquisition of the business in 2005.
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 credit of £27 million for 2010 reflects an increase in the projected
level of fees paid by policyholders, according to the current fund mix. The negative effect of the change in 2009 of £(13) million represents
a reduction in the level of fees.
The charge of £(34) million for other operating assumption changes in 2010 includes a credit of £4 million for the overall effect of changes
to persistency assumptions and the net effect of a number of items including a charge of £(19) million for the altered projection of life
reserves run-off. 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.
The spread assumption for Jackson is determined on a longer-term basis, net of provision for defaults. The spread experience variance in
2010 is a positive £158 million, arising principally from transactions undertaken in the year to more closely match the overall asset and
liability duration the effect of which is expected to persist in 2011 but at a reduced level.
The 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.
The realised gain or loss is amortised into the result over the period when the bonds would have otherwise matured to better reflect the
long-term returns included in operating profits. The increase in amortisation of interest-related gains and losses from £59 million in 2009 to
£82 million in 2010 reflects the increased level of realised gains in the second half of 2009, on which a full year’s amortisation is recognised
in 2010.
The positive expense experience variance of £32 million (2009: £40 million) primarily represents favourable experience variance relating
to marketing expenses.
The positive mortality experience variance of £21 million (2009: £32 million) primarily relates to life products.
The positive persistency experience variance of £23 million primarily arises from favourable experience on annuity and institutional
business.
F
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406
FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
NOTES ON THE EEV BASIS RESULTS
CONTINUED
3 OPERATING PROFIT FROM BUSINESS IN FORCE > CONTINUED
iii UK insurance operations
Unwind of discount and other expected returnsa
Effect of changes in operating assumptions:
Updated mortality assumptions, net of release of marginsb
Expensec
Effect of change in UK corporate tax rated
Other itemse
Total UK insurance operations
Notes
2010 £m
2009 £m
550
(40)
37
(3)
41
(17)
571
588
–
–
–
–
52
640
a
b
c
d
e
The decrease in unwind of discount and other expected returns from 2009 of £588 million to £550 million in 2010 mainly arises from the
impact of the reduction in discount rates, reflecting the decrease in gilt rates of 0.4 per cent.
The Continuous Mortality Investigation (CMI) model and Core Projection parameters have been reviewed and a custom parameterisation
of the CMI model has been made where some aspects of the pattern of convergence from current rates of improvements to long-term rates
of improvement have been altered. The assumption change shown above of a charge of £(40) million represents the effect of the
implementation of the custom parameterisation on the opening value of in-force business at 1 January 2010, offset by the effects of other
mortality assumption changes and the release of margins on the base mortality assumptions.
The credit of £37 million in 2010 for changes in operating expense assumptions relates to renewal expense assumptions on shareholder
backed annuity business.
At 31 December 2010 a change to reduce the UK corporate tax rate from 28 per cent to 27 per cent with effect from 1 April 2011 had been
enacted in the legislative process. The effect of the change in the corporate tax rate of £41 million represents the pre-tax benefit arising from
the change in projecting the tax cash flows attaching to in-force business.
The credit of £52 million in 2009 includes a credit of £22 million for the effects of rebalancing the UK annuity business asset portfolio backing
the liabilities to policyholders, reflecting the altered value arising from the revised projected yield and allowances for default risk.
4 SHORT-TERM FLUCTUATIONS IN INVESTMENT RETURNS
Short-term fluctuations in investment returns, net of the related change in the time value of cost of options and guarantees,
arise as follows:
Insurance operations:
Asianote i
USnote ii
UKnote iii
Other operations:
IGD hedge costsnote iv
Othernote v
Total
Notes
i
Asian operations
Indonesia
Hong Kong
Taiwan
Malaysia
Singapore
Other operations
2010 £m
2009 £m
287
(678)
336
–
25
(30)
437
(401)
445
(235)
105
351
2010 £m
2009 £m
55
51
40
37
16
88
287
40
113
20
40
159
65
437
For 2010 short-term fluctuations for Asian operations of £287 million primarily reflect the favourable performance in equity markets across
the territories. The short-term fluctuations for other operations in 2010 of £88 million include an unrealised gain of £30 million on the Group’s
8.66 per cent stake in China Life Insurance Company of Taiwan, which at 31 December 2010 was valued at £100 million. For 2009, the short-term
fluctuations in investment returns in Asia 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.
Prudential plc Annual Report 2010
407
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 transactionsa
Actual less long-term return on equity based investments and other itemsb
Investment return related (loss) gain 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 productsc
2010 £m
2009 £m
(351)
5
(332)
(678)
(367)
(144)
110
(401)
Notes
c
a
b
The charges relating to fixed income securities for 2010 of £(351) million and 2009 of £(367) million shown above primarily represent the
excess of credit-related 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, together with for 2010, the impact of de-risking activities within the portfolio.
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.
This item arises due to the market returns, net of related hedging activity, being higher or lower than the assumed longer-term rate of return.
This gives rise to higher or lower than expected period 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 2010 the US equity market returns were
14.5 per cent compared to the assumed longer-term rate of 6.8 per cent for the period which was more than offset by the impact of hedging
activity. For 2009 the US equity market returns were approximately 24 per cent compared to the assumed longer-term rate of 7.4 per cent
for the period.
iii UK insurance operations
The short-term fluctuations in investment returns for UK insurance operations represents:
With-profitsa
Shareholder-backed annuityb
Unit-linked and otherc
Notes
2010 £m
2009 £m
218
84
34
336
430
(40)
55
445
a
b
c
For with-profits business the credit for 2010 of £218 million reflects the positive 12.0 per cent actual investment return on the investments
of the PAC with-profits fund (covering policyholder liabilities and unallocated surplus) against the assumed long-term rate of 6.7 per cent.
The credit of £430 million for 2009 reflects the positive variance of 8.6 per cent against the assumed long-term investment return.
Short-term fluctuations in investment returns for shareholder-backed annuity business include gains (losses) on surplus assets relative to
the expected return due to a fall (rise) in yields, the difference between actual and expected default experience and mismatching profits and
losses arising from the impacts of changes in yields on assets and liabilities of differing durations. The short-term fluctuations in investment
returns for 2010 of a credit of £84 million represent better than expected default experience of £64 million, higher than expected gains
arising on surplus assets of £55 million, partially offset by mismatching losses of £(21) million, and other impacts of £(14) million. The charge
of £(40) million for 2009 represents mismatching losses of £(105) million, partially offset by better than expected default experience of
£22 million with the remaining balance of £43 million consisting of positive movements in other asset values partially offset by losses on
surplus assets.
The credit of £34 million for 2010 (2009: credit of £55 million) primarily relates to unit-linked business representing the increase in
capitalised value of future fees arising from the positive movements in market values experienced during the relevant reporting periods.
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 the
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 for 2009, arise from:
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
2010 £m
2009 £m
(25)
48
2
25
28
66
11
105
F
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S
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A
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408
FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
NOTES ON THE EEV BASIS RESULTS
CONTINUED
5 EFFECT OF CHANGES IN ECONOMIC ASSUMPTIONS
The effects of changes in economic assumptions for in-force business, net of the related change in the time value of cost of options and
guarantees, included within the profit from continuing operations before tax (including actual investment returns) arise as follows:
Asian operationsnote i
US operationsnote ii
UK insurance operationsnote iii
Total
2010 £m
2009 £m
(71)
(1)
62
(10)
(174)
(518)
(218)
(910)
Notes
i
The charge of £(71) million in Asian operations for the effect of changes in economic assumptions in 2010 primarily represents the effect of
derisking certain asset portfolios in Hong Kong and Singapore of £(73) million, together with the impact of the reduction in fund earned rates
and risk discount rates as shown in note 16(a), including the effect of altering the basis of setting economic assumptions to the ‘active’ basis as
described in note 1(b). The charge for 2009 of £(174) million primarily reflects increases in risk discount rates and fund earned rates, with the
largest impact arising for Hong Kong US dollar denominated business arising from the increase in US dollar government bond yields, partly offset
by 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 16a).
ii The charge of £(1) million for the effect of changes in economic assumptions, net of the related change in the time value of cost of options and
guarantees, for US operations for 2010 reflects the following:
Effect of changes in treasury rates, beta and equity risk premium:a
Fixed annuity and other general account business
Variable Annuity (VA) business
Increase in risk margin allowance for credit riskb
2010 £m
2009 £m
111
(112)
–
(1)
(398)
181
(301)
(518)
Notes
a
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. Secondary effects on the cash flows also result from changes to assumed
future yield and resulting policyholder behaviour. 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 2010, the effect of these changes resulted in an overall credit for fixed annuity and other general
account business of £111 million and a charge of £(112) million for VA business reflecting the reduction of 0.6 per cent in the risk-free rate (as
shown in note 16a).
For 2009, the effect of these changes resulted in an overall charge for fixed annuity and other general account business of £(398) million
b
and an overall credit on VA business of £181 million, reflecting the increase in the risk-free rate of 1.6 per cent.
For 2010 and 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:
i
How much of the credit spread on debt securities represents an increased credit risk not reflected in the Risk Margin Reserve (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
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.
ii
After taking these and other more detailed factors into account and, based on market conditions in late 2009, the risk discount rate for
general account business was increased by 150 basis points as an additional allowance for credit risk. For VA business, the additional
allowance increase was 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. For 2010 these additional allowances have been maintained at 2009 levels. 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.
