Prudential plc Annual Report 2012
Delivering
long-term value
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Prudential at a glance
Providing fi nancial
security for our customers
Prudential plc is an international fi nancial
services group with signifi cant operations
in Asia, the US and the UK. We serve around
24 million insurance customers and have
£405 billion of assets under management.
We are listed on stock exchanges in
London, Hong Kong, Singapore and
New York.
The Group is structured around four main business units:
Prudential Corporation Asia, Jackson National Life
Insurance Company, Prudential UK and M&G.
Prudential uses long-term thinking to create long-term
value. Through our strong fi nancial performance and
international strategy, we create fi nancial benefi ts for
our shareholders and investors and deliver economic
and social benefi ts for the communities in which
we operate.
Life assurance % of Group
APE new business premiums
45% Asia
35% US
20% UK
52% Asia
35% US
13% UK
Life assurance % of Group
new business profit
Asset management % of Group funds
under management – investment products
84% M&G
16% Asia
Notes
1 Including Cambodia where
operations were launched
in 2013.
2 Source: survey conducted
by Asia Asset Management
Magazine as at 30 June 2012
(based on assets sourced from
Asia ex-Japan).
3 Operating profi t from long-term
operations excluding Eastspring
Investments, development costs
and Asia regional head offi ce costs.
4 In terms of new business APE.
5 Based on operating profi t before
other income and expenditure.
6 EEV long-term business.
Prudential Corporation Asia
Prudential is a leading international
life insurer in Asia with operations
in 13 markets1. We have built a high-
performing platform with eff ective,
multi-channel distribution, a product
portfolio centred on regular savings and
protection, award-winning customer
services and a well respected brand.
Prudential’s Asia-based asset
management division, Eastspring
Investments, is one of the region’s
leading fund managers and the
largest retail asset manager2.
AAAAAAAAAAAAAA Asia life insurance business
operating profi t3 up 30 per cent
to £920 million
AAAAAAAAAAAAAA High-performing multi-channel
distribution with increasing agent
activity and productivity and
strongly growing sales through an
extensive range of bank partners
AAAAAAAAAAAAAA Well balanced life insurance product
portfolio emphasising regular
premium savings and protection that
off ers good returns for customers
and shareholders
AAAAAAAAAAAAAA More top three market positions4
than any other life insurer in the
region and the region’s largest retail
asset manager
More about our Asia business:
Asia page 20
www.prudentialcorporation-asia.com
32%
IFRS % of Group operating profi ts5
44%
EEV6 % of Group operating profi ts
Jackson
Prudential UK
M&G
Jackson is one of the largest life
insurance companies in the US,
providing retirement savings and
income solutions to approximately
4 million customers. Jackson is
also one of the top two 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 eff ective retirement
solutions for their clients.
Prudential UK is a leading life and
pensions provider to approximately
7 million customers in the
United Kingdom.
M&G is Prudential’s UK and European
fund management business with
total assets under management of
£228 billion.
Our expertise in areas such as longevity,
risk management and multi-asset
investment, together with our fi nancial
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-profi ts
and annuities.
M&G has been investing money for
individual and institutional clients for
over 80 years. Today it is one of Europe’s
largest active investment managers.
AAAAAAAAAAAA New business profi t of £873 million
AAAAAAAAAAAA Total IFRS operating profi t of
AAAAAAAAAAAAAA Record operating profi t up 6 per cent
AAAAAAAAAAAA Top two provider of variable
annuities in US
AAAAAAAAAAAA Rated as a ‘World Class’ service
provider for seven successive
years by Service Quality
Measurement Group
AAAAAAAAAAAA ‘Highest Customer Satisfaction
by Industry’ award from Service
Quality Measurement Group
£736 million
to £320 million
AAAAAAAAAAAA Strength and investment
AAAAAAAAAAAAAA Record net infl ows of £16.9 billion
performance of With-Profi ts Fund
allowed Prudential to deliver strong
annualised returns for policyholders
AAAAAAAAAAAA Two ‘Five Star’ ratings for excellent
service in the Investment and Life
and Pensions categories at the
Financial Adviser Service
Awards 2012
AAAAAAAAAAAAAA M&G’s retail business has been
awarded the prestigious Outstanding
Investment House of the Year 2012
Award for the third year running at
the OBSR Awards
AAAAAAAAAAAAAA M&G’s institutional business was
recognised for its strength and
expertise at the UK Pensions Awards,
where it was named Fixed Income
Manager of the Year 2012
AAAAAAAAAAAAAA £228 billion assets under
management
More about our US business:
More about our UK business:
More about M&G:
United States page 26
www.jackson.com
United Kingdom page 32
www.pru.co.uk
Asset management page 38
www.mandg.co.uk
32%
24%
12%
IFRS % of Group operating profi ts5
IFRS % of Group operating profi ts5
IFRS % of Group operating profi ts5
36%
20%
EEV6 % of Group operating profi ts
EEV6 % of Group operating profi ts
Highlights
A strong performance in 2012
Prudential has produced a strong
performance in 2012. Globally, we have
around 24 million insurance customers
and have continued to provide each of them
with products and services that they value
highly, delivering on our promise to offer
quality savings and protection products.
The quality of our products, the strength
of our multi-channel distribution platform
and our ability to innovate and develop
creative solutions to meet our customers’
needs translate over time into profitable
and sustainable growth. Our focus on
capital and risk management has allowed
us to deliver both growth and cash to
shareholders, despite a challenging
macroeconomic environment.
We have increased our dividend by
15.9 per cent to 29.19 pence per share.
This is the second time in three years
we have rebased our dividend upwards.
Our approach to growing the dividend
demonstrates our confidence in our
ability to continue to deliver long-term
value for our shareholders.
Key performance indicators
European Embedded Value
new business profit
£2,452m
+14%
£2,151m
2011
2012
International Financial Reporting
Standards operating profit based
on longer-term investment returns*
£2,533m
+25%
£2,027m
2011
2012
Business unit net remittances
£1,200m
+9%
£1,105m
2011
2012
European Embedded Value
operating profit from long-term business
£4,429m
+10%
£4,043m
2011
2012
29.19p
full-year dividend
+15.9%
increase on 2011
The directors’ report of Prudential plc for the year ended 31 December 2012
is set out on pages 1–110, 366–384 and 386–391 and includes the sections of the
Annual Report referred to in these pages.
Note
*2011 comparative adjusted for retrospective
application of the accounting policy change for
deferred acquisition costs as discussed in note A5
of the IFRS financial statements.
Contents
Prudential plc Annual Report 2012
01
Group Chief Executive’s report
For information about
our strategy and
operating principles
page 04
Corporate governance
For information about
our Board of directors
page 88
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Contents
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Full-year dividend
+1+ 5.9%
29.19p
23.85p
2525..19p9p
18.90p
19.85p
2008
2009
20 01
201111
2012
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(cid:14)(cid:17)(cid:16)(cid:12)(cid:11)(cid:19)(cid:12)(cid:12) (cid:2)(cid:21)(cid:11)(cid:19)(cid:15)(cid:1)(cid:13)(cid:16)(cid:13)(cid:16)(cid:23)(cid:11)(cid:16)(cid:16)
(cid:9)(cid:8)(cid:20)(cid:11)(cid:10)(cid:1)(cid:17)(cid:16)(cid:1)
(cid:15)(cid:11)(cid:16)(cid:21)(cid:1)(cid:19)(cid:11)(cid:21)(cid:22)(cid:19)(cid:16)(cid:20)
(cid:15)(cid:11)(cid:16)(cid:21)(cid:1)(cid:19)(cid:11)
(cid:20)(cid:21)(cid:15)(cid:20)(cid:21)(cid:15)
(cid:3)
+25%
£2,533mm
£2£ ,027m
£1,8£
26m
£1,248m
£1,4288mm
2008
2009
2009
2020 01
2011
2012012
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Business review
For information about our
business units’ performance
page 20
To view our report online:
prudential.co.uk
Section 1: Overview
02
04
Chairman’s statement
Group Chief Executive’s report
Section 2: Business review
12
14
20
46
68
79
Financial highlights
Chief Financial Offi cer’s overview
Business unit review:
AAAAAAAAA Insurance operations: Asia, US, UK
AAAAAAAAA Asset management: M&G, Eastspring Investments, US
Financial review
Risk and capital management
Corporate responsibility review
Section 3: Governance
88
93
110
111
Board of directors
Governance report
Additional disclosures
Index to principal directors’ report disclosures
Section 4: Directors’ remuneration report
114
Directors’ remuneration report
116
122
136
Remuneration policy report
2012 implementation of remuneration policy
Supplementary information
Section 5: Financial statements and European
Embedded Value (EEV) basis supplementary
information
146
147
148
149
151
153
154
315
316
324
325
326
331
363
364
Index to Group fi nancial statements
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated statement of changes in equity
Consolidated statement of fi nancial position
Consolidated statement of cash fl ows
Notes on the Group fi nancial statements
Balance sheet of the parent company
Notes on the parent company fi nancial statements
Statement of directors’ responsibilities in respect of the
Annual Report and the fi nancial 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
365 Additional unaudited fi nancial information
Section 6: Additional information
Risk factors
Glossary
Shareholder information
386
392
396
398 How to contact us
02
Overview Prudential plc Annual Report 2012
Chairman’s statement
Value for customers and real
returns for shareholders
‘ Our ability to generate strong fi nancial
performance despite adverse market
conditions and the challenge of historically
low long-term interest rates is testament to
both the success of our strategy and the
eff orts of our management team.’
Paul Manduca
Chairman
29.19p
full-year dividend
+15.9%
increase on 2011
Chairman’s statement
Prudential plc Annual Report 2012
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Welcome to Prudential’s 2012 Annual Report, the fi rst
since I became Chairman in July 2012. I am pleased to
report that the Group has delivered another excellent
performance in 2012, providing products and services of
real value to our 24 million insurance customers around
the world and strong returns to our shareholders. Our
leading presence in the fast-growing economies of Asia
drives our long-term profi table growth while our focused
businesses in the US and the UK continue to make solid
contributions to the Group’s overall performance.
The global economic outlook remains depressed and, although
there were some signs of improvement in 2012, there is a debate
about how sustainable the recovery may be. However, our ability
to generate strong fi nancial performance despite adverse market
conditions and the challenge of historically low long-term interest
rates is testament to both the success of our strategy and the
efforts of our management team led by Group Chief Executive
Tidjane Thiam. The Group remains on track to deliver the 2013
‘Growth and Cash’ objectives announced in December 2010.
We have achieved two major ones regarding Asia – the IFRS
operating profi t and cash remittance targets – one year ahead
of schedule.
As a Board, we must ensure that our results translate into real
returns for our shareholders. The continued strength of our
operations in Asia, the US and the UK gives us confi dence that
we will continue generating sustainable growth over the long
term. So for the second time in three years, we have been able
to announce the rebasing of our full-year dividend upwards by
4 pence. The Board has therefore recommended a fi nal dividend
of 20.79 pence per share, which brings the total dividend for the
year to 29.19 pence per share, 4 pence or 15.9 per cent higher
than the 2011 total dividend.
There have been some changes to the Board during the year.
When I succeeded Harvey McGrath as Chairman in the middle
of last year, I refl ected that his tenure encompassed some of the
most diffi cult economic conditions a business like ours could
face. On behalf of the Board and the entire Company, I would
like to thank him for his stewardship of Prudential during those
diffi cult times.
A key part of my role is to ensure appropriate governance
around the execution of the Group’s strategy, and to engage
with shareholders and other stakeholders on this matter. As
Chairman, I need to make sure the Board is equipped with the
right people to help me perform this role. We need directors
with the appropriate skill sets to bring different perspectives
to bear, as we face the complexities of a rapidly changing world.
In December 2012, we announced that Philip Remnant CBE
would become Senior Independent Director from 1 January
2013, replacing myself in that position. He is currently a senior
adviser at Credit Suisse, a Deputy Chairman of the Takeover
Panel and a non-executive director of UK Financial Investments
Limited. He has joined the Nomination, Audit and Remuneration
Committees. Philip brings a wealth of experience of fi nancial
services at the highest level, a deep understanding of the needs
of shareholders and a strong record of public service.
In March 2013, we announced that Anthony Nightingale, CMG,
would be joining the Board on 1 June 2013 as a non-executive
director and member of the Remuneration Committee. He has
spent more than 40 years at Jardine Matheson Group, which is
one of Asia’s leading and most diverse business groups, including
six years as Managing Director until he retired from executive
offi ce in March 2012. Anthony is a Hong Kong representative to
the APEC Business Advisory Council and is a member of the
Commission on Strategic Development in Hong Kong.
Anthony replaces Keki Dadiseth who announced he would
be retiring from the Board on 1 May 2013 after eight years of
service. He joined the Board in April 2005 and is a member of the
Remuneration Committee. Keki was also a member of the Audit
Committee from 2005 to 2007. I would like to thank him for his
hard work and trusted advice during his time at Prudential.
Wherever we operate in the world, we strive to make a strong
contribution to the communities we serve, not just through our
business activities, but by helping to address the needs of the
disadvantaged in those societies. Each of our businesses has
a community investment programme in place which provides
support to charitable organisations, both through long-term
funding and the experience and expertise of our employees.
The diversity of our markets means that our programmes vary
from region to region, but the shared focus for our community
investment is education and life skills. These activities include
fi nancial education, support to improve social mobility and
employee volunteering. Last year more than 7,350 employees
across the Group gave up their time to help others in their
communities, using their skills and knowledge to benefi t those
who most need our help.
Many volunteer as part of the Chairman’s Challenge, our fl agship
volunteering programme. The Chairman’s Challenge encourages
employees from across the Group to volunteer on projects
initiated by our global charity partners. I am extremely proud that
so many colleagues from across our business are so dedicated
and enthusiastic in helping others.
We continue to place great value on the UK, our home market,
where we were born 165 years ago. In 2013, we have agreed to
be the offi cial title sponsor of Prudential RideLondon, a two-day
cycling festival that will take place on 3 and 4 August 2013, which
we hope will help build on the legacy of the 2012 London
Olympics.
I would like to thank all our employees for contributing to what
has been another very strong year. It is their commitment to
supporting our customers, along with executing our successful
strategy, which allows us to be confi dent that we can continue to
provide shareholders with growing returns in the years to come.
Paul Manduca
Chairman
04
Overview Prudential plc Annual Report 2012
Group Chief Executive’s report
A strong performance based
on consistent strategy
‘ In 2012, we have delivered a strong
performance. Our Group has achieved
signifi cant and profi table growth and
produced increased levels of cash, which
allowed us to provide our shareholders
with a growing dividend.’
Tidjane Thiam
Group Chief Executive
Full-year dividend
+15.9%
29.19p
23.85p
25.19p
18.90p
19.85p
2008
2009
2010
2011
2012
IFRS operating profit based on
longer-term investment returns1
+25%
£2,533m
£2,027m
£1,826m
£1,248m
£1,428m
2008
2009
2010
2011
2012
Group Chief Executive’s report
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I am pleased to report a strong performance in 2012.