Prudential plc Annual Report 2010
409
iii The effect of changes in economic assumptions, net of the related change in the time value of cost of options and guarantees, of a credit
of £62 million for UK insurance operations for 2010 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 a
2010 £m
With-profits
and other
business
note b
(102)
55
(6)
(53)
(80)
183
12
115
Shareholder-
backed
annuity
business
note a
2009 £m
With- profits
and other
business
note b
(284)
240
25
(19)
191
(311)
(79)
(199)
Total
(182)
238
6
62
Total
(93)
(71)
(54)
(218)
Notes
a
b
For 2010, the effects of decreases in expected long-term rates of return and risk discount rates for shareholder-backed annuity business
primarily reflect the reduction in gilt rates of 0.4 per cent, as shown in note 16a. In 2009, the overall 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.
For 2010, the credit of £115 million for with-profits and other business reflects a decrease in risk discount rates which more than offsets the
reduction in fund earned rates, primarily driven by the decrease in gilt rates of 0.4 per cent in the year. In 2009, the charge of £(199) 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.
6 COSTS OF TERMINATED AIA TRANSACTION
The following costs were incurred in relation to the proposed and subsequently terminated transaction, to purchase AIA Group Limited
and related rights issue.
AIG termination break fee
Underwriting fees
Costs associated with foreign exchange hedging
Adviser fees and other
TOTAL COSTS BEFORE TAX
Associated tax relief
Total costs after tax
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
2010 £m
153
58
100
66
377
(93)
284
I
N
F
O
R
M
A
T
I
O
N
E
E
V
B
A
S
I
S
S
U
P
P
L
E
M
E
N
T
A
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410
FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
NOTES ON THE EEV BASIS RESULTS
CONTINUED
7 SHAREHOLDERS’ FUNDS (EXCLUDING NON-CONTROLLING INTERESTS) – SEGMENTAL ANALYSIS
ASIAN OPERATIONS
Long-term business:
Net assets of operations – EEV basis shareholders’ fundsnote iv
Acquired goodwillnote iii
Asset management:note i
Net assets of operations
Acquired goodwill
US OPERATIONS
Jackson – EEV basis shareholders’ funds (net of surplus note borrowings of £172 million
(2009: £158 million)note 9)
Broker-dealer and asset management operationsnote 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 note i
M&G:note i
Net assets of operations
Acquired goodwill
OTHER OPERATIONS
Holding company net borrowings at market value note 9
Other net assets (liabilities)note i
2010 £m
2009 £m
7,445
236
7,681
197
61
258
5,781
80
5,861
161
61
222
7,939
6,083
4,799
4,122
106
16
122
95
16
111
4,921
4,233
5,911
59
5,970
33
6,003
254
1,153
1,407
7,410
(2,212)
149
(2,063)
5,547
(108)
5,439
37
5,476
173
1,153
1,326
6,802
(1,780)
(65)
(1,845)
Total
18,207
15,273
Prudential plc Annual Report 2010
411
REPRESENTING:
Asian operations
US operations
UK insurance operations
Total long-term business operations
Other operationsnote ii
Group total
2010 £m
2009 £m
Statutory
IFRS basis
shareholders’
equity
Additional
retained
profit on
an EEV basis
EEV basis
shareholders’
equity
Statutory
IFRS basis
shareholders’
equity
Additional
retained
profit on
an EEV basis
EEV basis
shareholders’
equity
2,149
3,815
2,115
8,079
(48)
8,031
5,532
984
3,855
10,371
(195)
7,681
4,799
5,970
18,450
(243)
10,176
18,207
1,462
3,011
1,902
6,375
(104)
6,271
4,399
1,111
3,537
9,047
(45)
9,002
5,861
4,122
5,439
15,422
(149)
15,273
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 assets (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
2010 £m
2009 £m
(10)
(3)
(13)
(16)
(5)
(21)
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 £(177) million (2009: charge of £(26) million) and the effect of accounting for pension costs for the Prudential Staff
Pension Scheme.
iii The increase in acquired goodwill for Asian long-term business operations from £80 million in 2009 to £236 million in 2010 represents
£141 million arising from the acquisition of United Overseas Bank Life Assurance Limited (as shown in note 17) and £15 million for exchange rate
movements.
iv The EEV basis shareholders’ funds for Asian long-term business of £7,445 million for 2010 have been determined after including the £(39) million
effect of moving from a passive to an active basis of economic assumption setting, as described in note 1b.
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
I
N
F
O
R
M
A
T
I
O
N
E
E
V
B
A
S
I
S
S
U
P
P
L
E
M
E
N
T
A
R
Y
412
FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
NOTES ON THE EEV BASIS RESULTS
CONTINUED
8 ANALYSIS OF MOVEMENT IN FREE SURPLUS
Free surplus is the excess of the net worth over 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).
LONG-TERM BUSINESS AND ASSET MANAGEMENT OPERATIONSnote i
Underlying movement:
New business:
Excluding Japan
Japan
Total
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
Net cash flows to parent companynote iv
Exchange movements, timing differences and other itemsnote v
NET MOVEMENT IN FREE SURPLUS
Balance at 1 January 2010
BALANCE AT 31 DECEMBER 2010
Representing:
Asian operations
US operations
UK operations
1 January 2010
Representing:
Asian operations
US operations
UK operations
2010 £m
Asset
management
and UK
general
insurance
commission
note ii
Free surplus
of long-term
business, asset
management
and UK general
insurance
commission
Long-term
business
note 13
(643)
(2)
(645)
1,829
220
1,404
(120)
1,284
(735)
134
683
2,065
2,748
1,045
1,163
540
2,748
801
749
515
2,065
–
–
–
310
–
310
26
336
(200)
(12)
124
466
590
197
106
287
590
161
95
210
466
(643)
(2)
(645)
2,139
220
1,714
(94)
1,620
(935)
122
807
2,531
3,338
1,242
1,269
827
3,338
962
844
725
2,531
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.
iv Net cash flows to parent company for long-term business operations reflect the flows as included in the holding company cash flow at
transaction rates.
Prudential plc Annual Report 2010
413
2010 £m
Asset
management
and UK
general
insurance
commission
18
–
(30)
(12)
Long-term
business
78
68
(12)
134
Total
96
68
(42)
122
v
Exchange movements, timing differences and other items represent:
Exchange movementsnote 13
Mark to market value movements on Jackson assets backing surplus and required capitalnote 13
Other
9 NET CORE STRUCTURAL BORROWINGS OF SHAREHOLDER-FINANCED OPERATIONS
2010 £m
Mark to
market value
adjustment
note ii
EEV basis at
market value
IFRS basis
2009 £m
Mark to
market value
adjustment
note ii
EEV basis at
market value
Holding company* cash and short-term
investments
Core structural borrowings – central fundsnote i
Holding company net borrowings
Core structural borrowings – PruCapnote iii
Core structural borrowings – Jackson
Net core structural borrowings of shareholder
IFRS basis
(1,232)
3,267
2,035
250
159
–
177
177
–
13
(1,232)
3,444
2,212
250
172
(1,486)
3,240
1,754
–
154
– financial operations
2,444
190
2,634
1,908
* Including central finance subsidiaries.
Notes
i
EEV basis holding company borrowings comprise:
Perpetual subordinated capital securities (Innovative Tier 1)
Subordinated debt (Lower Tier 2)
Senior debt
–
26
26
–
4
30
(1,486)
3,266
1,780
–
158
1,938
2010 £m
2009 £m
1,491
1,372
581
3,444
1,351
1,372
543
3,266
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
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.
ii The movement in the mark to market value adjustment represents:
Mark to market movement in balance sheet:
Beginning of year
Change:
Income statement
Foreign exchange effects
End of year
2010 £m
2009 £m
30
164
(4)
190
(821)
795
56
30
iii The £250 million PruCap bank loan was made in two tranches: £135 million maturing in June 2014 and £115 million maturing in August 2012.