Our focus on our customers in each of our geographies,
combined with the strength of our distribution,
franchise and brands, has allowed us to continue to
provide distinctive value to our customers. Thanks to
this, the Group has continued to deliver on the three
key fi nancial metrics we have focused on since 2009:
IFRS operating profi t, new business profi t and net cash
remittances. In 2012 in Asia, we have achieved two of the
2013 ‘Growth and Cash’ objectives and have continued
to make progress towards achieving the others, despite
a global macroeconomic environment which remains
challenging and historically low long-term interest rates.
Our strategy has remained consistent: to accelerate growth
in Asia; to build on the strength of our US operations; to focus
the UK business and to optimise asset management. We have
remained focused on executing that strategy with discipline
and on producing strong results across our geographies.
Asia has delivered excellent results in 2012. Our business,
Prudential Corporation Asia, which is already one of the largest
in the region, has nevertheless been able to more than double its
IFRS operating profi t in three years to almost £1 billion, delivering
£988 million in 2012. That growth in IFRS operating profi t was not
achieved at the expense of cash generation or by slowing down
sales growth. Asia reported record new business profi t in 2012.
It also delivered a net cash remittance of £341 million, exceeding
its 2013 objective of £300 million. For the fi rst time in our
history, Asia was the largest contributor of cash to the Group,
an exceptional performance when you consider that in 2009
Asia’s net cash remittance was £40 million. This performance
was largely driven by the clear progress we have made in some
of our ‘sweet-spot’ markets, particularly Indonesia, Singapore,
Malaysia, the Philippines and Thailand.
There was strong growth in the US, with total IFRS operating
profi t exceeding £1 billion for the fi rst time, demonstrating the
strength of Jackson’s operations in a competitive marketplace.
The UK remains focused on with-profi ts products and individual
annuities, seeing strong sales of both in a diffi cult market. M&G
has seen record net fl ows at £16.9 billion, IFRS operating profi t
and funds under management, all driven by its investment
performance and customer proposition.
In a turbulent environment, we have continued to take proactive
and decisive management action to deliver on our strategy.
In our industry, distribution is absolutely key. Therefore we
have continued to strengthen our ability to reach our chosen
customers in our chosen markets. For instance, we have
strengthened our distribution in Thailand by establishing an
exclusive partnership with Thanachart Bank, a leading bank
in this market, and through the acquisition of its life business,
Thanachart Life. In the US, we have continued to invest in our
distribution as well, strengthening our relationship with our
partners. We have, throughout the year, ensured that we put
value ahead of volume, ensuring that we reached our return
on capital and payback targets. To mention a few examples,
in Malaysia we refocused the business on higher-value,
lower-volume protection business. In Korea and in Taiwan,
at times during the year, we refused to write poor-value business,
sacrifi cing some sales growth in the process.
We have maintained our bias in favour of insurance income
and fee income, which have grown as a proportion of our profi ts,
ahead of spread income. True to that logic, in the US we acquired
Reassure America Life Insurance Company (REALIC), which
increased our insurance income. We also continue to drive our
product mix to achieve the optimal balance between growth
in sales, profi t growth, cash generation and capital strength.
Therefore, we have continued to emphasise and to grow
protection products in Asia, which also provide excellent value
to our customers. In the US, we have seen growing demand for
Elite Access, a variable annuity without guarantees, launched
in March 2012. Elite Access allows us to meet the needs of a key
customer segment and to grow profi tably while staying within
our quantitative risk appetite in the year. We believe Elite Access
has excellent prospects in the US market. More generally, we
have continually and proactively re-priced our products and
modifi ed their features to ensure they continued to generate
adequate returns in the new interest rate environment.
Having looked at the strength and sustainability of the results we
have generated, the Board has decided to rebase our dividend
upwards for the second time in three years. This decision refl ects
the Board’s confi dence in the Group’s ability to continue to
deliver strong, sustainable fi nancial performance.
Group performance
The Group’s strategy is supported by three key Group-wide
operating principles.
First, we take a balanced approach to performance
management across the key measures of IFRS, EEV and
cash, with a particular focus on IFRS and cash. The Group
has reported a strong performance across all business units
on these measures. Our IFRS operating profi t based on
longer-term investment returns increased by 25 per cent in
2012 to £2,533 million (2011: £2,027 million1) led by Asia and
the US. IFRS shareholders’ funds increased by 21 per cent to
£10.4 billion, compared to £8.6 billion1 as at 31 December 2011.
EEV operating profi t grew by 9 per cent to £4,321 million
(2011: £3,978 million). Net cash remittances to the Group
from our businesses increased by 9 per cent to £1,200 million
(2011: £1,105 million), with Asia now the largest contributor.
Note
1 Comparatives adjusted for retrospective application of the accounting
policy change for deferred acquisition costs as discussed in note A5 of
the IFRS fi nancial statements.
06
Overview Prudential plc Annual Report 2012
Group Chief Executive’s report continued
Second, we focus on allocating capital to the highest return and
shortest payback opportunities across the Group, taking strong
action where necessary, such as deliberately reducing sales in
geographies, products or channels where our return and payback
criteria are not met. Our insurance businesses in Asia, the US,
and the UK have delivered a 14 per cent increase in new business
profi t to £2,452 million (2011: £2,151 million) with a distinctive
18 per cent increase in Asia. APE sales for the Group have
increased by 14 per cent to £4,195 million (2011: £3,681 million)
in 2012 and included the Group’s best-ever fourth quarter.
M&G has attracted strong net infl ows of £16.9 billion
(2011: £4.4 billion), a record performance led by the return
of investors’ risk appetite in Continental Europe, where M&G
has built a strong position over the last few years, and market-
leading sales in the UK retail market.
Third, we are proactive in managing risk across the cycle.
Our balance sheet continues to be defensively positioned
and at the end of the period our IGD surplus was £5.1 billion1
(31 December 2011: £4.0 billion). Our surplus increased due to
strong net capital generation through operating earnings offset,
as usual, by external dividend payments and other costs.
We continue to focus on promoting transparency by providing
shareholders with relevant disclosures about our business and
how we run it, to ensure that both our strategy and our operating
principles are well understood. In addition to the disclosures that
are provided with our quarterly fi nancial results, since 2010
we have organised an annual seminar to provide investors and
analysts with a further opportunity to discuss the business in
detail with the Group’s senior management.
We have organised three investor seminars in London (on
1 December 2010), Kuala Lumpur (on 15 November 2011)
and New York (on 29 November 2012). These seminars
consisted of presentations on different aspects of our business
including: Group strategy; our operating principles; the 2013
‘Growth and Cash’ objectives; our Asian business, including
country-by-country presentations; and Jackson, with further
insights into its hedging strategy, capital position and sensitivity
to market shocks. We intend to hold a fourth annual seminar in
the last quarter of 2013 in London.
2013 ‘Growth and Cash’ objectives
2012 has made a strong contribution to our progress towards
delivering our challenging 2013 ‘Growth and Cash’ objectives
that I set out at our 2010 investor conference. Asia has achieved
two of its three 2013 objectives in 2012 and the Group remains
on track to meet the remaining objectives.
Turning fi rst to our Asia objectives, I said in 2010 that we would
aim to double our 2009 IFRS operating profi t to £930 million by
2013 or, in other words, that we would double our IFRS operating
profi t in four years. In 2012, we have achieved IFRS operating
profi t of £988 million (2011: £784 million2). We have, therefore,
more than doubled profi ts in three years, rather than four.
Asia has also exceeded its 2013 cash objective, remitting a
total of £341 million to the Group against a 2013 objective of
£300 million. Looking at the remaining Asia objective, by the
end of 2013 we aim to double 2009 new business profi t to
£1,426 million and we remain on target to reach this, with the
business producing £1,266 million in 2012 (2011: £1,076 million).
These results were achieved despite an unfavourable and
volatile macroeconomic environment.
Beyond Asia, there has been continued progress towards our
other cash objectives. The US remitted £249 million in 2012
(2011: £322 million including exceptional release of surplus),
on track to meet its 2013 cash objective raised from £200 million
to £260 million earlier this year. The UK made remittances to the
Group of £313 million in 2012, on track to meet its 2013 objective
of £350 million.
Looking at the cumulative cash target of £3.8 billion over the
four-year period from 2010 to end-2013, we have so far achieved
85 per cent of the total objective with one year remaining.
Asia profi tability
Value of new business
IFRS operating profi tnote 3
Business unit net remittance objectives
Asianote 4
Jackson
UK
Cumulative net cash remittances from
2010 onwards
Actual
Objective
2012
£m
2013
£m
1,266
988
1,426
930
341
249
313
300
260note 5
350
3,240
3,800
Notes
1 From March 2013, the basis of calculating Jackson’s contribution to
the Group’s IGD surplus will change. Further detail can be found in the
‘Capital position, fi nancing and liquidity’ section of the Chief Financial
Offi cer’s overview.
2 Comparatives adjusted for retrospective application of the accounting
policy change for deferred acquisition costs as discussed in note A5 of
the IFRS fi nancial statements.
3 Total Asia operating profi t from long-term business and Eastspring
Investments aft er development costs. 2012 operating profi t includes a
one-off gain of £51 million arising on sale of the Group’s holding in China
Life Insurance Company of Taiwan.
4 Remittances from Asia in 2012 include a non-recurring net remittance of
£27 million, representing cash from sale of Group’s holding in China Life
Insurance Company in Taiwan off set by repayment of funding contingent
on future profi ts of the Hong Kong life insurance operations.
5 The net remittance objective for Jackson was increased from £200 million
to £260 million to refl ect the positive impact of the acquisition of REALIC.
Group Chief Executive’s report
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Our operating performance by business unit
Prudential Corporation Asia
Our strategy in Asia is focused on meeting the needs of the
emerging middle class in the region for savings and protection.
The region’s positive demographics, strong economic growth,
sound public fi nances and favourable public policy environment
with a clear preference for private provision of protection, have
all led to a rapidly expanding middle class, with a strong and
growing demand for our savings and protection products.
Geographically, Asia is a vast and diverse region. Our primary
area of focus is on what we call our ‘sweet-spot’ – Indonesia,
Hong Kong, Singapore, Malaysia, the Philippines, Thailand
and Vietnam. All these markets have attractive long-term
characteristics. We are in a strong position to capture profi tably
the growing demand for our products and services in these
selected markets. We continuously invest in these markets
to grow our distribution and to ensure we are well positioned
in terms of people, systems and capabilities. We will continue
to innovate to meet the evolving needs of our customers
and maintain our focus on regular premium savings and
protection products.
Our primary growth metric is new business profi t rather than
sales. This focus on new business profi t has ensured we have
delivered healthy and sustainable quality growth. In 2012, new
business profi t was up 18 per cent in the region, led by Indonesia,
Singapore and Malaysia, up 27 per cent collectively. While
under-penetration of insurance in markets across the region
offers signifi cant long-term growth opportunities, we retain
our focus on value not volume. New business profi t grew more
quickly than sales as we refocused our businesses in Taiwan,
Korea and Malaysia, deliberately reducing sales of lower-margin
products to ensure a consistent focus on higher-value lines. We
are determined to continue taking management action across the
region where and when required, to maintain our internal rates
of return of more than 20 per cent across all businesses, with a
payback period in Asia of three years, despite the low interest
rate environment.
Our life business in Asia, with its focus on capital-effi cient
products and fast payback periods, continues to deliver
profi table, cash-generative growth. IFRS long-term
operating profi t in Asia increased by 30 per cent in the period
to £920 million (2011: £709 million1) and net cash remittances
increased by 66 per cent to £341 million (2011: £206 million).
Our multi-channel distribution model is at the heart of our
success and we have continued to grow and strengthen our
distribution further in 2012. In both the agency and the bank
channels – bancassurance – the returns comfortably cover the
cost of capital, so we have a strong appetite for growth in both.
These channels grew their respective contribution to new
business profi t at similar rates in 2012. Agency is the largest
channel and we continue to increase both the scale and,
importantly, the quality and productivity of our agency force.
In the bank channel, where we are the regional leader, our
partnerships with Standard Chartered Bank (SCB) and United
Overseas Bank (UOB) have seen considerable sales growth,
up 42 per cent and 65 per cent respectively. Regular premium
products make up the bulk of our new business – in excess of
90 per cent of total APE sales – with higher-margin protection
products making up almost one-third of new business APE.
Our four largest markets – Indonesia, Hong Kong, Singapore
and Malaysia – have made the most material contribution to the
region’s growth in recent years. In addition to our well known
strength in these four markets, we are building our presence and
distribution in other markets that have the potential to become
material drivers of growth over the medium and long term.
Two such markets are Thailand and the Philippines, which in
aggregate grew new business profi t by 93 per cent in 2012.
In Thailand, a market with considerable and attractive growth
potential, where we were historically underweight, our recently
announced exclusive long-term bancassurance partnership with
Thanachart, and the acquisition of Thanachart Life, fulfi ls our
long-standing ambition to signifi cantly increase our footprint in
that country. In the Philippines, where we are a market leader,
our business is now making good progress, delivering strong
and profi table growth. We believe this market has promising
prospects due to its large population and the improved quality
of its macroeconomic management, with its renewed emphasis
on attracting foreign direct investment as well as the upgrading
of the country’s infrastructure. In January 2013, we started life
insurance operations in Cambodia, our 13th market, and entered
into a partnership with ACLEDA Bank PLC, the largest retail and
commercial bank in the country. This is the fi rst deal of its kind in
Cambodia, where we believe there are signifi cant opportunities
for growth as the market develops.
Overall, our geographic footprint, combined with the exceptional
quality of our distribution and of our products, has enabled us
to deliver another year of very strong performance in Asia.
Our 13 million insurance customers, whom we serve well and
profi tably, represent only a small proportion of the long-term
potential of this part of the world for our company.
Jackson National Life Insurance Company (Jackson)
The US is the world’s largest retirement savings market,
with large cohorts of the 78 million baby-boomers2 reaching
retirement age each year, creating signifi cant demand for
retirement income products. Our strategy in the US is to take
advantage of this profi table growth opportunity. We approach
this with a long-term perspective, proactively managing sales
through the economic cycle as our experience has shown us
how important it is to put value ahead of volume in the variable
annuity market. We take at all times a conservative approach
to pricing, even when that means losing market share to other
players, while hedging our fi nancial risks and managing our
balance sheet.
Notes
1 Comparatives adjusted for retrospective application of the accounting
policy change for deferred acquisition costs, as discussed in note A5 of
the IFRS fi nancial statements.
2 Source: US Census Bureau.
08
Overview Prudential plc Annual Report 2012
Group Chief Executive’s report continued
In 2012, Jackson delivered IFRS long-term operating
profi t of £964 million, up 48 per cent on the prior year
(2011: £651 million1). This increase in profi ts is in part due to
increased fee income from the signifi cant net fl ows captured
in the last few years, and in part due to the non-recurring in
2012 of an accelerated deferred acquisition cost amortisation
charge of £190 million in 2011. In 2012, new business profi t grew
7 per cent, with APE sales up 15 per cent as historically low
interest rates continued to weigh on profi ts. The pricing actions
taken during the year allowed Jackson to mitigate the negative
impact of these interest rates.
There is always a degree of tactical management in the variable
annuity market as sales are impacted by a number of factors,
including but not limited to equity market levels, interest rates
and the actions of Jackson’s competitors. During the second
half of 2012, as equity markets recovered, we saw stronger
sales growth in variable annuities despite pricing actions taken
earlier in the year to mitigate the impact of lower investment
returns as bond yields remained low. Therefore, in November
and December Jackson worked closely with distributors to
proactively manage volumes and to ensure that the level of
sales for 2012 would remain within the Group’s quantitative
risk appetite. We will continue to proactively balance value,
volume, capital and balance sheet strength in this market.
In March 2012 we launched Elite Access, a variable annuity
without guarantees, which offers access to alternative
investments. It taps into an unmet demand from customers and
has been particularly well received by distributors. The launch
of Elite Access helps Jackson to continue growing within the
Group’s risk appetite for products with guarantees. The
acquisition of REALIC, a traditional US life business, has helped
to diversify Jackson’s earnings and make the business more
resilient.
In the context of industry debates about the advantages and
disadvantages of various accounting methods, we believe that
cash generation is ultimately a very tangible metric of the quality
and value of a strategy. Therefore we set Jackson a net cash
remittance objective for 2013 which, following the acquisition
of REALIC, was increased from £200 million to £260 million. In
2012, Jackson delivered net cash remittances of £249 million in
the year (2011: £322 million including an exceptional release of
surplus) and is on track to meet this objective.
Prudential UK and Europe
In the UK, Prudential has adopted a focused strategy and
competes selectively to help Britain’s ageing population convert
their accumulated wealth into retirement income. We have a
clear focus on writing profi table new business while generating
cash sustainably and preserving our capital. We concentrate on
areas in which we have a clear competitive advantage, namely
individual annuities and with-profi ts products, where we
continue to be market leaders.
Note
1 Comparatives adjusted for retrospective application of the accounting
policy change for deferred acquisition costs, as discussed in note A5 of
the IFRS fi nancial statements.
Over the last decade, Prudential has been widely recognised as
the UK’s leading with-profi ts manager. Our long-term approach
to the management of the with-profi ts fund has continued to
benefi t customers during 2012 as it helps to provide protection
from the full impact of volatile market conditions. The fund has
consistently outperformed the FTSE All-Share Index. Over the
last 15 years, the fund has delivered a cumulative investment
return of 184.3 per cent on investments covering policyholder
liabilities. This compares favourably with the FTSE All-Share
Index total return of 106.5 per cent over the same period.
Total bonus payments are expected to top £2 billion in 2013
and our policyholders will typically see year-on-year increases
of between 3.5 per cent and 6.5 per cent in accumulating
with-profi ts policy values. Since 2003 an estimated £22 billion
has been added to policy values. Our UK business is also one of
the largest providers of annuities in the UK and in 2012 paid out
£2.9 billion in income to UK annuitants.
Our performance in 2012 has been strong in a diffi cult market,
which has been impacted by signifi cant UK and EU regulatory
change. This includes the implementation of the Retail
Distribution Review (RDR), auto-enrolment for company
pension schemes and gender neutral pricing.
Our UK business has demonstrated resilience as it continues
to benefi t from its focus on its core products, with-profi ts
and individual annuities, with sales of both increasing by more
than 30 per cent. We achieve internal rates of return that are
commensurate with other parts of the business. New business
profi t increased 20 per cent to £313 million (2011: £260 million)
and IFRS long-term operating profi t grew 3 per cent to
£703 million (2011: £683 million). We completed two
selective bulk annuity deals that contributed to this fi gure.
Where we see opportunities for future profi table growth we
will seek to capitalise on them but only if they meet our payback
criteria. In 2013 we have commenced sales operations in Poland,
one of Europe’s fastest-growing economies, which has an
expanding middle class and high savings rates.
We continue to assess the impact of the RDR, which was
implemented on 31 December 2012, and the resulting
changes to distributors’ business models. This is likely to lead
to some short-term dislocation in the market as consumers and
distributors adjust to the new sales environment. We expect
this transition phase to dampen our sales of investment bonds
in 2013, compared to the high sales in 2012. We are confi dent
that the strength of our brand combined with our investment
capabilities, fi nancial strength and experience will ensure that
we remain well placed to provide customers with dependable
retirement income. We believe that with-profi ts products will
continue to be popular with customers seeking competitive
long-term real investment returns.
Net cash remittances were £313 million, up 5 per cent
(2011: £297 million). Our inherited estate, which is estimated
at £7.0 billion (31 December 2011: £6.1 billion), is a key source
of capital strength.
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Capital and risk management
We take a disciplined approach to capital management and
continue to take action to ensure our capital works effi ciently
and effectively for the Group. Using the regulatory measure
of the Insurance Groups Directive (IGD), our Group capital
surplus position at 31 December 2012 was estimated at
£5.1 billion (31 December 2011: £4.0 billion), before allowing for
the fi nal dividend. The Group’s required capital cover was three
times. The structure of the Group, and the approach we have
taken to managing our risks, with a sizeable credit reserve in the
UK annuity book, a strong inherited estate in UK with-profi ts and
the relatively low-risk nature of our asset management and
Asia operations, together with a high level of IGD surplus,
means we have positioned ourselves well for future regulatory
developments and stresses to our business.
There is broad agreement that ultimately it would be benefi cial
to replace the IGD regime with a regime that is more risk-based.
Solvency II may provide such a framework but we now know that
it will not be implemented before 31 December 2015. In common
with other insurers we have been working with regulators to
ensure that the current capital regime remains robust while we
wait for the implementation of Solvency II.
In early March 2013, we agreed with the FSA to revise the
calculation of the contribution Jackson makes to the Group’s IGD
surplus. We consider the revised basis to be an improvement as
it is more closely aligned to the one we use to assess and report
free surplus. In the absence of an agreed Solvency II approach,
we believe that this change makes the IGD surplus a more
meaningful measure and one that is more closely aligned with
economic reality. The revised IGD surplus calculation has no
impact on the way that the US business is managed or regulated
locally. On this revised basis, the IGD surplus at 28 February 2013
is estimated at £4.4 billion1, before allowing for the fi nal dividend,
equivalent to a capital cover of 2.5 times.
Uncertainty about the fi nal Solvency II outcome remains. We will
continue to evaluate our options, including consideration of the
Group’s domicile, in the event that the fi nal outcome is negative
and potentially impacts our ability to deliver value to our
customers and shareholders. We welcome the decision by the
UK Financial Services Authority to strengthen the existing
Individual Capital Adequacy Standards (ICAS) regime in the
absence of the implementation of Solvency II.
Asset management
Our asset management business, M&G, has continued to focus
on delivering superior investment performance for our customers
while maximising the strength of its distribution capabilities.
It has pursued business diversifi cation across both geographies
and asset classes. Its retail funds are now registered for sale in
20 jurisdictions, with offi ces in 15 countries. During 2012, the
business has seen record net sales, funds under management
and IFRS operating profi t. The growth in sales has been driven
by M&G’s business in Continental Europe as investor risk
appetite returned.
M&G continued to attract signifi cant new asset fl ows during
the recent years of global market volatility, testament to the
strength of its reputation and focus on investment performance.
It has seen record total retail and institutional net infl ows of
£16.9 billion in 2012, signifi cantly higher than 2011 and the
previous high of £13.5 billion in 2009.
Total net sales in the UK were lower than 2011, refl ecting the
maturity of the UK business and management decisions to slow
the infl ow of new money into two market-leading UK corporate
bond funds to safeguard investment performance. We expect
these trends to persist in 2013. Despite the deliberate slowing
of sales in the UK, M&G was the UK’s top-selling investment
management house in 2012 and has ranked number one for both
net and gross fund sales for an unprecedented four consecutive
calendar years. Net fund sales in Continental Europe have
increased, generating a record £5.2 billion of net sales in 2012.
Assets sourced from outside the UK account for 29 per cent
of total retail funds under management, up from 25 per cent
in 2011.
Underlying profi ts for the full year rose by 14 per cent to a
new record level of £298 million. Following the addition of
performance-related fees and profi t from our associate
investment in South Africa, total operating profi t for 2012 was
£320 million. M&G’s funds under management also grew to a
record £228 billion (2011: £201 billion).
Looking ahead, the diversifi cation of our business by asset class
and geography positions us well to manage the expected shifts
in consumer asset allocation going forward.
Eastspring Investments, our rebranded Asia asset management
business, increased funds under management to £58.1 billion,
up 16 per cent (2011: £50.3 billion). IFRS operating profi t was
marginally lower, refl ecting a change in product mix towards
bond funds that attract lower fees. Also costs were higher as we
continued to invest in people and infrastructure, as we build out
our offshore capabilities following the launch of the new brand.
This included opening a US distribution offi ce, starting an
operation in Indonesia and launching new funds in Taiwan,
China and India.
Note
1 The estimated position at 28 February 2013 allows for economic conditions
and surplus generation since 31 December 2012. It is stated before the fi nal
dividend and the eff ect of the Thanachart acquisition and aft er allowing for
a reduction in Jackson’s contribution to IGD surplus of £1.3 billion.
10
Overview Prudential plc Annual Report 2012
Group Chief Executive’s report continued
Dividend
The Board has decided to rebase the full-year dividend
upwards by 4 pence, refl ecting the strong progress made in
both the earnings and free surplus generation of the business
and in the delivery of our fi nancial objectives. In line with this,
the directors recommend a fi nal dividend of 20.79 pence per
share (2011: 17.24 pence), which brings the total dividend for
the year to 29.19 pence (2011: 25.19 pence), representing an
increase of 15.9 per cent over 2011.
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 fi nancial
fl exibility and our assessment of opportunities to generate
attractive returns by investing in specifi c areas of the business.
The Board believes that in the medium term a dividend cover
of around two times is appropriate.
Outlook
In 2012, we have delivered a strong performance. In spite of
tough macroeconomic conditions and the negative effect of
persistently low long-term interest rates, our Group has achieved
signifi cant and profi table growth and produced increased levels
of cash, which allowed us to provide our shareholders with a
growing dividend.
Strategy and operating principles
Our strategy and operating principles remain clear and
unchanged. Asia is the key driver of sustainable and profi table
growth, building on the signifi cant opportunity that the
emergence of the growing and increasingly wealthy middle class
in this region represents. Our best opportunities lie in South-east
Asia, where the depth and breadth of Prudential’s franchise is a
source of strength. Our business units in the US and in the UK
will continue to focus on delivering strong earnings and cash.
We will achieve this by continuing to execute with discipline,
by maintaining a robust balance sheet and with proactive
risk management.
Our Group is set to continue to provide a distinctive combination
of profi table growth and cash by meeting the needs of our
customers across the world. Our confi dence is refl ected in the
decision to rebase the dividend upwards, the second time in
three years, as we remain focused on creating long-term,
sustainable value for our shareholders.
Tidjane Thiam
Group Chief Executive
etrics and disclos u r e s
Asia:
accelerate
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Focus on
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Asset management:
optimise
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United Kingdom:
focus
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Proactive risk ma n a g e m e n t
Prudential plc Annual Report 2012
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Section 2
Business
review
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14
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Financial highlights
Chief Financial Offi cer’s overview
Business unit review:
AAAAAAAAAAAA Insurance operations:
Asia, US, UK
AAAAAAAAAAAA Asset management:
M&G, Eastspring Investments, US
46
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Financial review
Risk and capital management
Corporate responsibility review
12
Business review Prudential plc Annual Report 2012
Financial highlights
Life APE new business sales, profi ts and investment in new business
Balancing capital consumption and value optimisation
Life APE new business sales
New business profit
£4,195m
£836m
£1,462m
+14%
£3,681m
£746m
£1,275m
£1,660m
£1,897m
£2,452m
£313m
£873m
+14%
£2,151m
£260m
£815m
£1,076m
£1,266m
2011
2012
2011
2012
Asia
US
UK
Free surplus investment
in new business
2011
2012
£(297)m
£(292)m
£(202)m
£(54)m
£(553)m
£(281)m
£(45)m
£(618)m
–12%
New business profi t margin
Payback period
Internal rate of return
Asia
US
UK
Group
2012
2011
2012
2011
2012
2011
2012
2011
67%
3 years
>20%
65%
3 years
>20%
60%
2 years
>20%
64%
1 year
>20%
37%
3 years
>20%
35%
4 years
>20%
58%
2 years
>20%
58%
2 years
>20%
Shareholder-backed policyholder liabilities
£122,183m
£1,839m
£7,824m
£43,944m
£60,523m
£17,716m
At 1 Jan
2011
Net liability flows1
£2,317m
£133,506m
£1,982m
£9,597m
£(657)m
£46,048m
£(1,129)m
Net liability flows1
£69,189m
£18,269m
At 1 Jan
2012
£19,023m £162,979m
£49,505m
£92,261m
£21,213m
At 31 Dec
2012
Asia
US
UK
Other movements
Asset management, profi tability, external funds under management and net infl ows
IFRS operating profit
External funds under
management
Total asset management
net inflows
M&G net inflows
£461m
£104m
£357m
£485m
£114m
£371m
+5%
£133.5bn
£21.6bn
£111.9bn
+20%
£111.2bn
£19.3bn
£91.9bn
£18,281m
£16,881m
+306%
+285%
£4,506m
£4,385m
2011
2012
2011
2012
2011
2012
2011
2012
M&G2
Other asset management business
Total asset management
Financial highlights
Prudential plc Annual Report 2012
13
Operating profi t, dividends and earnings per share
IFRS operating profit 3, 4, 5
EEV operating profit
Dividend per share relating
to the reporting year
Basic earnings per share – based
on operating profit after tax and
non-controlling interest
£2,533m
+25%
£3,978m
£4,321m
+9%
29.19p
+15.9%
25.19p
£2,027m
2011
2012
2011
2012
2011
2012
115.7p
62.8p
+8%
125.0p
+22%
76.8p
2011
2012
EEV
IFRS3
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Free surplus, capital and cash
Underlying free
surplus generated 6
IGD capital before
final dividend 7, 8
Business unit
net remittances 9
Holding company
cash balances
£1,983m
£2,082m
+5%
£5.1bn
+28%
£1,105m
£1,200m
+9%
£1,380m
+15%
£1,200m
£4.0bn
2011
2012
2011
2012
2011
2012
2011
2012
Group shareholders’ funds
(including goodwill attributable to shareholders)
EEV shareholders’ funds per share
EEV shareholders’ funds
IFRS shareholders’ funds 3
£22.4bn
+14%
£10.4bn
+21%
£19.6bn
£8.6bn
2011
2012
16%
16%
2011
2012
21%
23%
Return on shareholders’ funds 10, 11
771p
713p
2011
Including goodwill
Excluding goodwill
+14%
878p
+15%
820p
2012
Notes
1 Defi ned as movements in shareholder-backed policyholder liabilities
arising from premiums (net of charges), surrenders, maturities and deaths.
2 2012 includes M&G’s 49.99 per cent proportionate share in the metrics
above of PPM South Africa aft er the divestment transaction. 100 per cent of
these metrics were included in 2011.