I
N
F
O
R
M
A
T
I
O
N
E
E
V
B
A
S
I
S
S
U
P
P
L
E
M
E
N
T
A
R
Y
414
FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
NOTES ON THE EEV BASIS RESULTS
CONTINUED
10 RECONCILIATION OF MOVEMENT IN SHAREHOLDERS’ FUNDS (EXCLUDING NON-CONTROLLING INTERESTS)
2010 £m
Long-term business operations
UK
insurance
operations
Total
long-term
business
operations
Asian
operations
US
operations
Other
operations
Group
Total
OPERATING PROFIT (BASED ON LONGER-TERM
INVESTMENT RETURNS)
Long-term business:
New business:
Excluding Japannote 2
Japan
Total
Business in forcenote 3
Asia development expenses
UK general insurance commission
M&G
Asian asset management operations
US broker-dealer and asset management
Other income and expenditure
Solvency II implementation costs
Restructuring costs
OPERATING PROFIT BASED ON LONGER-TERM
INVESTMENT RETURNS
Short-term fluctuations in investment returnsnote 4
Mark to market value movements on
core borrowingsnote 9
Shareholders’ share of acturial and other
gains and losses on defined benefit
pension schemes
Effect of changes in economic assumptionsnote 5
Cost of terminated AIA transactionnote 6
Gain on dilution of holding in PruHealthnote 18
PROFIT (LOSS) FROM CONTINUING
OPERATIONS BEFORE TAX (INCLUDING
ACTUAL INVESTMENT RETURNS)
Tax (charge) credit attributable to shareholders’
profit (loss):note 11
Tax on operating profitnote iii
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
Tax on costs of terminated AIA transactionnote 6
Total tax (charge) credit
Non-controlling interests
PROFIT (LOSS) FOR THE YEAR
Prudential plc Annual Report 2010
902
(1)
901
549
1,450
(4)
–
–
–
–
–
–
–
1,446
287
–
–
(71)
–
–
761
–
761
697
1,458
–
–
–
–
–
–
(4)
–
1,454
(678)
(9)
–
(1)
–
–
365
–
365
571
936
–
–
–
–
–
–
(7)
(28)
901
336
–
(5)
62
–
3
2,028
(1)
2,027
1,817
3,844
(4)
–
–
–
–
–
(11)
(28)
3,801
(55)
(9)
(5)
(10)
–
3
–
–
–
–
–
–
46
284
72
22
(494)
(35)
–
(105)
25
(155)
(6)
–
(377)
–
2,028
(1)
2,027
1,817
3,844
(4)
46
284
72
22
(494)
(46)
(28)
3,696
(30)
(164)
(11)
(10)
(377)
3
1,662
766
1,297
3,725
(618)
3,107
(329)
(509)
(260)
(1,098)
264
(834)
(12)
325
(91)
222
–
222
–
4
–
(337)
–
1,325
–
–
–
(184)
–
582
–
(17)
–
(368)
–
929
–
(13)
–
(889)
–
2,836
2
–
93
359
(4)
(263)
2
(13)
93
(530)
(4)
2,573
415
2010 £m
Long-term business operations
UK
insurance
operations
Total
long-term
business
operations
Asian
operations
US
operations
Other
operations
Group
Total
OTHER MOVEMENTS
Exchange movements on foreign operations
and net investment hedgesnote i
Related tax
Intra-group dividends (including statutory
transfer)note v
External dividends
Reserve movements in respect of
share-based payments
Acquisition of UOB Lifenotes iv and 17
Investment in operationsnote v
Other transfersnote vi
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 £37 million) note 13
530
–
(365)
–
–
79
103
(8)
–
–
–
–
NET INCREASE IN SHAREHOLDERS’ EQUITY
Shareholders’ equity at 1 January 2010 notes ii and 7
1,664
5,781
124
–
(81)
–
–
–
–
(16)
–
–
–
68
677
4,122
–
–
(398)
–
–
–
21
(21)
–
–
–
–
531
5,439
654
–
(844)
–
–
79
124
(45)
–
–
–
68
2,872
15,342
5
34
844
(511)
37
(79)
(124)
45
(4)
3
75
–
62
(69)
659
34
–
(511)
37
–
–
–
(4)
3
75
68
2,934
15,273
SHAREHOLDERS’ EQUITY AT
31 DECEMBER 2010notes ii and 7
7,445
4,799
5,970
18,214
(7)
18,207
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 2010 and 2009 exchange rates as applied to shareholders’ funds at 1 January
2010 and the difference between 31 December 2010 and average 2010 rates for profits.
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 The tax charge attributable to shareholders’ profit includes an exceptional tax credit of £158 million as detailed in note 11(ii).
iv The charge of £(79) million for Other operations relating to the acquisition of UOB Life represents cash consideration paid of £(220) million offset
by goodwill arising on the acquisition of £141 million (as shown in note 17).
v Total intra-group dividends and investment in operations represent:
Intra-group dividends (including statutory transfer)
Investment in operationsa
Totalb
Asian
operations
£m
US
operations
£m
(365)
103
(262)
(81)
–
(81)
UK
insurance
operations
£m
(398)
21
(377)
Total
long-term
business
operations
£m
(844)
124
(720)
Other
operations
£m
844
(124)
720
Total
£m
–
–
–
a
b
Investment in operations reflects increases in share capital.
For long-term business operations, the difference between the total above of £(720) million for intra-group dividends (including statutory
transfer) and investment in operations and the net cash flows to parent company of £(735) million (as shown in note 8) primarily relates to
timing differences, intra-group loans and other non-cash items.
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
I
N
F
O
R
M
A
T
I
O
N
E
E
V
B
A
S
I
S
S
U
P
P
L
E
M
E
N
T
A
R
Y
416
FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
NOTES ON THE EEV BASIS RESULTS
CONTINUED
10 RECONCILIATION OF MOVEMENT IN SHAREHOLDERS’ FUNDS (EXCLUDING NON-CONTROLLING
INTERESTS) > CONTINUED
vi Other transfers from long-term business operations to Other operations in 2010 represent:
Adjustment for net of tax asset management projected profits of covered business
Other adjustments
11 TAX ATTRIBUTABLE TO SHAREHOLDERS’ PROFIT
The tax charge (credit) comprises:
Asian
operations
£m
US
operations
£m
UK
insurance
operations
£m
Total
long-term
business
operations
£m
(11)
3
(8)
(3)
(13)
(16)
(20)
(1)
(21)
(34)
(11)
(45)
TAX CHARGE ON OPERATING PROFIT BASED ON LONGER-TERM INVESTMENT RETURNS:
Long-term business:
Asian operationsnote i
US operations
UK insurance operationsnote i
Other operations
Total tax charge on operating profit based on longer-term investment returns, excluding exceptional
tax credit
Exceptional tax creditnote ii
TOTAL TAX CHARGE ON OPERATING PROFIT BASED ON LONGER-TERM INVESTMENT RETURNS,
INCLUDING EXCEPTIONAL TAX CREDITnote ii
TAX CREDIT ON ITEMS NOT INCLUDED IN OPERATING PROFIT:
Tax credit on short-term fluctuations in investment returnsnote iii
Tax credit on shareholders’ share of actuarial and other gains and losses on defined benefit
pension schemes
Tax charge (credit) on effect of changes in economic assumptions
Tax credit on costs of terminated AIA transaction
Total tax credit on items not included in operating profit
2010 £m
2009 £m
329
509
260
1,098
(106)
992
(158)
834
(222)
(2)
13
(93)
(304)
239
416
245
900
(34)
866
–
866
(26)
(23)
(336)
–
(385)
TAX CHARGE ON PROFIT ON ORDINARY ACTIVITIES FROM CONTINUING OPERATIONS (INCLUDING
TAX ON ACTUAL INVESTMENT RETURNS)
530
481
Notes
i
ii The tax charge on operating profit based on longer-term investment returns in 2010 of £834 million includes an exceptional tax credit
Including tax relief on Asia development expenses and restructuring costs borne by UK insurance operations.
of £158 million which primarily relates to the impact of the settlement agreed with the UK tax authorities.
iii The tax charge on short-term fluctuations in investment returns for 2010 of £(222) million includes a credit of £52 million for a net present value
reduction in US deferred tax liabilities following changes to variable annuity reserving in accordance with revised statutory guidance.
Prudential plc Annual Report 2010
417
2010 £m
2009 £m
3,696
(992)
(4)
2,700
158
2,858
106.9p
6.3p
113.2p
3,107
(530)
–
(4)
2,573
101.9p
2,524
3,090
(866)
(3)
2,221
–
2,221
88.8p
–
88.8p
1,743
(481)
(14)
(3)
1,245
49.8p
2,501
12 EARNINGS PER SHARE (EPS)
Operating EPS:
Operating profit before tax
Tax excluding exceptional tax credit
Non-controlling interests
Operating profit after tax and non-controlling interests excluding exceptional tax credit
Exceptional tax credit*
Operating profit after tax and non-controlling interests including exceptional tax credit
Operating EPS (pence) excluding exceptional tax credit
Exceptional tax credit (pence)
Operating EPS (pence) including exceptional tax credit
Total EPS:
Profit from continuing operations before tax
Tax
Discontinued operations (net of tax)
Non-controlling interests
Total profit after tax and non-controlling interests
Total EPS (pence) including exceptional tax credit
Average number of shares (millions)
* The tax charge attributable to shareholders’ return includes an exceptional tax credit of £158 million which primarily relates to the impact of
a settlement agreed with the UK tax authorities.
The average number of shares reflects the average number in issue adjusted for shares held by employee share trusts and consolidated
unit trusts and OEICs which are treated as cancelled.
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
I
N
F
O
R
M
A
T
I
O
N
E
E
V
B
A
S
I
S
S
U
P
P
L
E
M
E
N
T
A
R
Y
418
FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
NOTES ON THE EEV BASIS RESULTS
CONTINUED
13 RECONCILIATION OF NET WORTH AND VALUE OF IN-FORCE BUSINESS note i
GROUP
SHAREHOLDERS’ EQUITY AT 1 JANUARY 2010
New business contribution:notes ii,iii
Excluding Japan
Japan
Total
Existing business – transfer to net worth
Expected return on existing business
Changes in operating assumptions and experience variances
Changes in non-operating assumptions, experience variances
2010 £m
Free
Surplus
note 8
Required
capital
Total net
worth
Value of
in-force
business
note iv
Total
long-term
business
2,065
2,994
5,059
10,283
15,342
(643)
(2)
(645)
1,690
139
220
461
–
461
(372)
84
(4)
(182)
(2)
(184)
1,318
223
216
1,615
1
1,616
(1,318)
918
(86)
1,433
(1)
1,432
–
1,141
130
and non-controlling interests
(120)
85
(35)
168
133
PROFIT AFTER TAX AND NON-CONTROLLING INTERESTS
FROM LONG-TERM BUSINESS
Exchange movements on foreign operations and
net investment hedges
Acquisition of United Overseas Bank (UOB) Life
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
1,284
78
18
(720)
68
(45)
254
119
48
–
–
–
1,538
1,298
2,836
197
66
(720)
68
(45)
457
13
–
–
–
654
79
(720)
68
(45)
SHAREHOLDERS’ EQUITY AT 31 DECEMBER 2010
2,748
3,415
6,163
12,051
18,214
REPRESENTING:
ASIAN OPERATIONS
SHAREHOLDERS’ EQUITY AT 1 JANUARY 2010
New business contribution:notes ii,iii
Excluding Japan
Japan
Total
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 non-controlling interests
PROFIT AFTER TAX AND NON-CONTROLLING INTERESTS
FROM LONG-TERM BUSINESS
Exchange movements on foreign operations and
net investment hedges
Acquisition of United Overseas Bank (UOB) Life
Intra-group dividends (including statutory transfer) and
investment in operationsnote v
Other transfers from net worth
801
585
1,386
4,395
5,781
(278)
(2)
(280)
500
103
3
146
472
57
18
(295)
(8)
84
–
84
20
(9)
(15)
1
81
76
48
–
–
(194)
(2)
(196)
520
94
(12)
147
553
133
66
(295)
(8)
866
1
867
(520)
404
(40)
61
772
397
13
33
–
672
(1)
671
–
498
(52)
208
1,325
530
79
(262)
(8)
SHAREHOLDERS’ EQUITY AT 31 DECEMBER 2010
1,045
790
1,835
5,610
7,445
Prudential plc Annual Report 2010
419
US OPERATIONS
SHAREHOLDERS’ EQUITY AT 1 JANUARY 2010
New business contributionnote ii
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 non-controlling interests
PROFIT AFTER TAX AND NON-CONTROLLING 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
2010 £m
Free
Surplus
note 8
Required
capital
Total net
worth
Value of
in-force
business
note iv
Total
long-term
business
749
(300)
692
31
191
(192)
422
21
(81)
68
(16)
1,405
270
(329)
56
18
2,154
(30)
363
87
209
1,968
525
(363)
153
1
4,122
495
–
240
210
42
57
43
–
–
–
(150)
(213)
(363)
479
64
(81)
68
(16)
103
60
–
–
–
582
124
(81)
68
(16)
SHAREHOLDERS’ EQUITY AT 31 DECEMBER 2010
1,163
1,505
2,668
2,131
4,799
UK INSURANCE OPERATIONS
Shareholders’ equity at 1 January 2010
New business contributionnote ii
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 non-controlling interests
PROFIT AFTER TAX AND NON-CONTROLLING 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 2010
515
(65)
498
5
26
(74)
1,004
107
(63)
37
(7)
1,519
42
435
42
19
3,920
224
(435)
361
(47)
42
(32)
320
390
116
506
(344)
(21)
423
(33)
–
–
–
(344)
(21)
540
1,120
1,660
4,310
5,970
Notes
i
ii The movements arising from new business contribution and new business capital usage are as follows:
All figures are shown net of tax.
2010 £m
US
operations
UK
insurance
operations
NEW BUSINESS CAPITAL USAGE
Pre-tax new business contributionnote 2
Tax
Post-tax new business contribution
Free surplus invested in new business
Asian
operations
(excluding
Japan)
note iii
902
(230)
672
(278)
761
(266)
495
(300)
Post-tax new business contribution per £1 million
free surplus invested
2.4
1.7
Total
long-term
business
operations
note iii
2,028
(595)
1,433
(643)
Total
long-term
business
operations
Japan
note iii
(1)
–
(1)
(2)
2,027
(595)
1,432
(645)
2.2
(0.5)
2.2
365
(99)
266
(65)
4.1
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
5,439
266
–
403
(28)
288
929
(377)
(21)
I
N
F
O
R
M
A
T
I
O
N
E
E
V
B
A
S
I
S
S
U
P
P
L
E
M
E
N
T
A
R
Y
420
FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
NOTES ON THE EEV BASIS RESULTS
CONTINUED
13 RECONCILIATION OF NET WORTH AND VALUE OF IN-FORCE BUSINESS note i > CONTINUED
NEW BUSINESS CAPITAL USAGE
Pre-tax new business contributionnote 2
Tax
Post-tax new business contribution
Free surplus invested in new business
Post-tax new business contribution per £1 million
free surplus invested
2009 £m
Asian
operations
(excluding
Japan)
note iii
725
(180)
545
(231)
2.4
US
operations
UK
insurance
operations
664
(232)
432
(326)
1.3
230
(64)
166
(103)
1.6
Total
long-term
business
operations
note iii
1,619
(476)
1,143
(660)
Total
long-term
business
operations
1,607
(476)
1,131
(675)
Japan
note iii
(12)
–
(12)
(15)
1.7
(0.8)
1.7
MOVEMENTS ARISING FROM NEW BUSINESS CONTRIBUTION
2010 £m
2009 £m
Free surplus invested in new business:
Excluding Japan
Japan
Total
Required capital
Total net worth
Value of in-force business
Total post-tax new business contribution
(643)
(2)
(645)
461
(184)
1,616
1,432
(660)
(15)
(675)
451
(224)
1,355
1,131
iii New business contribution and free surplus invested in new business for the Group’s Japanese insurance subsidiary, which ceased selling new
business with effect from 15 February 2010, have been presented separately from those of the remainder of the Group.
iv The value of in-force business includes the value of future margins from current in-force business less the cost of holding required capital
and represents:
Value of in-force business before deduction of cost of capital and guarantees
Cost of capitala
Cost of time value of guaranteesb,c
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
2010 £m
Asian
operations
US
operations
5,941
(321)
(10)
5,610
2,584
(183)
(270)
2,131
UK
insurance
operations
4,635
(236)
(89)
4,310
2009 £m
Asian
operations
US
operations
4,605
(198)
(12)
4,395
2,351
(175)
(208)
1,968
UK
insurance
operations
4,181
(221)
(40)
3,920
Group
13,160
(740)
(369)
12,051
Group
11,137
(594)
(260)
10,283
a
b
c
The increase in cost of capital for Asian operations from 2009 of £(198) million to £(321) million at 2010 mainly arises from the addition of new
business, the effect of changes in economic assumptions resulting from changes in economic factors (including the impact of moving from
a ‘passive’ to ‘active’ basis as described in note 1b) and the impact of foreign exchange.
The increase in the cost of time value of guarantees for US operations from 2009 of £(208) million to 2010 of £(270) million primarily relates
to Variable Annuity (VA) business, mainly arising from the new business written in the period, reflecting the significant increase in VA sales.
The increase in the cost of time value of guarantees for UK operations from 2009 of £(40) million to 2010 of £(89) million primarily reflects
the effects of short-term fluctuations in investment returns together with the reduction in risk free rate of 0.4 per cent.
v The amounts shown in respect of free surplus and the value of in-force business for Asian and UK operations for intra-group dividends and
investment in operations include the impact of contingent loan funding.
Prudential plc Annual Report 2010
421
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 2010 and 2009 totals in the tables below for the
emergence of free surplus as follows:
Required capitalnote 13
Value of in-force (VIF)note 13
Add back: deduction for cost of time value of guaranteesnote 13
Other itemsnote
2010 £m
2009 £m
3,415
12,051
369
(845)
14,990
2,994
10,283
260
(865)
12,672
Note
‘Other items’ represents deductions for amounts incorporated into VIF where there is no definitive timeframe for when the payments will be made.
In particular, other items includes the deduction of the value of the shareholders’ interest in the estate, the value of which is derived by increasing
final bonus rates so as to exhaust the estate over the lifetime of the in-force with-profits business. This is an assumption to give an appropriate
valuation. To be conservative this item is excluded from the expected free surplus generation profile below.
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 are 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
2010 Total as
shown above
6,329
4,078
4,583
14,990
100%
2009 Total as
shown above
4,911
3,739
4,022
12,672
100%
2010 £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
2,304
2,358
1,792
6,454
43%
1,407
1,007
1,173
3,587
24%
866
421
755
591
173
468
2,042
1,232
14%
8%
1,161
119
395
1,675
11%
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
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%
I
N
F
O
R
M
A
T
I
O
N
E
E
V
B
A
S
I
S
S
U
P
P
L
E
M
E
N
T
A
R
Y
422
FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
NOTES ON THE EEV BASIS RESULTS
CONTINUED
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 2010 (31 December 2009) and the new business
contribution after the effect of required capital for 2010 and 2009 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.
In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised
economic conditions.
NEW BUSINESS PROFIT FOR 2010
As reportednote 10
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
* The impact of the sensitivities above for Japan for 2010 is negligible.