3 Comparatives adjusted for retrospective application of the accounting
policy change for deferred acquisition costs as discussed in note A5 of the
IFRS fi nancial statements.
7 Estimated.
8 From March 2013 the basis of calculating Jackson’s contribution to the Group’s
IGD surplus will change, further detail can be found in the ‘Capital position,
fi nancing and liquidity’ section of the Chief Financial Offi cer’s Overview.
9 Remittances from Asia in 2012 include net remittance of £27 million,
representing cash from the sale of the Group’s holding in China Life
Insurance Company in Taiwan off set by repayment of funding contingent
on future profi ts of the Hong Kong life insurance operations.
4 2012 operating profi t includes one-off gain of £51 million arising on sale of
10 IFRS operating profi t aft er tax and non-controlling interests as percentage
Group’s interest in China Life Insurance Company of Taiwan.
5 2011 included accelerated deferred acquisition costs (DAC) amortisation of
£190 million which has not recurred.
6 Underlying free surplus generated comprises underlying free surplus
generated from the Group’s long-term business (net of investment in new
business) and that generated from asset management operations.
of opening IFRS shareholders’ funds. Comparatives adjusted for
retrospective application of the accounting policy change for deferred
acquisition costs as discussed in note A5 of IFRS fi nancial statements.
11 EEV operating profi t aft er tax and non-controlling interests as percentage
of opening EEV shareholders’ funds.
14
Business review Prudential plc Annual Report 2012
Chief Financial Offi cer’s overview
Delivering profi table growth and
enhanced capital fl exibility
‘ Over the last few years, our success has been founded
on attracting new customers and on retaining those who
have chosen Prudential for their savings and protection
needs. We operate in markets where consumer demand
for the products that we provide is strong and we have
achieved success by providing both value and service
to our customers while generating attractive returns
for shareholders.’
Nic Nicandrou
Chief Financial Offi cer
EEV new business profit
IFRS operating profit based on
longer-term investment returns1
£2,452m
+14%
£2,533m
+25%
£2,151m
£2,027m
2011
2012
2011
2012
Our guiding operating principle is simple – drive
the creation of sustainable shareholder value while
operating within a conservative risk management
framework. Over the last four years, through a
combination of disciplined execution and prudent
management of our balance sheet risks, Prudential has
delivered profi table growth and enhanced its capital
fl exibility, despite the challenging market environment.
2012 has seen Prudential continue to build on the positive
momentum of recent years, with a strong fi nancial performance
that included two of our 2013 ‘Growth and Cash’ fi nancial
objectives being exceeded and continued progress towards the
rest. This performance refl ects good contributions across our key
fi nancial measures from each of our business operations, despite
the challenge of low long-term interest rates and weak growth in
the global economy. It is particularly pleasing to note that Asia
became the largest contributor of cash to the Group in 2012,
remitting over £300 million for the fi rst time in its history and
exceeding its 2013 cash objective. With IFRS operating profi t,
after development expenses, of £988 million in 2012, Asia
has also exceeded its 2013 IFRS operating profi t objective.
EEV new business profi t (‘new business profi t’), our primary
growth measure, increased by 14 per cent to £2,452 million
(2011: £2,151 million), IFRS operating profi t based on
longer-term investment returns (‘IFRS operating profi t’)
increased by 25 per cent to £2,533 million (2011: £2,027 million)1
and net cash remitted from the business units to the Group
increased by 9 per cent to £1,200 million (2011: £1,105 million).
As these results demonstrate, the quality of our businesses
across Asia, the US and the UK, combined with the strength of
our balance sheet and fi nancial discipline, underpins the Group’s
ability to deliver both growth and cash in the face of continued
macroeconomic headwinds.
Note
1 Comparatives adjusted for retrospective application of the accounting
policy change for deferred acquisition costs as discussed in note A5 of
the IFRS fi nancial statements.
Chief Financial Offi cer’s overview
Prudential plc Annual Report 2012
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Profi tability
Over the last few years, our success has been founded on
attracting new customers and on retaining those who have
chosen Prudential for their saving and protection needs. We
operate in markets where consumer demand for the products
that we provide is strong and we have achieved success by
providing both value and service to our customers while
generating attractive returns for shareholders. In 2012
this approach produced £10.5 billion of life business net
infl ows on shareholder-backed business, which together with
investment-related and other movements, drove an increase
in the overall size of our life insurance book of business by
22 per cent to £163 billion (2011: £133.5 billion). At the same
time, our combined asset management operations attracted
£18.3 billion of retail and institutional net fl ows, surpassing
the previous highs in 2009 and 2010, driving an increase in the
third party managed funds by 20 per cent to £133 billion
(2011: £111 billion). By attracting, retaining and growing our
customers’ savings and our obligations towards them, we are
able to generate higher revenues, which in 2012 have once again
increased at a faster rate than our expenses, culminating in
greater overall profi ts.
Group IFRS operating profi t increased by 25 per cent in 2012
to £2,533 million (2011: £2,027 million)1, driven by strong
growth in total contributions2 from Asia and the US, which
were up 26 per cent and 49 per cent respectively. Group EEV
operating profi t based on longer-term investment returns
(‘EEV operating profi t’) increased by 9 per cent to £4,321 million
(2011: £3,978 million), with growth in all regions. Non-UK
operations now account for a larger proportion of both total IFRS
and EEV operating profi t than ever before, while the contribution
to these metrics from each business operation and each earnings
source remains well balanced, preserving both the quality and
the resilience of the Group’s earnings.
Our Asia long-term business has continued to build on
the progress of recent years, with IFRS operating profi t of
£920 million (2011: £709 million)1 up 30 per cent. This strong
performance has been driven by the increase in the size of
the in-force portfolio including the growth of our health and
protection business. Our largest markets of Indonesia, Hong
Kong, Singapore and Malaysia continue to generate good levels
of growth, with IFRS operating profi t up 22 per cent collectively.
Asia’s long-term EEV operating profi t grew by 11 per cent in
2012 to £1,960 million (2011: £1,764 million), with progress on
this measure impacted by lower expected returns as a result of
the fall in interest rates during the year.
In the US, long-term business IFRS operating profi t was up
48 per cent in 2012 to £964 million (2011: £651 million)1, which
includes a contribution of £67 million from REALIC, following its
acquisition in September 2012. The remaining increase primarily
refl ects higher fee income generated by growth in the separate
account assets, as well as the expected non-recurring impact
of accelerated deferred acquisition cost (DAC) amortisation
of £190 million in 2011. This has been partially offset by the
adverse effect on spread income of lower bond yields. Fee
income increased by 29 per cent to £875 million in 2012
(2011: £680 million), as a result of growth in separate account
asset balances, which stood at £49 billion at 31 December
2012 (31 December 2011: £38 billion), together with higher
average fee levels. Spread income (including the expected
return on shareholders’ assets) was £757 million in 2012
(2011: £813 million), with lower yields reducing the average
spread margin that we earned on general account liabilities
from 258 basis points in 2011 to 239 basis points in 2012 as
expected. Jackson’s long-term EEV operating profi t increased
by 13 per cent to £1,610 million (2011: £1,431 million) primarily
due to improved new business profi ts and higher opening value
of in-force business following recent growth in the portfolio.
We are pleased with the acquisition of REALIC as it presents
a fi nancially attractive deal, generating seasoned insurance
income, immediate earnings accretion and a gain on EEV
shareholders’ funds of £453 million.
UK long-term business IFRS operating profi t was 3 per cent
higher at £703 million (2011: £683 million) including £431 million
from the shareholder-backed business. The strength of the
with-profi ts fund, which currently has a surplus estate of
£7.0 billion, offers strong policyholder protection and assists
in generating positive returns for both policyholders and
shareholders. EEV long-term operating earnings increased
by 2 per cent in 2012 to £866 million (2011: £853 million),
representing higher new business profi ts offset by the impact
of lower interest rates on the recognition of in-force profi ts.
Our asset management businesses generated IFRS operating
profi t of £485 million in 2012 (2011: £461 million), with M&G’s
contribution higher at £371 million (including Prudential Capital).
M&G continues to benefi t from the delivery of strong infl ows,
with underlying profi ts (excluding performance-related
payments and earnings from associates) up 14 per cent in 2012.
This progress refl ects higher revenues, up 10 per cent in 2012,
as the scale and proportion of external funds continues to grow,
and improvements in the cost-income ratio, to 59 per cent in
2012 (2011: 61 per cent). IFRS operating profi t from Eastspring
Investments of £75 million (2011: £80 million) was impacted by
lower average margins on funds under management following
a consumer-led shift in business mix away from equities to
fi xed income funds, as well as increased costs as the business
continues to invest in growth opportunities. This included
the opening of its fi rst US offi ce, in Chicago, in June 2012 and
starting operations in Indonesia.
Notes
1 Comparatives adjusted for retrospective application of the accounting
policy change for deferred acquisition costs as discussed in note A5 of
the IFRS fi nancial statements.
2 Operating profi t from long-term and asset management business.
16
Business review Prudential plc Annual Report 2012
Chief Financial Offi cer’s overview continued
Capital generation
We continue to promote disciplined use of our capital resources
across the Group, and focus on allocating capital to the growth
opportunities that offer the most attractive returns with the
shortest payback periods. We have taken several important
steps over the last few years to improve the effi ciency and
effectiveness of the capital allocation process, which has
improved not only our returns on capital invested but also
our overall fi nancial fl exibility. In 2012 we have continued to
produce signifi cant amounts of free capital, which we measure
as free surplus generated.
In 2012, we generated £2,700 million of underlying free surplus
(before reinvestment in new business) from our life in-force
and asset management businesses. This is 6 per cent higher
than the £2,536 million generated in 2011, refl ecting increases
from Asia and the US. We reinvested £618 million of the free
surplus generated in the period into writing new business
(2011: £553 million).
Asia continues to be our preferred destination for new
capital and accounted for £292 million of this reinvestment
(2011: £297 million), falling despite the growth in new business
as we continue to focus on more capital-effi cient products. We
have not sought to invest in spread-based products in the region
that carry more onerous capital charges and produce insuffi cient
returns. In the US, new business investment has increased to
£281 million from £202 million in 2011, which primarily refl ects
the higher level of new business written, changes in business mix,
and the impact on regulatory reserving requirements for new
business from the low interest rate environment. In the UK, our
capital-effi cient product focus on annuities and with-profi ts
bonds means we invested just £45 million, yet delivered more
new business profi t. The IRRs on invested capital were more than
20 per cent in Asia, the US, and the UK; with payback periods of
three years, two years and three years respectively.
Of the remaining free surplus generated after reinvestment in
new business, £1,200 million was remitted from the business
units to Group. This cash was used to meet central costs of
£205 million, service net interest payments of £278 million and
meet dividend payments of £655 million. The total free surplus
balance deployed across our life and asset management
operations at the end of the year was £3,689 million
(2011: £3,421 million).
‘Growth and Cash’ fi nancial objectives
The following discussion contains forward-looking statements
that involve inherent risks and uncertainties. Prudential’s actual
future fi nancial 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
document). See the discussion under the heading ‘Forward-
looking statements’ at the front of this document.
At our 2010 investor conference, entitled ‘Growth and Cash’,
we announced new fi nancial objectives demonstrating our
confi dence in continued rapid growth in Asia, and increasing
levels of cash remittances from all of our businesses. These
objectives have been defi ned as follows:
(i) Asia growth and profi tability objectives1:
To double the 2009 value of IFRS life and asset management
pre-tax operating profi t in 2013 (2009: £465 million); and
To double the 2009 value of new business profi ts 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 £260 million2 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 million3).
(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.
As mentioned in the Group Chief Executive’s report, we
remain focused on these objectives and have continued to make
progress towards them. In 2012 we have exceeded our 2013 IFRS
operating profi t and net remittance objectives for Asia and we are
on track to achieve the rest. We set out below in more detail our
progress towards these objectives based on our results for 2012.
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 The net remittance objective for Jackson was increased from £200 million
to £260 million to refl ect the positive impact of the acquisition of REALIC.
3 Representing the underlying remittances excluding the £150 million impact
of proactive fi nancing techniques used to bring forward cash emergence of
the in-force book during the fi nancial crisis.
Chief Financial Offi cer’s overview
Prudential plc Annual Report 2012
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Asia profi tability objectives
Actual (as originally reported)
Objective
Value of new business
IFRS operating profi t(note 1)
Business unit net cash remittance objectives
Asia(note 2)
Jackson(note 3)
UK(note 4)
M&G(note 5)
2009
£m
713
465
2009
£m
40
39
434
175
2010
£m
901
604
2011
£m
2012
£m
1,076
784
1,266
988
Actual
2010
£m
233
80
420
202
2011
£m
206
322
297
280
2012
£m
341
249
313
297
688
935
1,105
1,200
Change
(over
2011)
%
Change
(since
2009)
%
18
26
78
112
2013
£m
1,426
930
Objective
2013
£m
300
260 note 6
350
Objectives for cumulative period 1 January 2010 to 31 December 2013
Cumulative net cash remittances from 2010 onwards
Cumulative underlying group free surplus generation (which is net of investment in new business)
Actual Objective
1 Jan 2010
to 31 Dec
2012
£m
1 Jan 2010
to 31 Dec
2013
£m
Percent-
age
achieved
At 31 Dec
2012
%
3,240
5,779
3,800
6,500
85
89
Notes
1 Total Asia operating profi t from long-term business and Eastspring
Investments aft er development costs. 2012 operating profi t includes a
one-off gain of £51 million arising on sale of Group’s interest in China Life
Insurance Company of Taiwan. The comparatives represent results as
reported in the respective periods and excludes adjustment for altered
US GAAP requirements for deferred acquisition costs as described in
note A5 to the IFRS fi nancial statements.
2 Remittances from Asia in 2012 include net remittance of £27 million,
representing cash from sale of Group’s holding in China Life Insurance
Company in Taiwan off set by repayment of funding contingent on future
profi ts of the Hong Kong life insurance operations. 2010 remittances
included a one-off remittance of £130 million, representing the
accumulation of historic distributable reserves.
3 Net remittances from Jackson in 2011 include releases of excess surplus
to Group.
4 In 2009, the net remittances from the UK included the £150 million arising
from the proactive fi nancing techniques used to bring forward cash
emergence of the in-force book during the fi nancial crisis. The 2010 net
remittances included an amount of £120 million representing the releases
of surplus and net fi nancing payments.
5 Including Prudential Capital.
6 The net remittance objective for Jackson was increased from £200 million
to £260 million to refl ect the positive impact of the acquisition of REALIC.
18
Business review Prudential plc Annual Report 2012
Chief Financial Offi cer’s overview continued
In 2012, cash remitted to the Group increased by 9 per cent to
£1,200 million (2011: £1,105 million), with considerable amounts
of cash remitted from all our business operations highlighting
the improved balance of contributions from across the Group.
Asia’s remittances increased 66 per cent to £341 million
(2011: £206 million), demonstrating its transition into a highly
cash-generative business as a result of signifi cant growth and
its focus on health and protection products. Asia’s 2012 cash
remittance is ahead of its 2013 fi nancial objective of £300 million.