NEW BUSINESS PROFIT FOR 2009
As reported
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
2010 £m
Asian
operations
(including
Japan*)
US
operations
UK
insurance
operations
Total
long-term
business
operations
901
(111)
(7)
(20)
41
–
–
761
(51)
34
(40)
63
–
–
365
(53)
(8)
8
12
(13)
26
2,027
(215)
19
(52)
116
(13)
26
2009 £m
Asian
operations
(including
Japan)
US
operations
UK
insurance
operations
Total
long-term
business
operations
713
(91)
(3)
3
31
–
–
664
(48)
8
(12)
39
–
–
230
(43)
(7)
8
11
(9)
18
1,607
(182)
(2)
(1)
81
(9)
18
Prudential plc Annual Report 2010
423
2010 £m
Asian
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
7,445
4,799
5,970
18,214
(643)
(220)
176
308
(174)
104
–
–
(437)
(254)
336
227
(339)
5
(87)
174
(1,244)
(622)
615
655
(518)
236
(87)
174
(164)
(148)
103
120
(5)
127
–
–
2009 £m
Asian
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
5,781
4,122
5,439
15,342
(522)
(183)
231
255
(147)
28
–
–
(146)
(137)
55
82
(10)
123
–
–
(401)
(231)
298
213
(298)
6
(76)
152
(1,069)
(551)
584
550
(455)
157
(76)
152
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
EMBEDDED VALUE OF LONG-TERM OPERATIONS
AT 31 DECEMBER 2010
As reportednote 10
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
EMBEDDED VALUE OF LONG-TERM OPERATIONS
AT 31 DECEMBER 2009
As reportednote 10
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
I
N
F
O
R
M
A
T
I
O
N
E
E
V
B
A
S
I
S
S
U
P
P
L
E
M
E
N
T
A
R
Y
424
FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
NOTES ON THE EEV BASIS RESULTS
CONTINUED
15 SENSITIVITY OF RESULTS TO ALTERNATIVE ASSUMPTIONS > CONTINUED
b Sensitivity analysis – non-economic assumptions
The tables below show the sensitivity of the embedded value as at 31 December 2010 (31 December 2009) and the new business
contribution after the effect of required capital for 2010 and 2009 to:
• 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).
NEW BUSINESS PROFIT FOR 2010
As reportednote 10
Maintenance expenses – 10% decrease
Lapse rates – 10% decrease
Mortality and morbidity – 5% decrease
Change representing effect on:
Life business
UK annuities
* The impact of the sensitivities above for Japan for 2010 is negligible.
NEW BUSINESS PROFIT FOR 2009
As reported
Maintenance expenses – 10% decrease
Lapse rates – 10% decrease
Mortality and morbidity – 5% decrease
Change representing effect on:
Life business
UK annuities
2010 £m
Asian
operations
(including
Japan*)
US
operations
UK
insurance
operations
Total
long-term
business
operations
365
5
8
(20)
1
(21)
2,027
41
120
37
58
(21)
901
761
27
81
50
50
–
9
31
7
7
–
2009 £m
Asian
operations
(including
Japan)
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)
Prudential plc Annual Report 2010
425
2010 £m
Asian
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
7,445
4,799
5,970
18,214
104
293
233
233
–
48
67
(181)
12
(193)
39
158
81
81
–
2009 £m
191
518
133
326
(193)
Asian
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
5,781
4,122
5,439
15,342
77
232
169
169
–
33
141
78
78
–
43
70
(157)
11
(168)
153
443
90
258
(168)
EMBEDDED VALUE OF LONG-TERM OPERATIONS
AT 31 DECEMBER 2010
As reportednote 10
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 2009
As reportednote 10
Maintenance expenses – 10% decrease
Lapse rates – 10% decrease
Mortality and morbidity – 5% decrease
Change representing effect on:
Life business
UK annuities
Effect of proposed change in UK corporation tax rates
The 2010 results include the impact of the change in UK corporate tax rate that has been enacted to reduce the rate from 28 to 27 per
cent from 1 April 2011. The effect of further reductions in the UK corporate tax rate to reduce the rate by one per cent per annum each
year from the effective rate of 27 per cent applied in 2010 to 24 per cent in 2014 would increase the net of tax value of the in-force
business of UK insurance operations at 1 January 2010 by around £80 million.
16 ASSUMPTIONS
a Principal economic assumptions
Deterministic assumptions
The tables below summarise the principal financial assumptions:
Assumed investment returns reflect the expected future returns on the assets held and allocated to the covered business at the
valuation date.
Equity risk premiums in Asia range from 3.25 per cent to 8.7 per cent (2009: 3.0 per cent to 8.35 per cent). In the US and the UK,
the equity risk premium is 4.0 per cent (2009: 4.0 per cent).
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
I
N
F
O
R
M
A
T
I
O
N
E
E
V
B
A
S
I
S
S
U
P
P
L
E
M
E
N
T
A
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Y
426
FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
NOTES ON THE EEV BASIS RESULTS
CONTINUED
16 ASSUMPTIONS > CONTINUED
ASIAN OPERATIONSnote i
China
note vi
Hong
Kong
notes iii,v
India Indonesia
notes iii,vi
Japan
Korea
note vi
Malaysia
notes iv,v
Philippines
notes iii,vi
Singapore
note v
Taiwan
Thailand Vietnam
note vi
31 Dec 2010 %
10.45
10.45
5.1
5.1
13.1
13.1
13.0
13.0
4.9
4.9
7.9
8.1
7.0
7.1
13.2
13.2
5.4
6.1
5.0
5.2
10.5
10.5
18.85
18.85
2.5
2.25
4.0
5.0
–
3.0
2.5
4.0
2.0
1.0
3.0
5.5
3.95
3.3
8.1
7.75
1.1
4.6
4.0
6.4
2.7
1.6
3.8
12.1
China
note vi
Hong
Kong
notes iii,v
India Indonesia
notes iii,vi
Japan
Korea
note vi
Malaysia
notes iv,v
Philippines
notes iii,vi
Singapore
note v
Taiwan
Thailand Vietnam
note vi
31 Dec 2009 %
11.75
11.75
5.5
5.7
14.25
14.25
13.8
13.8
5.1
5.1
8.2
8.4
9.1
9.3
15.75
15.75
5.7
6.8
7.5
7.5
13.0
13.0
16.75
16.75
4.0
2.25
5.0
6.0
–
2.75
2.75
5.0
1.75
2.25
3.0
6.0
8.25
3.9
9.25
10.25
1.9
5.5
6.5
9.25
4.25
5.5
6.75
10.25
Risk discount rate:
New business
In force
Expected long-term
rate of inflation
Government
bond yield
Risk discount rate:
New business
In force
Expected long-term
rate of inflation
Government
bond yield
Weighted risk discount rate:note ii
New business (excluding Japan)
In force
Asia total %
31 Dec 2010
31 Dec 2009
8.4
8.1
9.0
8.8
Notes
i
In preparing the EEV basis results for 2010 the ‘active’ basis of economic assumption setting has been applied for all Asian operations.
For 2009 the ‘active’ basis was applied in preparing the EEV results for Japan, Korea and US dollar denominated business written in Hong Kong,
as described in note 1(b).
ii 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.
iii The assumptions shown are for US dollar denominated business which comprises the largest proportion of the in-force Hong Kong business.
The risk discount rates shown for Indonesia and Philippines are for local currency denominated business which comprises the largest
proportion of the in-force business in those territories.
iv The risk discount rate for Malaysia reflects both the Malaysia life and Takaful operations.
v The mean equity return assumptions for the most significant equity holdings in the Asian operations were:
Hong Kong
Malaysia
Singapore
31 Dec 2010 % 31 Dec 2009 %
7.3
10.0
8.7
7.9
12.4
10.2
vi
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.
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.
Prudential plc Annual Report 2010
427
US OPERATIONS (JACKSON)
31 Dec 2010 % 31 Dec 2009 %
Assumed new business spread margins:note iii
Fixed Annuity business (including the proportion of variable annuity business invested in
the general account):note i
First five years:
January to June issues
July to December issues
Long-term assumption
Fixed Index Annuity business:
January to June issues
July to December issues
Risk discount rate:
Variable annuity
Non-variable annuity
Weighted average total: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
2.0
2.0
2.0
2.5
2.5
7.8
5.6
7.6
6.9
3.3
7.3
2.3
2.75
2.25
2.0
3.5
2.5
8.2
6.2
7.8
7.2
3.9
7.9
2.4
Notes
i
For new business issuances in 2010, the assumed spread margin for fixed annuities and for the proportion of variable annuity business
invested in the general account of 2.0 per cent applies from inception for all durations and reflects the combined effects of net annualised yields
on new assets of 4.8 per cent and crediting rates. The spread assumptions for 2009 of 2.75 per cent for January to June issuances and 2.25 per
cent for July to December issuances, reflected the exceptional combined benefit of high investment yields which were 6.4 per cent for 2009,
and lower crediting rates. The assumptions for 2009 included a provision that crediting rates and spreads would normalise in the future.
Therefore, the assumption for new business spreads shown above were set at the higher new level for the first five years before reducing over
the following 10 years with the valuation of new business taking into account an assumed associated risk of increased lapse under certain
interest rate scenarios.
ii The weighted average risk discount rates reflect the mix of business between variable annuity and non-variable annuity business. The decrease
in the weighted average risk discount rates from 2009 to 2010 primarily reflects the decrease in the US 10-year Treasury bond rate of 60 bps,
partly offset by a change in the product mix with the 2010 results seeing an increase in the proportion of new and in-force business arising from
Variable Annuity business.
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 on the reinvested assets of 1.25 per cent over 10 years.
The expected new business spread margins are determined after allowing for a Risk Margin Reserve (RMR) allowance for 2010 of 26 bps (2009:
28 bps) for longer-term defaults as described in note 1b(iii). The RMR of 26 bps represents the allowance, as at the valuation 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 2010 and 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 5.
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.
F
I
N
A
N
C
I
A
L
S
T
A
T
E
M
E
N
T
S
I
N
F
O
R
M
A
T
I
O
N
E
E
V
B
A
S
I
S
S
U
P
P
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E
M
E
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428
FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
NOTES ON THE EEV BASIS RESULTS
CONTINUED
16 ASSUMPTIONS > CONTINUED
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
Post-tax expected long-term nominal rate of return for the PAC with-profits fund:
Pension business (where no tax applies)
Life business
31 Dec 2010 % 31 Dec 2009 %
7.3
9.9
5.1
5.2
6.9
7.0
8.7
10.2
5.6
5.8
7.7
7.4
8.0
7.3 to 10.2
6.7
4.0
5.7
3.55
8.4
7.9 to 10.3
6.7
4.4
6.1
3.7
6.7
5.9
6.9
6.0
Notes
i
The risk discount rate applied to shareholder-backed annuity business has been determined after allowing for credit risk as detailed in
note iv below.
ii 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 2010 and 2009 results the assumed earned rate
for with-profit holdings of corporate bonds is defined as the risk-free rate plus an assessment of the long-term spread over gilts, net of expected
long-term defaults. This approach is similar to that applied for equities and properties for which the projected earned rate is defined as the
risk-free rate plus a long-term risk premium.
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 88 per cent of UK shareholder-backed annuity business, the allowance for credit risk for the in-force business at 31 December
2010 is made up of:
a
16 basis points for fixed annuities and 14 basis points for inflation-linked annuities in respect of long-term expected defaults. This is derived
by applying Moody’s data from 1970 to 2009 uplifted by between 100 per cent (B) and 200 per cent (AAA) according to credit rating, to the
asset portfolios.
11 basis points for fixed annuities and 9 basis points 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 2009, to the asset portfolios.
43 basis points for fixed annuities and 39 basis points 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. 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 (compared to the in-force portfolio).
b
c
Prudential plc Annual Report 2010
429
The credit assumptions used and the residual liquidity premium element of the bond spread over swap rates is as follows:
IN-FORCE BUSINESS
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 allowance2
Liquidity premium
NEW BUSINESS1
Bond spread over swap rates
Total credit risk allowance2
Liquidity premium
Notes
2010 (bps)
2009 (bps)
160
16
10
42
68
92
175
19
13
39
71
104
2010 (bps)
2009 (bps)
117
38
79
198
54
144
1
2
The new business liquidity premium is based on the weighted average of the point of sale liquidity premium.
For 2010 and 2009, specific assets were allocated to the year’s new business with the appropriate allowance for credit risk which was 38 basis
points (2009: 54 basis points). The reduced allowance for new business in comparison to that for the in-force book reflects the assets held
and other factors that influence the necessary level of provision.
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 2010 and 2009 ranges from 18 per cent to 35 per cent, and the volatility of government bond yields ranges for 2010 from
0.9 per cent to 2.4 per cent (2009: 1.3 per cent to 2.4 per cent).
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• 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 returns and bond interest rates have been stochastically generated using a log-normal model with parameters
determined by reference to historical data. The volatility of equity fund returns for 2010 ranges from 19.0 per cent to 32.1 per cent,
(2009: 18.6 per cent to 28.1 per cent) depending on the risk class and the class of equity, and the standard deviation of interest rates
ranges from 2.0 per cent to 2.4 per cent (2009: 1.4 per cent to 1.6 per cent).
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.
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FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
NOTES ON THE EEV BASIS RESULTS
CONTINUED
16 ASSUMPTIONS > CONTINUED
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 are as follows:
Equities:
UK
Overseas
Property
2010 %
2009 %
18.0
18.0
15.0
18.0
18.0
15.0
b 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.
c 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 funds, together with Solvency II
implementation and restructuring costs, are charged to EEV basis results as incurred.
d 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.
17 ACQUISITION OF UNITED OVERSEAS BANK LIFE ASSURANCE LIMITED
On 1 February 2010, the Group acquired from United Overseas Bank (UOB) its 100 per cent interest in UOB Life Assurance Limited
in Singapore for total cash consideration, after post-completion adjustments of SGD67 million (£32 million), of SGD495 million
(£220 million). As part of the transaction the Group also entered into a long-term strategic partnership to develop a major regional
bancassurance business with UOB.
In addition to the amounts above the Group incurred £2 million of acquisition-related costs (excluding integration costs).
Goodwill arising on acquisition
Cash consideration
Less: fair value of identifiable net assets acquired
Goodwill arising on acquisition
£m
220
(79)
141
Goodwill arose on the acquisition of UOB Life Assurance Limited in Singapore because the acquisition included revenue and cost
synergies. These synergies could not be recognised as assets separately from goodwill because they are not capable of being separated
from the Group and sold, transferred, licensed, rented or exchanged, either individually or together with any related contracts and did
not arise from contractual or other legal rights.
None of the goodwill arising on this transaction is expected to be deductible for tax purposes.
Prudential plc Annual Report 2010
431
18 DILUTION OF HOLDING IN PRUHEALTH
On 1 August 2010, Discovery Holdings of South Africa, the Group’s joint venture partner in its investment in PruHealth completed
the acquisition of the entire share capital of Standard Life Healthcare, a wholly-owned subsidiary of the Standard Life Group, for
£138 million. Discovery funded the purchase of the Standard Life Healthcare transaction, and contributed Standard Life Healthcare
to PruHealth as a capital investment on completion. As a result of the transaction, Discovery have increased their shareholding in
PruHealth from the previous level of 50 per cent to 75 per cent, and Prudential’s shareholding has been reduced from 50 per cent
of the previous joint venture structure to 25 per cent of the new structure with the much enlarged business.
A gain of £3 million arises upon the dilution, representing the difference between the fair value of the enlarged 25 per cent
investment still held and the book value of the original 50 per cent investment holding.
19 SALE OF THE TAIWAN AGENCY BUSINESS IN 2009
Profit on sale and results for Taiwan agency business
2009 £m
91
In 2009, the Company sold 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. In addition, the Company invested £45 million to purchase a 9.99 per
cent stake in China Life through a share placement. The sale was completed on 19 June 2009.
The Company retained 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 made in 2009. At 31 December 2010 the Company’s interest in China Life was
8.66 per cent.
The profit on sale and results for the period of ownership comprise:
Proceeds
Net asset value attributable to equity holders of Company after the effect of completion and other adjustments
and provision for restructuring costs
Goodwill written off
Representing:
Profit arising on sale and result for long-term business operations
Goodwill written off
Adjustments in respect of restructuring costs borne by non-covered business
£m
–
135
(44)
91
148
(44)
(13)
91
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20 POST BALANCE SHEET EVENTS
In January 2011, the Company issued US$550 million 7.75 per cent Tier 1 subordinated debt, primarily to retail investors. The proceeds,
net of costs, were US$539 million and are intended to finance the repayment of the ¤500 million Tier 2 subordinated notes in
December 2011.
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FINANCIAL STATEMENTS > EUROPEAN EMBEDDED VALUE (EEV) BASIS SUPPLEMENTARY INFORMATION
NOTES ON THE EEV BASIS RESULTS
CONTINUED
21 NEW BUSINESS PREMIUMS AND CONTRIBUTIONS notes i,ii,iii
GROUP INSURANCE OPERATIONS
Asia – excl Japannote iii
US
UK
GROUP TOTAL – EXCL JAPAN
Japannote iii
GROUP TOTAL
ASIAN INSURANCE OPERATIONS
Hong Kong
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
SE Asian operations inc. Hong Kong
China (Group’s 50% interest)
India (Group’s 26% interest)
Korea
Taiwan
Single
Regular
Annual premium and
contribution
equivalents (APE)
Present value of new
business premiums
(PVNBP)
2010 £m 2009 £m 2010 £m 2009 £m 2010 £m 2009 £m 2010 £m 2009 £m
1,104
11,417
5,656
785
8,885
4,768
18,177
13
14,438
57
1,391
22
254
1,667
6
1,131
24
246
1,401
46
1,501
1,164
820
3,485
7
1,209
912
723
7,493
11,572
6,842
5,982
9,048
5,902
2,844
52
25,907
39
20,932
263
18,190
14,495
1,673
1,447
3,492
2,896
25,946
21,195
107
141
58
64
318
15
1
704
103
85
66
146
94
41
63
14
297
14
1
524
72
47
38
104
276
269
198
17
143
25
41
969
48
180
89
105
232
186
140
10
98
14
35
715
38
163
118
97
287
283
204
23
175
26
41
1,039
58
188
96
120
241
190
146
11
128
16
35
767
45
168
122
107
1,693
1,011
1,153
108
1,357
100
148
5,570
336
582
486
519
1,414
671
814
39
1,033
54
128
4,153
253
581
568
427
TOTAL ASIAN OPERATIONS – EXCL JAPAN
1,104
785
1,391
1,131
1,501
1,209
7,493
5,982
US INSURANCE OPERATIONS
Fixed annuities
Fixed index annuities
Life
Variable annuities
836
1,089
11
9,481
1,053
1,433
10
6,389
TOTAL US INSURANCE OPERATIONS
11,417
8,885
UK INSURANCE OPERATIONS
Direct and partnership annuities
Intermediated annuities
Internal vesting annuities
Total individual annuities
Corporate pensions
Onshore bonds
Other products
Wholesalenote iv
TOTAL UK INSURANCE OPERATIONS
593
221
1,235
590
242
1,357
2,049
2,189
228
1,660
774
945
192
1,444
881
62
5,656
4,768
–
–
22
–
22
–
–
–
–
198
–
56
–
254
–
–
24
–
24
–
–
–
–
191
–
55
–
246
84
109
23
948
105
143
25
639
836
1,089
166
9,481
1,053
1,433
173
6,389
1,164
912
11,572
9,048
59
22
124
205
221
166
133
95
820
59
24
136
593
221
1,235
590
242
1,357
219
2,049
2,189
210
145
143
6
1,099
1,660
1,089
945
1,007
1,444
1,200
62
723
6,842
5,902
GROUP TOTAL – EXCL JAPAN
18,177
14,438
1,667
1,401
3,485
2,844
25,907
20,932
Prudential plc Annual Report 2010
433
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 Equivalents (APE) are calculated as the aggregate of regular new business amounts and one-tenth of single new business
amounts and are subject to roundings. The Present Value of New Business Premiums (PVNBP) 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. Internal vesting
business is classified as new business where the contracts include an open market option.
ii 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, is excluded from the table.
iii New business sales for the Group’s Japanese insurance subsidiary, which ceased selling new business with effect from 15 February 2010, have
been presented separately from the remainder of the Group.
iv UK wholesale sales for 2010 include amounts for a bulk annuity buy-in insurance agreement with an APE of £88 million.