We remain confi dent of further positive progress underpinned by
strong cash generation from the in-force portfolio and continued
growth in capital-effi cient new business. The quality of Jackson’s
post-fi nancial crisis expansion in variable annuities is evidenced
by its cash remittance of £249 million while continuing to grow
the business, and fi nancing the acquisition of REALIC through
its internal resources. The positive impact of this fi nancially
attractive acquisition will enable Jackson to increase its net
remittance objective for Group from £200 million to £260 million
in 2013 and beyond. The UK life operations have continued to
make sizeable remittances at £313 million (2011: £297 million),
supported by shareholder transfers from the with-profi ts fund
and cash-positive new annuity business. M&G (including
Prudential Capital) delivered net remittances of £297 million
(2011: £280 million), refl ecting its relatively capital-light business
model that facilitates a high dividend payout ratio from earnings.
Against the cumulative 2010 to 2013 net remittance objective
of £3.8 billion, by 31 December 2012 over £3.2 billion has
been remitted by business operations. We remain confi dent
of achieving this target. Our confi dence is underpinned by the
strong underlying free surplus generation of our businesses
which, by 31 December 2012, had generated a total of
£5.8 billion against our 2010 to 2013 cumulative objective
of £6.5 billion.
Capital position, fi nancing and liquidity
Despite the challenging macroeconomic conditions, we continue
to operate with a strong solvency position, while maintaining high
levels of liquidity and capital generation. This is testament to our
capital discipline, the effectiveness of our hedging activities,
our low direct Eurozone exposure, the minimal level of credit
impairments and our comparatively low interest rate sensitivity.
The Group has maintained a strong capital position.
At 31 December 2012, our IGD surplus before fi nal dividend
is estimated at £5.1 billion (31 December 2011: £4.0 billion),
generating very strong coverage of three times the requirement.
All of our subsidiaries continue to hold strong capital positions
on a local regulatory basis. In particular, at 31 December 2012,
the value of the estate of our UK with-profi ts funds is estimated
at £7.0 billion (31 December 2011: £6.1 billion), while
Jackson’s risk-based capital (RBC)1 ratio was 423 per cent at
31 December 2012, excluding the gains on interest rate swaps
under permitted practice, which if included would increase the
RBC ratio to 478 per cent.
Furthermore, on a statutory (Pillar 1) basis the total credit default
reserve for the UK shareholder annuity funds also contributes
to protecting our capital position in excess of the IGD surplus.
Notwithstanding the absence of defaults in the period, at
31 December 2012 we have maintained our credit default reserves
at £2.1 billion, representing 40 per cent of the portfolio spread
over swaps, compared with 33 per cent at 31 December 2011.
The delays in fi nalising the implementation measures for
Solvency II prolong the uncertainty of the effective date of the
capital adequacy regime, a major overhaul for European insurers.
We are supportive in principle of the development of a more
risk-based approach to capital, but we have concerns as to the
potential consequences of some aspects of the Solvency II
regime under consideration. With the continued delays to policy
development, the fi nal outcome of Solvency II remains uncertain.
Despite this uncertainty we remain focused on preparing for
implementation of the new regime.
Note
1 The National Association of Insurance Commissioners designed the
Risk-Based Capital (RBC) formula as an early warning tool for State
regulators to identify potentially inadequately capitalised companies for
purposes of initiating regulatory action. The RBC ratio, being the ratio of
available capital to regulatory capital, is based on the highest level of
capital requirement at which remedial action may be initiated, the
Company Action Level.
Chief Financial Offi cer’s overview
Prudential plc Annual Report 2012
19
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In March 2013, we have agreed with the FSA to revise the
calculation of the contribution Jackson makes to the Group’s IGD
surplus. Until now the contribution of Jackson to the reported
IGD surplus was based on an intervention level set at 75 per cent
of US Risk-Based Capital Company Action Level (CAL). Going
forward the contribution of Jackson to IGD surplus will equal the
surplus in excess of 250 per cent of CAL. This is more in line with
the level at which we currently report free surplus, which we
have set at 235 per cent of CAL. In the absence of an agreed
Solvency II approach, we believe that this change makes the IGD
surplus a more meaningful measure and one that is more closely
aligned with economic reality. The change has no impact on the
way that the US business is managed or regulated locally. For
consistency we also intend to align our free surplus calibration
to 250 per cent of CAL going forward.
On the new basis, the IGD surplus at 28 February 2013 is
estimated at £4.4 billion1 (equivalent to a capital cover of 2.5 times),
which includes the proceeds of £0.4 billion of subordinated
debt, raised in January 2013, and is after deducting £1.3 billion
in respect of the Jackson change from 75 per cent to 250 per cent
of CAL. The intended change to free surplus will have a negligible
effect on EEV and is estimated to reduce total free surplus by
around £100 million.
Our fi nancing and liquidity position remained strong
throughout the period. The issue of US$700 million (£0.4 billion)
of subordinated debt (perpetual tier 1 notes) in January 2013
further supports the fi nancial fl exibility of the Group, while taking
advantage of very favourable market conditions. Our central
cash resources amounted to £1.4 billion at 31 December 2012,
up from £1.2 billion at 31 December 2011, and we retain a further
£2.1 billion of untapped committed liquidity facilities.
Shareholders’ funds
During 2012, investment markets continued to experience
considerable volatility, with positive movements in global
equity market indices only towards the end of the year and
further falls in long-term interest rates in the US, the UK
and a number of Asian countries, most notably Hong Kong
and Singapore. Despite these effects, the Group’s EEV
shareholders’ funds increased by 14 per cent during 2012
to £22.4 billion (31 December 2011: £19.6 billion). On a
per share basis EEV at the end of 31 December 2012 stood
at 878 pence, up from 771 pence at 31 December 2011. IFRS
shareholders’ funds were 21 per cent higher at £10.4 billion
(31 December 2011: £8.6 billion)2.
The increases in shareholders’ funds on both reporting bases
are the result of the Group’s strong operating performance,
while our balance sheet continues to benefi t from both the
quality of the asset portfolio and the effectiveness of our
proactive approach to risk management.
Summary
The fi nancial progress we have reported in 2012 demonstrates
the Group’s resilience to the challenges faced by the global
economy. By maintaining our bias in favour of less volatile types
of income, such as insurance and fee, and by diversifying our
products set and distribution platforms, we have continued
to improve both the quality and the balance of our earnings.
Our disciplined approach to value creation and focus on cash
generation, combined with a robust capital position and
a conservative risk management stance, provide us with
a strong foundation for the future.
Nic Nicandrou
Chief Financial Offi cer
Notes
1 The estimated position at 28 February 2013 allows for economic conditions
and surplus generation since 31 December 2012 and is stated before the fi nal
dividend and the eff ect of the Thanachart acquisition, and aft er allowing for
a reduction in Jackson’s contribution to IGD surplus of £1.3 billion.
2 Comparatives adjusted for retrospective application of the accounting
policy change for deferred acquisition costs as discussed in note A5 of
the IFRS fi nancial statements.
20
Business review Prudential plc Annual Report 2012
Asia:
accelerate
Insurance operations: Asia
Prudential plc Annual Report 2012
Prudential plc Annual Report 2012
21
21
Our strategy in Asia is focused on
meeting the needs of the emerging
middle class for savings and
protection. The region’s positive
demographics, strong economic
growth, sound public fi nances
and favourable public policy
environment with a clear
preference for private provision of
protection, have all led to a rapidly
expanding middle class, with a
strong and growing demand for our
savings and protection products.
13m+
insurance customers
400,000+
agents
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22
Business review Prudential plc Annual Report 2012
Insurance operations
Asia: accelerate
‘ Prudential’s strategy in Asia is well established and
continues to be highly eff ective. We are focused on
building high-quality, multi-channel distribution that
provides customers with access to products that are
appropriate for their fi nancial planning needs. Typically
this involves a high proportion of regular premium
policies that combine savings and protection.’
Barry Stowe
Chief Executive
Prudential Corporation Asia
New business profit
Total IFRS operating
profit
£1,266m
+18%
£920m
+30%
£1,076m
£709m
2011
2012
2011
2012
2013 fi nancial objectives
AAAAAAAAAAAAAA Double 2009 value
of IFRS life and asset
management pre-tax
operating profi t
AAAAAAAAAAAAAA Double 2009 value of
new business profi ts
AAAAAAAAAAAAAA Deliver £300 million
of net cash remittance
to the Group.
Financial performance
APE sales
New business profi t
Total IFRS operating profi tnotes (i)(ii)
Total EEV operating profi tnote (i)
AER
CER
2012 £m
2011 £m Change %
2011 £m Change %
1,897
1,266
920
1,960
1,660
1,076
709
1,764
14
18
30
11
1,642
1,065
697
1,747
16
19
32
12
Notes
(i) Operating profi t from long-term operations excluding Eastspring
Investments, development costs and Asia regional head offi ce costs.
(ii) Comparatives adjusted for retrospective application of the accounting
policy change for deferred acquisition costs as discussed in note A5
of the IFRS fi nancial statements.
Insurance operations: Asia
Prudential plc Annual Report 2012
23
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Market overview
Asia’s rapidly-growing middle class remains a key
growth driver for the retail fi nancial services sector,
particularly life insurance with an emphasis on
protection. Research has shown that as the middle class
becomes more established the proportion of income
they allocate to fi nancial planning increases
from 5 per cent to around 12 per cent1.
We believe the Asian life insurance markets remain a highly
compelling opportunity for delivering profi table growth over the
long term with South-east Asia, including Hong Kong, currently
offering the most attractive market dynamics for insurance
providers, with increasing opportunities to provide fi nancial
security to the new middle class whose expectations now go
beyond basic subsistence to protecting and improving their
personal fi nances over the long term.
The manifestation of this demand varies signifi cantly across the
region, refl ecting the various stages of development in each
individual market, together with their distinct regulatory and
competitive environments, cultural differences and customer
preferences. However, across all markets there is increasing
recognition among governments and regulators of the social
utility of a vibrant private sector life insurance market that
provides fi nancial security to families, effi ciently channels
long-term savings into fi nancial markets and generates
employment opportunities within the industry.
During 2012, Asia’s average economic growth rates, although
they remained well above the global average, continued to
moderate following the post-crisis high seen in 2010. This is to
some degree a consequence of the weakness of the economies
of North America and Europe. While domestic factors were a
signifi cant infl uence in India and China as policymakers grapple
with sensitive political situations and economic imbalances, the
resilience of many other economies in the region, particularly
in South-east Asia, was highlighted by upward revisions to IMF
growth forecasts in the second half of the year. Hong Kong’s
economic growth accelerated during the fourth quarter last
year and looks set to have an improved year in 2013 and the
Singaporean Government has said that the outlook for its
economy is cautiously positive as it also had a better than
expected fourth quarter. However, the strongest performing
regional economies were led by Indonesia, Malaysia, the
Philippines and Thailand where growth is increasingly driven by
the expansion of domestic demand and is less reliant on exports.
Face to face sales, typically through an agent, remains the dominant
distribution channel throughout the Asia region and the expertise
needed to build and manage agency represents a signifi cant
barrier for new entrants. Bancassurance has been growing at
a faster rate than agency in recent years from a lower base.
As the life insurance industry continues to grow, so the regulatory
environment continues to evolve. Regulators are encouraging
insurers to strengthen their risk and solvency management
processes and to improve their sales processes to ensure that
customers receive good quality advice and buy products suitable
to their needs. Most international insurers operating in the region
are supportive of these trends and generally aim to operate above
current local regulatory standards. The recent recommendations
of the Monetary Authority of Singapore’s FAIR Panel are indicative
of the kind of regulatory efforts under way in the region to
improve the overall standard of agency distribution in insurance.
Business performance
Prudential’s strategy in Asia is well established and continues to
be highly effective. The customer is at the heart of our strategy
and Asian customers fi nd our offering of regular premium
savings and protection products distributed principally through
high-quality face to face distribution channels particularly
attractive. The quality of our brand, our products, and of our
distribution allows us to translate our sales into strong returns
to our shareholders.
Building and strengthening Prudential’s multichannel distribution
capabilities is a constant objective for us. Tied-agency remains
a highly effective and effi cient distribution channel in Asia and
Prudential has one of the region’s largest agency forces. We
focus both on the size and the productivity of our agency force.
Agency activity is a key indicator of quality and performance;
during 2012 Prudential’s average active agency manpower rate
increased by 14 per cent (excluding India). In our sweet-spot
of South-east Asia, the increase in active agency manpower of
15 per cent contributed signifi cantly to a 19 per cent increase in
new business profi t in the agency channel.
Bancassurance has been growing rapidly in the region in recent
years and Prudential remains a regional leader in this channel
with APE growth of 29 per cent, led by highly productive
relationships including SCB, where APE sales were up 42 per cent
this year and UOB, where APE sales grew at an even faster rate of
65 per cent year-on-year. In November, Prudential announced a
new and strategically signifi cant, exclusive long-term partnership
with Thailand’s Thanachart Bank as part of a deal that will see
Thanachart Life merged with our existing life operation in the
country immediately doubling our market share. The deal is
expected to complete during the fi rst half of 2013.
It is part of our strategy to focus on regular premium products
which allow our customers to invest over the long term and
smooth the impact of timing on their investment returns. We aim
to make most of our sales as regular premiums and in 2012, the
proportion of regular premium in our APE sales was in excess of
90 per cent, which ensures the profi tability and resilience of our
growing in-force book. Although single premium products can
provide appropriate opportunities for customers with lump
sums, we believe that regular premium policies with protection
riders best meet the majority of our customers’ needs. In 2012,
32 per cent of our new business APE was related to protection,
up 2 percentage points over prior year. Given the recent volatility
in the fi nancial markets, we have seen a shift towards non-linked
products; the proportion of linked products in the new business
APE mix declined to 29 per cent compared to 32 per cent for 2011.
Note
1 HSBC Global Research.
24
Business review Prudential plc Annual Report 2012
Insurance operations continued
Asia: accelerate
Managing the in-force book is always a high priority as
this ensures that the shareholder value that we expect to
capture over the life of the product does emerge over time as
distributable shareholder profi ts. For 2012 we reported small
net positive experience and assumptions change of £95 million
up from £75 million in 2011.
On 2 July, we announced that Prudential has received in-principle
approval from Cambodia’s Ministry of Economy and Finance to
establish a wholly foreign-owned life insurance operation in the
country. Although the Cambodian economy is relatively small
at present, it has delivered strong GDP growth over the past
10 years and we believe this presents excellent opportunities
to develop the life insurance industry in the coming years.
The business sold its fi rst policies in January 2013.
In addition to providing value directly to our customers through
our products and services, we aim to provide wider benefi ts
to the community where we operate. Therefore, Prudential
supports a range of corporate social responsibility activities
across Asia, with a focus on providing disaster relief, promoting
fi nancial literacy and benefi ting children. During 2012,
Prudential extended its highly successful children’s fi nancial
literacy programme, ‘Cha-Ching’; for example, this has now
been adopted in the Philippines as part of the school curriculum.
Financial performance
Prudential Asia has delivered in 2012 IFRS operating profi t
and cash remittance ahead of the 2013 objectives with strong
operational performances enhanced by some non-recurring
items. We remain on track to meet our third objective in the
region of doubling the 2009 new business profi t by 2013.
New business APE was £1,897 million, an increase of 14 per cent
over prior year. During the second half of 2012 the reported
growth rates did moderate as the economic climate became
generally more challenging and specifi cally in Malaysia, Korea
and Taiwan we deliberately and proactively slowed sales of lower
margin products.
New business profi t of £1,266 million grew at a faster rate than
APE at 18 per cent. This refl ects the positive impacts of product
participation decisions as outlined above, proactive pricing
actions to mitigate the adverse effects of low interest rates and
a shift in country mix. Our agency and bank channels grew their
respective contribution to new business profi t at similar rates
in 2012.
EEV operating profi t from our in-force business of £694 million
is in line with prior year as the impact of the signifi cant increase
in the unwind that comes from a larger in-force book and the net
positive movement in the contribution to profi ts from assumption
changes and experience variances was offset by the drag from
lower discount rates.
Operating profi t on an IFRS basis from Asia’s life businesses,
continues to grow strongly at £920 million, 30 per cent higher
than in 2011. This includes £51 million of one-off profi t from the
sale of the Group’s interest in China Life Insurance Company
of Taiwan. Excluding this amount, IFRS operating profi t was
£869 million, 23 per cent higher than last year. This is principally
driven by improved in-force profi ts, which grew by 18 per cent
in the year, refl ecting the increasing scale of the business.
During 2012, shareholder-backed business policyholder
liabilities have increased by 16 per cent to £21.2 billion
(31 December 2011: £18.3 billion), due to strong business fl ows
of £2.0 billion (up 8 per cent on last year’s equivalent amount of
£1.8 billion) and higher bond and equity values.
Underlying free surplus generated by the in-force life business
was 9 per cent higher at £771 million (2011: £707 million)
refl ecting the increasing scale of the business. Of this total,
£292 million (2011: £297 million) was reinvested in new business
at internal rates of return of over 20 per cent and average payback
periods of three years. The overall cash generating capacity of
the life business is clearly demonstrated by net remittances of
£384 million to the Group during 2012.
Looking at individual countries:
China
AER
CER
2012 £m
2011 £m Change %
2011 £m Change %
APE sales
(Prudential’s
50 per cent share)
56
59
(5)
61
(8)
Market conditions in China during 2012 have been challenging
as economic growth slowed and the country continued to adjust
to a changing political environment.
CITIC-Prudential remains one of the leading foreign joint
ventures in a market that remains dominated by domestic players.
We do anticipate the market liberalising at some point in the
future, however the timing of such an opening remains uncertain.
In the meantime, we are focused on continuing to build a
high-quality, multichannel distribution organisation.
Prudential’s 50 per cent share of sales for 2012 was £56 million,
broadly in line with the prior year. During this year we continued
to focus on agent recruitment and on promoting sales of regular
premium business. Bancassurance, which accounts for nearly
half of our total sales in China, has seen lower productivity from
bank branches following the tightening of regulations that came
into effect last year.
Hong Kong
AER
CER
2012 £m
2011 £m Change %
2011 £m Change %
APE sales
396
331
20
336
18
The Hong Kong economy continues to benefi t from its close ties
with mainland China and it remains a fi nancial and logistics hub
for the region beyond China, which ensures a continued and
strong demand for our products.
Prudential Hong Kong delivered strong new business APE
growth with an increase of 20 per cent over the prior year
to £396 million. Prudential remains the only leading player in
Hong Kong to have a material presence in both agency and bank
distribution, enabling it to reach the widest range of customers.
Both channels performed well in 2012.
Insurance operations: Asia
Prudential plc Annual Report 2012
25
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India
AER
CER
2012 £m
2011 £m Change %
2011 £m Change %
APE sales
(Prudential’s
26 per cent share)
102
101
1
90
13
The Indian life insurance market has been going through a
signifi cant period of change, however there are signs it has begun
to grow again following the regulator-driven refocus on savings
and protection products, which came into effect in 2010. During
the second half the economy faltered, impacted by domestic
imbalances and a challenging political environment. Although
we remain optimistic about the long-term potential of the market,
we expect it will be some time before private sector sales
volumes return to pre-2010 levels.
Prudential’s joint venture with ICICI continues to be the leader
in the private sector.
Indonesia
AER
CER
2012 £m
2011 £m Change %
2011 £m Change %
APE sales
446
363
23
343
30
The Indonesian economy continues to outperform and this is
underpinned by the scale and resilience of its domestic demand.
Indonesia has one of the region’s largest populations and lowest
rates of insurance penetration.
Prudential has a strong market leading position with over 60 per cent
of the industry’s registered tied-agents and has successfully been
building its business outside of Jakarta; now around 45 per cent
of APE is from outside the capital. New business APE growth of
23 per cent to £446 million has been primarily driven by the
continued expansion of the agency force. Growth in the agency
force is now being supplemented by the smaller but fast growing
bancassurance channel which includes partnerships with UOB,
BII, Citibank and Permata.
Korea
AER
CER
2012 £m
2011 £m Change %
2011 £m Change %
APE sales
95
101
(6)
101
(6)
In Korea, the weak economic climate has resulted in a decline in
demand for unit-linked products, with consumers opting instead
for interest sensitive products. Against this backdrop, we have
chosen to relinquish volume rather than compete for the low
margin, capital-intensive guaranteed return segment of the
market. Consequently, we have deliberately let our sales via
banks and brokers decline. Our business has continued to focus
on developing a high-quality proprietary distribution channel
which saw active agents increase by 9 per cent in 2012.
Malaysia
AER
CER
2012 £m
2011 £m Change %
2011 £m Change %
APE sales
218
223
(2)
224
(3)
The latest statistics released by the Malaysian Life Insurance
Association show that the industry grew by 2.2 per cent during
2012 in terms of weighted premiums relative to 2011 refl ecting
general concerns about the economic outlook. Prudential
remains the market leader in Malaysia with a highly productive
agency force and growing bank distribution.
Our focus in 2012 on health and protection rather than lower margin,
higher premium volume savings related top ups has boosted the
mix of these products to around 60 per cent and improved our
profi tability, at the expense of top line growth. We have continued
to expand in the Takaful sector where we remain market leader.
Singapore
AER
CER
2012 £m
2011 £m Change %
2011 £m Change %
APE sales
301
235
28
239
26
The Singapore market continues to perform strongly with the Life
Insurance Association having announced that industry APE grew
by 8 per cent during 2012 with regular premiums growing even
more strongly at 18 per cent.
Prudential’s APE was £301 million up 28 per cent on prior year.
Bancassurance was an important driver of growth where we
now have a number of partners including UOB, SCB, Maybank
and Singpost, enabling us to access a broad range of customers.
Our agency channel continues to be one of Singapore’s most
productive, and according to the latest available market statistics,
we lead the market in terms of regular premium new business
generated per agent1.
Taiwan
AER
APE sales
2012
£m
156
2011
£m
148
Change
%
5
CER
2011
£m
149
Change
%
5
Taiwan is mainly focused on bank distribution through our
partnership with E.Sun Commercial Bank and SCB, supplemented
by direct marketing and worksite marketing activities which are
growing fast. APE was depressed by our decision not to compete
in the market with products we consider to be uneconomic.
Others – Philippines, Thailand and Vietnam
AER
CER
2012 £m
2011 £m Change %
2011 £m Change %
APE sales
127
99
28
99
28
In Vietnam, we saw a very strong recovery during the fourth quarter
with new business APE up 23 per cent over prior year, to deliver an
overall 7 per cent increase for the year. In Thailand, we saw growth
of 37 per cent driven by our bancassurance capabilities. The
Philippines delivered growth of 50 per cent, refl ecting increased
agency activity and the success of partnership distribution.
Note
1 Source: Life Insurance Association of Singapore.
Barry Stowe
Chief Executive
Prudential Corporation Asia
26
Business review Prudential plc Annual Report 2012
United States:
build on strength
Insurance operations: United States
Prudential plc Annual Report 2012
27
The US is the world’s largest
retirement savings market, with
large cohorts of the 78 million
baby-boomers1 reaching retirement
age each year, creating signifi cant
demand for retirement income
products. Our strategy in the
US is to take advantage of this
profi table growth opportunity.
4m
customers
Note
1 Source: US Census Bureau.
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Business review Prudential plc Annual Report 2012
Insurance operations continued
United States: build on strength
‘ Jackson’s strategy remains focused on providing value
to its customers and driving shareholder value while
operating within a conservative risk management
framework. This approach has enabled us to successfully
navigate the signifi cant macroeconomic and fi nancial
market challenges of the last fi ve years and ensured
a continuation of our strong performance in 2012.’
Mike Wells
President and
Chief Executive Offi cer
Jackson National
Life Insurance Company
New business profit
Total IFRS operating
profit
£815m
£873m
+7%
£964m
+48%
2013 fi nancial objective
AAAAAAAAAAAA Deliver £260 million
of net cash remittance
to the Group*
£651m
2011
2012
2011
2012
Financial performance
APE sales
New business profi t
Total IFRS operating profi tnote
Total EEV operating profi t
AER
CER
2012 £m
2011 £m Change %
2011 £m Change %
1,462
873
964
1,610
1,275
815
651
1,431
15
7
48
13
1,290
825
659
1,448
13
6
46
11
Note
Comparatives adjusted for retrospective application of the accounting
policy change for deferred acquisition costs as discussed in note A5 of
the IFRS fi nancial statements.
* The net remittance objective for Jackson was increased from £200 million
to £260 million to refl ect the positive impact of the acquisition of REALIC.
Insurance operations: United States
Prudential plc Annual Report 2012
29
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Market overview
The United States is the world’s largest retirement
savings market. Each year, many of the 78 million
‘baby- boomers’ reach retirement age, which will trigger
a shift from savings accumulation to retirement income
generation for more than US$10 trillion of accumulated
wealth over the next decade1.
Business performance
Jackson’s strategy remains focused on providing value to its
customers and driving shareholder value while operating within
a conservative risk management framework. This approach has
enabled us to successfully navigate the signifi cant macroeconomic
and fi nancial market challenges of the last fi ve years and ensured
a continuation of our strong performance in 2012.
This demographic transition constitutes a signifi cant opportunity
for those companies that are able to provide the ‘baby-boomers’
with long-term retirement solutions. Jackson takes a selective
approach to this opportunity by leveraging its distinctive
distribution capabilities and asset liability management expertise
to offer prudently priced annuity products.
Despite the challenges faced by the global economy, US equity
markets delivered strong gains in 2012. The S&P 500 index
increased by 13.4 per cent over the course of the year and market
volatility declined notably from the levels experienced in 2011.
Interest rates remained historically low with the 10-year treasury
rate ending below 180 basis points at year end, while corporate
spreads tightened considerably from 2011 year end levels.
The competitive environment continues to favour companies
with good fi nancial strength ratings and a track record of
fi nancial discipline. Companies that were hardest hit by the
market disruptions over the last few years still have to work to
regain market share as customers and distributors seek product
providers that offer consistency, stability and fi nancial strength.
Jackson continues to benefi t from this fl ight to quality and
heightened risk aversion.
In 2012, Jackson delivered APE retail sales of £1,424 million,
an increase of 14 per cent over 2011. With the addition of a
modest level of institutional sales, total APE sales increased by
15 per cent to £1,462 million. These strong sales levels helped
to drive annuity net fl ows higher to £8.8 billion during 2012,
a 19 per cent increase over 2011. Although we do not target
volume or market share, our ranking climbed to second in
variable annuity sales in the US through the third quarter of 2012
(latest information available), while market share increased to
14.0 per cent from 11.4 per cent for the full year 20112.
In March 2012, we launched a new variable annuity product,
Elite Access, which has no guaranteed benefi ts and provides
tax effi cient access to alternative investments. The rollout of this
new product has received a positive reaction from distributors,
with close to 100 per cent of them signing up to distribute this
product. Single premium sales in the period since launch were
£849 million. We are optimistic about the future of Elite Access
and will continue to drive product innovation as a way of both
meeting the needs of our customers and driving shareholder value.
Notes
1 Source: US Census Bureau.
2 Sources: Morningstar Annuity Research Center (MARC) Third Quarter 2012
Sales Report© and Fourth Quarter 2011 Sales Report©. © Morningstar, Inc.
All Rights Reserved. The information contained herein: (1) is proprietary
to Morningstar and/or its content providers; (2) may not be copied or
distributed; and (3) is not warranted to be accurate, complete or timely.
Neither Morningstar nor its content providers are responsible for any damages
or losses arising from any use of this information. Past performance is no
guarantee of future results.
30
Business review Prudential plc Annual Report 2012
Insurance operations continued
United States: build on strength
Jackson continues to be one of the most effi cient operators
within the US life insurance market. The ratio of statutory general
expenses to average assets improved slightly to 41 basis points
in 2012 versus 42 basis points in 2011. This effi ciency has been
delivered while maintaining world class standards of customer
service for our customers. In 2012, Jackson was rated as a ‘World
Class’ service provider by the Service Quality Measurement
Group for the seventh consecutive year.
On 4 September 2012, Jackson completed the acquisition
of SRLC America Holding Corp (SRLC) from Swiss Re for a
consideration of £370 million which is subject to fi nalisation of
completion procedures. SRLC was the US holding company of
REALIC. The acquisition helps diversify Jackson’s sources of
earnings by increasing the amount of income generated from
underwriting activities. The transaction is expected to add an
additional £100 million to Jackson’s IFRS pre-tax profi ts in the
fi rst year, representing stand-alone earnings from REALIC of
approximately £115 million, less £15 million of income foregone
on the assets sold to fi nance the transaction. In the four month
period since completion, REALIC contributed £67 million to
Jackson’s IFRS operating profi t while having only a modest
impact on statutory capital.
Financial performance
Jackson’s IFRS pre-tax operating profi t in 2012 was 48 per cent
higher at £964 million (2011: £651 million)1. This result refl ects
the strong underlying growth in fee income, and lower deferred
acquisition cost (DAC) amortisation. The result also includes four
months of REALIC operating profi t.
At 31 December 2012, Jackson held £49 billion in separate
account assets, compared to £38 billion in 2011. The increase
in separate account assets primarily refl ects the impact of
positive net fl ows. This resulted in variable annuity separate
account fee income of £875 million in 2012, up 29 per cent
over the £680 million achieved in 2011.
With corporate spreads tightening during 2012 and continued
low levels of absolute interest rates, total spread income,
including the expected return on shareholders’ assets, was lower
at £757 million, compared to £813 million in the previous year.
Product acquisition costs during 2012 increased slightly
compared to 2011, despite the growth in sales as a greater
proportion of distributors are opting for asset-based commission.
Following the introduction of new DAC guidance in 2012, which
was applied retrospectively, acquisition costs are no longer fully
deferrable, resulting in IFRS new business strain of £174 million
in 2012, compared to £156 million in 2011.