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FINANCIAL STATEMENTS > STATEMENT OF DIRECTORS’ RESPONSIBILITIES
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.
Prudential plc Annual Report 2010
FINANCIAL STATEMENTS > INDEPENDENT AUDITOR’S REPORT
435
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 (‘the
Company’) for the year ended 31 December 2010 set out on
pages 389 to 433. The financial reporting framework that has
been applied in the preparation of 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 395 to
400 and 425 to 430 respectively. The supplementary information
should be read in conjunction with the Group financial
statements which are on pages 153 to 352.
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 Directors’ Responsibilities
Statement set out on page 434, 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, and express an opinion on, 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 sufficient 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 Group’s circumstances and have
been consistently applied and adequately disclosed; and the
reasonableness of significant accounting estimates made by the
directors. In view of the purpose for which the supplementary
information has been prepared, however, we did not assess the
overall presentation of the supplementary information which
would have been required if we were to express an audit opinion
under International Standards on Auditing (UK and Ireland).
Opinion on supplementary information
In our opinion, the EEV basis supplementary information of
the Company for the year ended 31 December 2010 has been
properly prepared, in all material respects, in accordance with
the EEV Principles using the methodology and assumptions set
out on pages 395 to 400 and 425 to 430 respectively.
G BAINBRIDGE
FOR AND ON BEHALF OF KPMG AUDIT PLC
Chartered Accountants
London
8 March 2011
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Prudential plc Annual Report 2010
437
ADDITIONAL
INFORMATION
438 Risk factors
443
445 How to contact us
Shareholder information
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ADDITIONAL INFORMATION > RISK FACTORS
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 below
under ‘Forward Looking Statements’.
Prudential’s approaches to managing risks are explained in the
‘Business review’ section under ‘Risk and capital management’.
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 could adversely affect Prudential’s business and
profitability. The adverse effects of volatility arising from such
uncertainty and negative 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 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
• estimates of the value of financial instruments are difficult
because 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.
During the period of market dislocation in 2008 and the first
half of 2009, Prudential had to operate against a challenging
background of unprecedented volatility in the global capital
and equity markets and interest rates and widespread economic
uncertainty. Government interest rates fell to historic lows in
the US, global credit spreads widened to historic levels, and
credit markets seized up reducing liquidity. These factors had
a significant adverse effect on Prudential’s business and
profitability during that period. Although global markets partially
stabilised in 2009 and 2010, interest rates remain low, and many
of the challenges of 2008 persist in the credit markets. New
challenges may continue to emerge.
For some non-unit-linked investment products, in particular
those written in some of the Group’s Asian operations, it may
not be possible to hold assets which will provide cash flows to
match exactly 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. While this
residual asset/liability mismatch risk can be managed, it cannot
be 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
Prudential’s reported profit.
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 Prudential 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.
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
Prudential’s results.
A significant part of the profit from Prudential’s UK insurance
operations is related to bonuses for policyholders declared on
with-profits products, which are broadly based on historical
and current rates of return on equity, real estate and fixed
income securities, as well as Prudential’s expectations of
future investment returns.
Prudential plc Annual Report 2010
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Prudential is subject to the risk of potential
sovereign debt credit deterioration owing to the
amounts of sovereign debt obligations held in its
investment portfolio
Prudential is subject to the risk of potential sovereign debt
credit deterioration and default. Investment in sovereign debt
obligations involves risks not present in debt obligations of
corporate issuers. Investing in such instruments creates
exposure to the direct or indirect consequences of political,
social or economic changes (including changes in governments,
heads of states or monarchs) in the countries in which the
issuers are located and the creditworthiness of the sovereign.
In addition, the issuer of the debt or the governmental authorities
that control the repayment of the debt may be unable or unwilling
to repay principal or pay interest when due in accordance with
the terms of such debt, and Prudential may have limited recourse
to compel payment in the event of a default. A sovereign debtor’s
willingness or ability to repay principal and to pay interest in a
timely manner may be affected by, among other factors, its cash
flow situation, its relations with its central bank, the extent of its
foreign currency reserves, the availability of sufficient foreign
exchange on the date a payment is due, the relative size of the
debt service burden to the economy as a whole, the sovereign
debtor’s policy toward local and international lenders, and the
political constraints to which the sovereign debtor may be
subject. Periods of economic uncertainty may affect the volatility
of market prices of sovereign debt to a greater extent than the
volatility inherent in debt obligations of other types of issues.
If a sovereign were to default on its obligations, this could have
a material adverse effect on Prudential’s financial condition and
results of operations.
Prudential is subject to the risk of exchange rate
fluctuations owing to the geographical diversity of its
businesses
Due to their geographical diversity, Prudential’s businesses are
subject to the risk of exchange rate fluctuations. Prudential’s
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 pounds sterling. The currency
exposure relating to the translation of reported earnings is not
currently separately managed. The impact of gains or losses
on currency translations is recorded as a component of
shareholders’ funds within other comprehensive income.
Consequently, this could impact on Prudential’s gearing ratios
(defined as debt over debt plus shareholders’ funds).
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.
Also, regulators in jurisdictions in which Prudential operates may
change the level of capital required to be held by individual
businesses or could introduce 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 Prudential to make use of its
internal economic capital models, if approved by the Financial
Services Authority (FSA) or other relevant supervisory authority.
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 is in the process of consulting
on the detailed rules that will complement the high-level
Principles of the Directive, referred to as ‘implementing
measures’, which 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 Prudential,
including potentially a significant increase in capital required
to support its business.
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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. In July 2010, the IASB
has published an Exposure Draft for its Phase II on insurance
accounting, which would introduce significant changes to the
statutory reporting of insurance entities that prepare accounts
according to IFRS. The IASB has indicated a target date of June
2011 for issuing a final standard but it remains uncertain whether
and how the proposals in the Exposure Draft 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 an MCEV basis 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. These actions could involve a review
of business sold in the past under 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.
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 annuity and insurance product industries. This focus includes
new regulations in respect of the suitability of 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 challenge current practices, or are
retrospectively applied to sales made prior to their introduction.
Litigation, disputes and regulatory investigations
may adversely affect Prudential’s profitability and
financial condition
Prudential is, and may be in the future, subject to legal actions,
disputes and regulatory investigations in the ordinary course of
its insurance, investment management and other business
operations. These legal actions, disputes and investigations 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
operations or cash flows.
Prudential plc Annual Report 2010
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Prudential’s businesses are conducted in highly
competitive environments with developing
demographic trends and continued profitability
depends on 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 and agents with local experience, particularly in
Asia, may limit Prudential’s potential to grow its business as
quickly as planned.
In Asia, the 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.
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.
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.
Downgrades in Prudential’s ratings, as a result of, for example,
decreased profitability, increased costs, increased indebtedness
or other concerns, 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 the Group’s
ability to meet its contractual obligations.
Prudential’s long-term senior debt is rated as A2 (negative
outlook) by Moody’s, A+ by Standard & Poor’s and A 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;
The Prudential Assurance Company Limited long-term fund is
rated Aa2 (negative outlook) by Moody’s, AA by Standard &
Poor’s and AA by Fitch;
Jackson’s financial strength is rated AA by Standard & Poor’s and
Fitch, A1 (negative outlook) by Moody’s, and A+ by AM Best.
In addition, 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.
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 a significant part of its UK
back office and customer-facing functions as well as a number of
IT functions, resulting in reliance upon the operational processing
performance of its outsourcing partners.
Further, because of the long-term nature of much of the Group’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 2010,
which have subsequently caused, or are expected to cause,
a significant negative impact on its results of operations.
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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 setting reserves
and for reporting its 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’s UK
business 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), the Group’s results of
operations could be adversely affected.
Another example is the impact of epidemics and other effects
that cause a large number of deaths. Significant influenza
epidemics have occurred three times in the last century, but
the likelihood, timing or the severity of future epidemics cannot
be predicted. The effectiveness of external parties, including
governmental and non-governmental organisations, in
combating the spread and severity of any epidemics could
have a material impact on the Group’s loss experience.