DAC amortisation of £356 million decreased in 2012, compared
to £506 million in 2011. This decrease is primarily a result of the
negative prior year impact of the reversal of the benefi t received
in 2008 from the mean reversion formula. Partially offsetting this
decrease was higher amortisation due to the higher earnings
base in 2012.
Administration expenses increased to £537 million in 2012
compared to £412 million in 2011, with the increase due primarily
to higher asset-based commissions paid on the larger 2012
separate account balance, which is classifi ed as an administration
expense. This increase was also attributable to larger home offi ce
staff due to the growing in-force book, the acquisition of REALIC,
and certain non-recurring expenditures.
Jackson continues to actively manage its investment portfolio
to mitigate investment risk. Net realised gains on debt
securities amounted to £47 million in 2012 compared to gains
of £106 million in 2011. This includes a realised loss net of
recoveries of £10 million (2011: gains of £10 million) on
credit-related sales of impaired bonds. Write-downs on
debt securities were £37 million (2011: £62 million).
Interest related gains during the period totalled £94 million
(2011: £158 million), primarily due to sales of corporate debt.
Note
1 Comparatives adjusted for retrospective application of the accounting
policy change for deferred acquisition costs as discussed in note A5
of the IFRS fi nancial statements.
Insurance operations: United States
Prudential plc Annual Report 2012
31
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In 2012, Jackson’s life in-force book generated £755 million of
underlying free surplus (2011: £748 million) refl ecting an increase
due to the growth in the business and higher operating variances
offset by the impact of low interest rates. Some £281 million
was reinvested to write new business (2011: £202 million). The
increase in capital consumption was driven by the signifi cant
decrease in interest rates which in turn caused a large drop in
the valuation rate used to set reserves, resulting in higher strain
compared to 2011. Notwithstanding this effect, the fast payback
nature of the products, which in 2012 averaged two years across
the portfolio (2011: one year) means that returns remain
extremely attractive.
Jackson’s RBC level at the end of 2012 was 423 per cent which
compares to 429 per cent at the end of 2011. In 2012, capital
formation was strong refl ecting both the good operating
performance, the modest level of impairments and other
market value related net gains. This strong capital formation
enabled Jackson to remit £249 million to Group and complete
the acquisition of REALIC, while supporting its balance sheet
growth and growing total adjusted capital from year end
2011 levels.
Mike Wells
President and Chief Executive Offi cer
Jackson National Life Insurance Company
The net unrealised gain position has improved from £2,057 million
at 31 December 2011 to £2,807 million at 31 December 2012
due to the decline in the US Treasury rates and tighter spreads.
Gross unrealised losses improved from £246 million at
31 December 2011 to £178 million at 31 December 2012.
Jackson delivered total APE sales of £1,462 million, a 15 per cent
increase over 2011. Jackson has achieved these sales levels,
while maintaining its pricing discipline, as it continued to write
new business at aggregate internal rates of return in excess of
20 per cent.
Variable annuity APE sales of £1,245 million were 14 per cent
higher than in 2011. Expressed in local currency most of the
increase was accounted for by APE sales of Elite Access, which
totalled US$135 million. Excluding the contribution of Elite Access
variable annuity APE sales of US$1,837 million were 5 per cent
higher than those achieved in 2011 of US$1,749 million. In the
course of the year and particularly in the second half of 2012,
Jackson implemented various product initiatives to continue
to balance value, volume, capital and balance sheet strength.
Fixed annuity APE sales of £58 million were 23 per cent higher
than the level of sales in 2011. Jackson ranked seventh in sales of
traditional deferred fi xed annuities through the third quarter of
2012, with a market share of 3.6 per cent, compared to thirteenth
with a 2.1 per cent market share for the full year 20111.
Fixed index annuity APE sales of £109 million in 2012 increased
17 per cent from 2011. Jackson ranked eighth in sales of fi xed
index annuities through the third quarter of 2012, with a market
share of 4.9 per cent, up from a market share of 4.6 per cent in the
full year 20112.
Total EEV basis operating profi t for the long-term business in
2012 was £1,610 million, compared to £1,431 million in 2011
refl ecting increases in both new and in-force business profi ts.
Jackson’s new business profi t increased by 7 per cent to
£873 million, refl ecting active management of sales volumes
and mix, higher charges and lower levels of guarantees
offered. These actions counteracted the adverse effect of lower
long-term yields and tighter spreads. Higher in-force profi t was
driven largely by higher unwind of discount, due to growth in
the underlying book, and larger positive contributions from
operating experience variances and assumption changes.
Notes
1 Sources: LIMRA U.S. Individual Annuities Sales Survey. Third Quarter 2012
and Fourth Quarter 2011.
2 Sources: AnnuitySpecs.com’s Indexed Sales & Market Report, Third Quarter
2012 and Fourth Quarter 2011: Copyright © 2012, AnnuitySpecs.com.
All rights reserved.
32
Business review Prudential plc Annual Report 2012
United Kingdom:
focus
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Insurance operations: United Kingdom
Prudential plc Annual Report 2012
33
In the UK, Prudential has adopted
a focused strategy and competes
selectively to help Britain’s
ageing population convert their
accumulated wealth into retirement
income. We have a clear focus on
writing profi table new business
while generating cash sustainably
and preserving our capital. We
concentrate on areas in which we
have a clear competitive advantage,
namely individual annuities and
with-profi ts products, where we
continue to be market leaders.
7m
customers
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Business review Prudential plc Annual Report 2012
Insurance operations continued
United Kingdom: focus
‘ Our ability to deliver value to our customers and the
resulting market franchise allowed us to achieve higher
new business profi tability in 2012, as well as increasing
cash generation and preserving our strong capital position,
despite the challenging economic environment and
competitive conditions that prevailed in the
UK marketplace.’
Rob Devey
Chief Executive
Prudential UK and Europe
Total IFRS operating
profit
£723m
£736m
+2%
2013 fi nancial objective
AAAAAAAAAAA Deliver £350 million
of net cash remittance
to the Group
2011
2012
Financial performance
APE sales
New business profi t
Total IFRS operating profi t
Total EEV operating profi t
AER
CER
2012 £m
2011 £m Change %
2011 £m Change %
836
313
736
899
746
260
723
893
12
20
2
1
746
260
723
893
12
20
2
1
Insurance operations: United Kingdom
Prudential plc Annual Report 2012
35
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Market overview
The life and pensions market in the UK is mature and
highly regulated. Signifi cant regulatory change occurred
in 2012 with the implementation of the conclusions of the
Retail Distribution Review (RDR), auto-enrolment for
company pension schemes and gender neutral pricing.
These new regulations represent major changes to the way
business is conducted in a number of areas of the markets in
which we operate in the UK, and impact not only insurance and
investments providers, but also distributors and consumers. It is
inevitable that regulatory change of this scale and scope creates
a period of uncertainty before the shape of the new long-term
competitive landscape becomes evident.
The UK market is also characterised by an ageing population and
a concentration of wealth in the 50+ age group, many of whom
have built up substantial pension funds in employer-sponsored
schemes. These customers require help to convert their wealth
into sustainable lifetime income. For the next generation of
savers, the responsibility for retirement provision has shifted
substantially away from government and employers towards
the individual. These customers are typically under-funded for
retirement and helping them accumulate saving constitutes a
signifi cant opportunity for long-term savings and retirement
income providers, at a time when the ability of the state to
intervene is signifi cantly diminished.
Prudential UK’s longevity experience, multi-asset investment
capabilities, long-standing trusted brand and fi nancial strength
mean that we are favourably positioned to help consumers
translate their accumulated wealth into dependable retirement
income through our range of market leading with-profi ts and
annuity products.
We do so by focusing on those areas of the market where we are
able to bring superior value to our customers and where we enjoy
a competitive advantage. The performance of our with-profi ts
fund in 2012 has allowed us to declare bonuses which mean that
our policyholders should see year-on-year increases of between
3.5 per cent and 6.5 per cent in accumulating with-profi ts policy
values and our total bonus payments are expected to top
£2.0 billion in 2013.
Our ability to deliver value to our customers and the resulting
market franchise allowed us to achieve higher new business
profi tability in 2012, as well as increasing cash generation and
preserving our strong capital position, despite the challenging
economic environment and competitive conditions that prevailed
in the UK marketplace.
Business performance
Prudential UK has a well-established individual annuity business,
built on a robust pipeline of internal vestings from maturing
pension policy customers. The internal vestings pipeline is
supplemented by sales through intermediaries and strategic
partnerships with third parties where Prudential is the offered
annuity provider for customers vesting their pensions at
retirement.
Total APE sales for 2012 were £836 million (2011: £746 million)
of which sales of individual annuities of APE £241 million were
35 per cent higher than in 2011.
Annuity sales from internal vestings of £146 million were
20 per cent higher than 2011, due to a combination of several
factors – a higher number of customers retiring, higher average
fund values and increased client contact activity. Sales of
external annuities of APE £95 million were 67 per cent higher in
2012 refl ecting an increase in demand for our with-profi ts Income
Choice Annuity which offers customers income security with the
potential for income growth.
36
Business review Prudential plc Annual Report 2012
Insurance operations continued
United Kingdom: focus
Onshore bonds sales of APE £228 million were up 28 per cent
on 2011, including with-profi ts bond sales of APE £214 million,
which increased by 34 per cent. Our PruFund range made up
75 per cent of with-profi ts bond sales, with 35 per cent higher
sales than in 2011. PruFund continues to be popular with
consumers, providing smoothed returns and a range of optional
guarantees, which offer a degree of security against potential
market falls in a post-crisis environment where investors have
become much more risk-averse. Although the demand for
guarantees remains high, the increase in PruFund sales is based
entirely on the non-guaranteed version of the product, which is
attractive to those customers who are prepared to accept some
risk to their capital but still want to benefi t from the smoothing
offered by a with-profi t product.
The RDR, one of a number of current reforms to the UK
regulatory framework, was implemented on 31 December
2012. It means that fi nancial advisers can no longer be paid
commissions for recommending investment products. This is
likely to lead to some short-term disruption in the market as
consumers adjust to paying fees for advice and adviser fi rms
adapt their business models for the new rules. We have seen an
increase in sales of with-profi t bonds in 2012 and, while we have
prepared our business for the post-RDR regulatory environment,
we expect this transition phase to have a negative impact on our
sales of investment bonds in 2013.
Corporate pensions sales of APE £189 million were 19 per cent
lower than the previous year. Sales in 2011 were particularly
high due to new defi ned contribution members joining our
schemes following closure of a number of defi ned benefi t
schemes operated by existing clients. We continue to focus
on securing new members and incremental business from our
current portfolio of corporate pensions customers rather than
acquiring new corporate pensions schemes where market
pricing is currently unattractive. Prudential UK remains the
largest provider of additional voluntary contribution plans
within the public sector, where we now provide schemes
for 68 of the 99 public sector authorities in the UK.
Sales of other products, principally individual pensions,
PruProtect, PruHealth and offshore bonds of £137 million were
12 per cent higher than in 2011. Individual pensions APE sales
(including income drawdown) of £80 million were 11 per cent
higher, refl ecting increased demand for our Flexible Retirement
Plan among advisers and their clients.
In the wholesale market, we aim to continue our selective
participation approach to bulk and back-book buyouts using our
fi nancial strength, superior investment track record, annuitant
mortality risk assessment and servicing capabilities. In line with
this opportunistic approach, two bulk annuity buy-in insurance
agreements were signed in 2012 totalling APE £41 million
(2011: single deal APE £33 million). We will continue to maintain
our focus on value and only participate in transactions that meet
our return on capital and payback requirements.
Our direct advice service, Prudential Financial Planning (PFP),
was launched in December 2011 and grew to 129 advisers in
2012, generating APE sales of £21 million. PFP offers a complete
fi nancial planning service, focused primarily on our existing
direct customer base. The response from our customers has been
very encouraging and we intend to continue to grow this channel
to 200 advisers by the end of 2013.
The combined fi nancial strength and investment performance
track record of Prudential’s UK With-Profi ts Fund continues to
provide a key source of non-price differentiation in a competitive
market. Our with-profi ts customers benefi t from the security of
Prudential’s large inherited estate, which was valued at £7 billion
at the year end, and provides a high degree of protection against
adverse market movements. The Fund continues to provide
customers with solid returns and to outperform the FTSE
All-Share Index over medium to long-term horizons. Over the last
15 years, the Fund has delivered a cumulative investment return
of 184.3 per cent on investments covering policyholder liabilities.
This compares favourably with other with-profi ts funds and the
FTSE All-Share Index total return of 106.5 per cent over the same
period, and, by offering customers a smoothed return, helps
provide protection from the full impact of volatile market
conditions. This performance shows that investing in a strong
with-profi ts fund can produce good returns for cautious
investors, in spite of the combined pressures of volatile market
conditions and UK interest rates remaining at historically low levels.
Retention and management of our customer base of approximately
seven million remains a key focus for the business. We aim
to maintain loyalty by continuing to improve our service
year-on-year for both customers and intermediaries. Prudential
UK’s focus on continuing to deliver excellent customer service
was recognised at the 2012 Financial Adviser Service Awards,
where we retained our two 5-Star ratings in the Life & Pensions
and Investment categories.
Insurance operations: United Kingdom
Prudential plc Annual Report 2012
37
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Prudential UK writes with-profi ts annuity, with-profi ts bond and
with-profi ts corporate and individual pensions business in its
Life Fund, with other products backed by shareholder capital.
For shareholder-backed business written in 2012, the weighted
average post-tax internal rate of return (IRR) on the shareholder
capital allocated to new business was in excess of 20 per cent
and the undiscounted payback period on that new business
was three years.
Operating free surplus generated from the long-term in-force
business in the UK amounted to £507 million (2011: £503 million).
Of this total, £45 million (2011: £54 million) was reinvested in
writing shareholder-backed business at attractive average IRRs.
During 2012 Prudential UK remitted cash of £313 million
to the Group (2011: £297 million), comprising £216 million
(2011: £223 million) from the annual with-profi ts transfer
to shareholders and £97 million (2011: £74 million) from the
shareholder-backed business. The business expects to generate
£350 million per annum of sustainable cash remittances by 2013,
supported by the strength of the with-profi ts 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.
Rob Devey
Chief Executive
Prudential UK and Europe
Financial performance
Total APE sales of £836 million were 12 per cent higher than
2011, principally due to increased sales of individual annuities
and with-profi ts bonds, partly offset by lower sales of corporate
pensions. Retail APE sales of £795 million were up 12 per cent on
the previous year (2011: £712 million). Although the lower level
of interest rates in 2012 had a negative impact on retail new
business profi tability, this was more than offset by the positive
mix effect from growth in higher margin products such as
individual annuities and with-profi ts bonds.
New business profi t increased by 20 per cent to £313 million
(2011: £260 million), including bulk annuity transactions. Retail
new business profi t at £274 million was 19 per cent above 2011
(2011: £231 million), primarily driven by increased volumes in
higher margin product areas.
IFRS life operating profi t was higher than in 2011 at £736 million
(2011: £723 million), with £272 million (2011: £293 million) from
with-profi ts and the balance from shareholder-backed business.