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
The Group’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 long-term funds and any amounts
that may be raised through the issuance of equity, debt and
commercial paper. Certain of the subsidiaries are restricted
by applicable insurance, foreign exchange and tax laws, rules
and regulations that can limit the payment of dividends, which
in some circumstances could limit the ability to pay dividends
to shareholders or to make available funds held in certain
subsidiaries to cover operating expenses of other members
of the Group.
Prudential operates in a number of markets through
joint ventures and other arrangements with third-
parties (including in China and India), involving
certain risks that Prudential does not face with respect
to its consolidated subsidiaries
Prudential operates, and in certain markets is required by local
regulation to operate, through joint ventures (including in China
and India). For the Group’s joint venture operations, management
control is exercised jointly with the venture participants. The
level of control exercisable by the Group depends on the terms
of the joint venture agreements, in particular, the allocation of
control among, and continued co-operation between, the joint
venture participants. Prudential may 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 the results of operations of Prudential.
Prudential’s Articles of Association contain an
exclusive jurisdiction provision
Under Prudential’s Articles of Association, certain legal
proceedings may only be brought in the courts of England and
Wales. This applies to legal proceedings by a shareholder (in its
capacity as such) against Prudential and/or its directors and/or
its professional service providers. It also applies to legal
proceedings between Prudential and its directors and/or
Prudential and Prudential’s professional service providers
that arise in connection with legal proceedings between the
shareholder and such professional service provider. This
provision could make it difficult for US and other non-UK
shareholders to enforce their shareholder rights.
Changes in tax legislation may result in adverse
tax consequences
Tax rules, including those relating to the insurance industry,
and their interpretation, may change, possibly with retrospective
effect, in any of the jurisdictions in which Prudential operates.
Significant tax disputes with tax authorities, and any change
in the tax status of any member of the Group or in taxation
legislation or its interpretation could affect Prudential’s profitability
and ability to provide returns to shareholders or alter the post-tax
returns to shareholders.
Prudential plc Annual Report 2010
ADDITIONAL INFORMATION > SHAREHOLDER INFORMATION
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SHAREHOLDER INFORMATION
Analysis of shareholder accounts as at 31 December 2010
Size of shareholding
1,000,001 upwards
500,001–1,000,000
100,001–500,000
10,001–100,000
5,001–10,000
1,001–5,000
1–1,000
TOTAL
Dividend information
2010 final dividend
Ex dividend date
Record date
Payment date
Number of
shareholder
accounts
% of total
number of
shareholder
accounts
269
149
476
1,979
2,768
17,724
42,683
0.41
0.23
0.72
3.00
4.19
26.83
64.62
Number of
shares
2,207,270,343
102,594,369
113,585,023
51,146,680
19,283,246
39,516,636
12,198,209
% of total
number of
shares
86.71
4.03
4.46
2.01
0.76
1.55
0.48
66,048
100.00
2,545,594,506
100.00
Shareholders
registered on the
UK register
Shareholders
registered on the
Irish branch
register
Shareholders
registered on the
Hong Kong
branch register
30 March 2011
1 April 2011
30 March 2011
1 April 2011
31 March 2011
1 April 2011
26 May 2011
26 May 2011
26 May 2011
Shareholders
with ordinary
shares standing
to the credit of
their CDP
securities
accounts
30 March 2011
1 April 2011
On or about
2 June 2011
Annual General Meeting
The 2011 Annual General Meeting (AGM) will be held on
19 May 2011 at 11.00am in the Churchill Auditorium at
The Queen Elizabeth II Conference Centre, Broad Sanctuary,
Westminster, London SW1P 3EE. The directors believe the
AGM is an important opportunity to communicate directly with
shareholders. The Notice of Meeting and all other details for
the AGM are available at our website www.prudential.co.uk/
investors/AGM information
Shareholder enquiries
For enquiries about shareholdings, including dividends and
lost share certificates, please contact the Company’s registrars:
By post:
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
By telephone:
Tel: 0871 384 2035
Fax: 0871 384 2100
Textel: 0871 384 2255 (for hard of hearing)
Calls to 0871 numbers are charged at 8p per minute from
a BT landline. Other telephone providers costs may vary.
International shareholders tel: +44 (0)121 415 7026
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
Cash dividend alternative
The Company has introduced a new Dividend Re-investment
Plan (DRIP). It will be offered for the first time in connection
with the 2010 final dividend. Consequently, the scrip dividend
scheme has been discontinued.
Once shareholders have signed up to the DRIP they will
automatically receive shares for all future dividends in respect
of which a DRIP alternative is offered. The election may be
cancelled at any time by the shareholder. Further details
of the DRIP and the timetable are available on the Company’s
website at www.prudential.co.uk/prudential-plc/investors
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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. The option to receive shareholder
documents electronically is not available to shareholders holding
shares through The Central Depository (Pte) Limited (CDP).
Please contact Equiniti if you require any assistance or further
information.
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
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
in the UK and it is also possible to obtain income tax relief.
Hong Kong branch register
The Company operates a branch register for shareholders
in Hong Kong. All enquiries regarding Hong Kong branch
register accounts and requests for the Chinese version of the
2010 Annual Report should be directed to Computershare
Hong Kong Investor Services Limited, 17M Floor, Hopewell
Centre, 183 Queen’s Road East, Wan Chai, Hong Kong.
Telephone: +852 2862 8555. Dividends will be paid in Hong
Kong Dollars to shareholders on the Hong Kong Register.
Singapore shareholder enquiries
Shareholders who have shares standing to the credit of their
securities accounts with CDP in Singapore may refer queries to
the CDP at 4 Shenton Way, #02-01, SGX Centre 2, Singapore
068807. Telephone +65 6535 7511. Enquiries regarding shares
held in Depository Agent Sub-accounts should be directed to
your Depository Agent or broker. Dividends will be paid in
Singapore Dollars to shareholders with shares standing to the
credit of a Central Deposit and Securities account.
Irish branch register
The Company operates a branch register for shareholders
in Ireland. All enquiries regarding Irish branch register
accounts should be directed to Capita Registrars (Ireland)
Limited, Unit 5, Manor Street Business Park, Manor Street,
Dublin 7. Telephone: + 353 1 810 2400.
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
General (800) 990-1135 or from outside the US +651 453-2128
or log on to www.adr.com
Prudential plc Annual Report 2010
ADDITIONAL INFORMATION > HOW TO CONTACT US
445
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
John Foley
Group Chief Risk Officer
Peter Goerke
Group Human Resources Director
John Murray
Interim 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
Mike Wells
President & Chief Executive Officer
Institutional Analyst and
Investor Enquiries
Tel: +44 (0)20 7548 3300
E-mail: investor.relations@prudential.co.uk
UK Register Private
Shareholder Enquiries
Tel: 0871 384 2035
International shareholders tel:
+44 (0) 121 415 7026
Irish Branch Register Shareholder Enquiries
Tel: + 353 1 810 2400
Hong Kong Branch Register Shareholder Enquiries
Tel: +852 2862 8555
The Central Depository (Pte) Limited Shareholder
Enquiries
Tel: +65 6535 7511
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
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ADDITIONAL INFORMATION > HOW TO CONTACT US
HOW TO CONTACT US
CONTINUED
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 company incorporated, some of whose
subsidiaries are authorised and regulated by the Financial
Services Authority (FSA).
Forward-Looking Statements
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 that
are not historical facts, including statements about our beliefs
and expectations, are forward-looking statements. These
statements are based on current plans, estimates and
projections, and therefore you should not place undue reliance
on them. By their nature, all forward-looking statements involve
risk and uncertainty. A number of important factors could cause
Prudential’s actual future financial condition or performance or
other indicated results to differ materially from those indicated in
any forward-looking statement. Such factors include, but are not
limited to, future market conditions, fluctuations in interest rates
and exchange rates, and the performance of financial markets
generally; the policies and actions of regulatory authorities,
including, for example, new government initiatives related to
the financial crisis and the effect of the European Union’s
‘Solvency II’ requirements on Prudential’s capital maintenance
requirements; 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; the impact of changes in capital,
solvency standards or accounting standards, and tax and
other legislation and regulations in the jurisdictions in which
Prudential and its affiliates operate; and the impact of legal
actions and disputes. These and other important factors
may for example result in changes to assumptions used for
determining results of operations or re-estimations of reserves
for future policy benefits. Further discussion of these and other
important factors that could cause Prudential’s actual future
financial condition or performance or other indicated results to
differ, possibly materially, from those anticipated in Prudential’s
forward-looking statements can be found under the heading
‘Risk factors’ in this Report and in Item 3 ‘Risk Factors’ of
Prudential’s most recent annual report on Form 20-F filed
with the U.S. Securities and Exchange Commission, as well as
under the heading ‘Risk factors’ in any subsequent Prudential
Half Year Financial Report. This Annual Report and subsequent
Half Year Financial Report are/will be available on the Company’s
website at www.prudential.co.uk.
Any forward-looking statements contained in this report are
made only as of the date hereof. Prudential undertakes no
obligation to update the forward-looking statements contained
in this statement or any other forward-looking statements it may
make, whether as a result of future events, new information or
otherwise except as required pursuant to the Prospectus Rules,
the Listing Rules, the Disclosure and Transparency Rules, the
Hong Kong Listing Rules or the SGX-ST listing rules.
Prudential plc Annual Report 2010
447
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This Annual Report is printed on paper made from 50 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
Prudential plc Annual Report 2010
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).