Commission received on Prudential-branded General Insurance
products contributed £33 million to IFRS operating profi t in 2012,
£7 million lower than in 2011 as the book of business originally
transferred to Churchill in 2002 is, as expected, decreasing in size.
At half year 2010 we announced that the business had
achieved its cost savings target of £195 million per annum.
At the end of 2010, an additional series of initiatives to reduce
costs by a further £75 million per annum by the end of 2013
was announced. By 31 December 2012 these additional annual
cost savings of £75 million per annum had also been achieved,
one year earlier than planned.
EEV total operating profi t of £899 million was 1 per cent higher
than in 2011, refl ecting higher new business profi ts, partly offset
by lower in-force profi ts which were impacted by the lower
level of interest rates in the period. EEV profi t also included a
contribution of £87 million from a change in the long-term tax
rate assumption (including future tax rate changes which take
effect in April 2013) from 25 per cent to 23 per cent, compared
with £79 million from the 2 per cent tax rate reduction in 2011.
38
Business review Prudential plc Annual Report 2012
Asset management:
optimise
M&G has continued to focus on
delivering superior investment
performance for our customers
while maximising the strength
of its distribution capabilities.
It has pursued business
diversifi cation both across
geographies and asset classes.
£228bn
assets under management
Asset management
Prudential plc Annual Report 2012
39
Eastspring Investments recently
became the largest retail asset
manager in Asia1, and continues to
build a cohesive regional presence,
penetrating the off shore segment
more eff ectively.
£58.1bn
assets under management
Note
1 Source: survey conducted by Asia Asset
Management Magazine as at 30 June 2012
(based on assets sourced from Asia ex-Japan).
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Business review Prudential plc Annual Report 2012
Asset management
Asset management: optimise
M&G
‘ M&G has had a record-breaking year in terms of net sales,
funds under management and profi ts. It continues to
execute against its strategy and deliver strong performance
for both clients and its shareholder, the Prudential Group.’
Michael McLintock
Chief Executive
M&G
Total IFRS operating
profit
External funds under
management
£357m
£371m
+4%
£111.9bn
+22%
£91.9bn
2011
2012
2011
2012
M&G
Gross investment infl ows
Net investment infl ows:
Retail business
Institutional business
Total
Revenue
Other income
Staff costs
Other costs
Underlying profi t before performance-related fees
Share of associate's resultsnote (i)
Performance-related fees
Operating profi t from asset management operations
Operating profi t from Prudential Capital
Total IFRS operating profi t
Funds under managementnote (ii)
AER
CER
2012 £m
2011 £m Change %
2011 £m Change %
36,464
25,981
40
25,981
40
7,842
9,039
16,881
728
6
(289)
(147)
298
13
9
320
51
371
3,895
490
4,385
662
4
(270)
(134)
262
26
13
301
56
357
101
1,745
285
10
50
(7)
(10)
14
(50)
(31)
6
(9)
4
3,895
490
4,385
662
4
(270)
(134)
262
26
13
301
56
357
£228bn
£201bn
13 £201bn
101
1,745
285
10
50
(7)
(10)
14
(50)
(31)
6
(9)
4
13
Notes
(i) The 2012 fi gure represents M&G’s 49.99 per cent proportionate share in the operating profi t (including performance-related fees) of PPM South Africa
following the divestment transaction in 2012. 100 per cent of operating profi ts were included in 2011.
(ii) Funds under management includes M&G’s share of the assets managed by PPM South Africa at 49.99 per cent and 100 per cent for 2012 (£4.4 billion) and
2011 (£7.9 billion) respectively.
Asset management: M&G
Prudential plc Annual Report 2012
41
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Market overview
M&G is the UK and European fund manager of the
Prudential Group with responsibility for investments
on behalf of both internal and external clients. It is
an investment-led business with a clear focus on
generating superior long-term returns for investors,
whether they are third-party clients or the funds of
Prudential’s insurance operations. This is achieved
by creating an environment that is attractive to
talented investment professionals.
Against a backdrop of continued political and macroeconomic
uncertainty, M&G continues to deliver strong investment
performance. Over the three years to 31 December 2012,
20 funds representing approximately 61 per cent of retail funds
under management (FUM) produced fi rst or second quartile
investment returns. The performance of funds managed
on behalf of institutional fi xed income clients also remains
extremely strong with all actively-managed mandates
meeting or outperforming their benchmarks over this period.
Business performance
M&G has had a record-breaking year in terms of net sales,
funds under management and profi ts.
Total net sales for the 12 months to the end of December 2012
were £16.9 billion, 25 per cent higher than the previous full year
peak of £13.5 billion in 2009 and 285 per cent higher than net
sales of £4.4 billion in 2011.
The strength of net fl ows, together with increases in equities and
bond values in the year, have led to an increase of 13 per cent in
total funds under management, to an all-time high of £228 billion.
The FTSE All Share Index has increased by 8 per cent over the
year and the sterling corporate bond index has increased by
15 per cent. Building on the strength of the net fl ows generated
by the business over recent years, M&G was the largest retail
fund manager in the UK1, measured by funds under management.
M&G’s total UK retail FUM is £41.2 billion, as noted by the
Investment Management Association at the end of December 2012.
Underlying operating profi t for the year was £298 million,
14 per cent higher than the previous best of £262 million in
2011. Total operating profi t for 2012 was £320 million.
This caps a decade of extremely strong growth for M&G. Since
2003 net fund sales have increased at an annual compound rate
of 32 per cent and external client assets have grown at an annual
compound rate of 19 per cent. Over this period underlying profi t
has grown at an annual rate of 22 per cent.
Retail
In the retail market, M&G operates a single fund range from the
UK, which it distributes both locally and internationally through
increasingly diverse channels. Assets sourced from investors
outside the UK now account for 29 per cent of M&G’s total
retail FUM.
Notes
1 Source: Investment Management Association, data as at end of December 2012.
2 Source: SimFund Global. Data as at end of December 2012 in EUR. Based
on estimated net sales of funds classed as fund market ‘International’
(registered for sale in more than fi ve countries). Excludes Money Market
and Alternative funds.
Its reputation for delivering superior long-term investment
returns and a high standard of client service enabled M&G to
attract a record level of net fund sales in the retail market in 2012.
Excluding the results of our South African associate company,
where our shareholding reduced from 75 per cent to 49.99 per cent
during 2012, total net sales were £8.2 billion. This is 15 per cent
higher than their previous high of £7.2 billion in 2010.
In the UK, M&G’s core market, net sales totalled £3.0 billion,
30 per cent lower than the previous year, but still suffi ciently
high to rank M&G as the top selling house for the year. M&G has
ranked fi rst for both net and gross fund sales in the UK for four
consecutive calendar years, an unprecedented achievement.
Fund sales slowed in the second half as a direct consequence
of a decision in July to limit fl ows of new money into two of our
best-selling sterling corporate bond funds to ensure continued
fl exibility in the management of the funds. We expect UK net
sales to continue to slow in 2013.
By contrast, net fund sales in mainland Europe increased sharply.
Following a minor net outfl ow in 2011, the business generated
a record £5.2 billion of net sales representing 67 per cent of total
retail net sales in 2012. Over the year M&G saw retail assets
sourced from European clients grow by 75 per cent to £14.4 billion
(2011: £8.2 billion). Today M&G has offi ces in 15 different countries
and its retail funds are registered for sale in 20 jurisdictions.
A core pillar of M&G’s retail business is to offer a diversifi ed range
of investment funds and so be well-placed for changes in investor
trends. The demand for conservatively managed portfolios for
most of 2012 saw strong infl ows into the M&G Optimal Income
Fund, a highly fl exible international fi xed income fund, and into
the M&G Global Dividend Fund. In Europe, Optimal Income was
the fourth best-selling fund, while Global Dividend ranked ninth
over the year to end of December 2012 and was the top selling
cross border Equity fund in 20122.
No fewer than 10 of M&G’s retail funds, across the major asset
classes of fi xed income, equities and real estate, each attracted
net sales of at least £100 million during the 12 month period.
The £8.2 billion of net retail infl ows in the UK and Europe were
partially off-set by a £0.4 billion net outfl ow from funds managed
by M&G’s associate entity in South Africa. These redemptions
were entirely from the PPM South Africa Dividend Income Fund,
which was closed on 31 March 2012 ahead of the implementation
of new tax legislation on 1 April 2012, which would have had a
materially adverse impact on the treatment of the distribution
made by the fund to its investors. Fund fl ows into other retail
funds of the South African business have been positive.
Institutional
In the institutional marketplace, M&G’s approach is to leverage
investment strategies developed primarily for Prudential’s
internal funds to create higher margin external business
opportunities. M&G offers third-party clients, such as pension
funds and sovereign wealth funds, an innovative range of
specialist fi xed income and real estate strategies, including
private debt opportunities and infrastructure investment.
42
Business review Prudential plc Annual Report 2012
Asset management continued
Asset management: optimise
M&G
The profi t from the South Africa entity represents our
proportionate share of its operating profi t which, following the
divestment transaction in the fi rst quarter of 2012, reduced our
ownership to 49.99 per cent. For 2011 and prior periods, the
results of the South Africa entity were fully consolidated within
our operating profi t.
Given the ongoing strength of its fi nancial performance, M&G
continues to provide capital-effi cient profi ts and cash generation
for the Prudential Group. This is in addition to the strong
investment returns generated on the internally managed funds.
M&G remits a substantial proportion of its post-tax profi ts to
the shareholder. During 2012 cash totalling £206 million
(2011: £213 million) was remitted to Group.
Prudential Capital
Prudential Capital manages the Group’s balance sheet for profi t
by leveraging Prudential’s market position. This business has
three strategic objectives: (i) to provide professional treasury
services to the Prudential Group; (ii) to operate a fi rst-class
wholesale and capital markets interface; and (iii) to realise
profi table opportunities within a tightly controlled risk
framework. Prudential Capital generates revenue by
providing bridging fi nance, managing investments and
operating a securities lending and cash management
business for the Prudential Group and its clients.
Markets have remained diffi cult and volatile in 2012, and as
a result the business remains focused on liquidity across the
Prudential Group, management of the existing asset portfolio
and conservative levels of new investment. Prudential Capital
has continued to invest in developing its capabilities, by seeking
to maintain the dynamism and fl exibility necessary to ensure that
the treasury and wholesale services remain robust in a period
of increased regulatory change, and to identify and realise
opportunities for profi t within acceptable risk parameters.
Prudential Capital is committed to working closely with other
business units across the Prudential Group to exploit opportunities
and increase value creation for Prudential as a whole.
Prudential Capital has a diversifi ed earnings base derived from
its portfolio of secured loans, debt investments and the provision
of wholesale markets services. IFRS operating profi t was
£51 million in 2012 (2011: £56 million). In 2012 a total of
£91 million (2011: £67 million) cash was remitted to Group.
Michael McLintock
Chief Executive
M&G
The institutional business attracted a record level of net funds in
2012, predominantly into fi xed income strategies on the strength
of its outstanding record of outperformance. At £9.0 billion,
net infl ows were 50 per cent higher than the previous best of
£6.0 billion in 2009. The 2012 infl ows include a single £7.6 billion
mandate which is expected to be partially or wholly redeemed
within the next 24 months.
M&G continues to grow its business with external institutional
clients, including the provision of alternatives to bank lending.
The M&G UK Companies Financing Fund, a loan facility for
medium-sized companies launched in the wake of the 2008
credit crisis, has increased its total commitments to £930 million
across 11 individual loans. During the year, loans were made
to three new clients, while a fourth advance went to an
existing borrower.
Other innovations for third-party clients include a series of
investment strategies to manage long-term infl ation-linked
liabilities. The business successfully launched the M&G Infl ation
Opportunities Fund and the M&G Debt Opportunities Fund,
which complement the existing M&G Secured Property
Income Fund, a portfolio of long-lease properties with inbuilt
infl ation-linked increases. This last fund, which has total
investor commitments of £1.3 billion, has delivered an annualised
return of 7 per cent above the retail prices index (RPI) over the
past three years.
In infrastructure, Infracapital, M&G’s unlisted infrastructure
equity division, led a consortium (comprising Infracapital and
other parties independent of Prudential) in the acquisition of a
90 per cent interest in Veolia Environnement S.A.’s (Veolia) UK
regulated water business (now renamed Affi nity Water). Affi nity
Water is the largest regulated water-only company in the UK by
turnover. The acquisition is the fi rst investment for Infracapital
Partners II LP, which has current commitments of £358 million.
Financial performance
M&G continues to execute against its strategy and deliver strong
performance for both clients and its shareholder, the Prudential
Group. M&G’s 2012 fi nancial performance continues the
momentum from the strong full year results recorded in both
2011 and 2010, with further growth in profi ts and improvement
in operating margins.
Total revenues, including other income, were £734 million, an
increase of 10 per cent on the 2011 position. The increased scale
of the business following the strong growth in FUM over recent
periods has generated operational effi ciencies. Combined with
a focus on cost discipline across the business, this has resulted
in the cost/income ratio1 improving from 61 per cent in 2011 to
59 per cent for 2012. Underlying profi t for the full year rose by
14 per cent to a new record level of £298 million. Following the
addition of performance-related fees and profi t from our
associate investment in South Africa, total operating profi t for
2012 was at a record level of £320 million. Although affected by
the reduction in our holding in our South African business, this
is an increase of 6 per cent on the 2011 position of £301 million,
which had been the previous record year.
Note
1 Excluding performance-related fees, carried interest on private equity
investment and profi t from the PPM South Africa entity.
Asset management: M&G/ Eastspring Investments
Prudential plc Annual Report 2012
43
Asset management continued
Asset management: optimise
Eastspring Investments
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Eastspring Investments
Gross investment infl owsnote
Net investment fl owsnote
Total IFRS operating profi t
Funds under management
AER
CER
2012 £m
2011 £m Change %
2011 £m Change %
9,036
1,626
75
7,824
633
80
15
157
(6)
7,707
599
79
£58.1bn £50.3bn
16 £49.8bn
17
171
(5)
17
Market overview
Prudential’s asset management business in Asia
manages investments for Asia’s third-party retail
and institutional clients in addition to investments
of Prudential’s Asia, UK and US life companies. It has
operations in 11 markets, including Indonesia which
was successfully opened during 2012, increasing our
asset management footprint in the region.
Markets remained challenging in 2012. Equity funds struggled to
gain traction, due to poor investor sentiment in the face of weak
macroeconomic signals. Fixed income and regular yield products
remained in favour.
In November 2011, Prudential announced that its Asia Asset
Management operations would be rebranded Eastspring
Investments. The new brand, which was offi cially launched in
February 2012, is enabling the business to establish a cohesive
regional presence, thereby penetrating the offshore segment
more effectively. It also supports distribution to new markets
outside Asia and we have recently opened a distribution offi ce
in the US.
Eastspring Investment’s leading presence in Asia was
acknowledged when it was ranked the largest retail asset
manager in Asia (based on assets sourced from Asia ex-Japan),
as at 30 June 2012, in a survey conducted by Asia Asset
Management magazine. Eastspring Investments also received
multiple accolades for its investment capabilities, including four
fund managers from Singapore, Malaysia and Indonesia being
named ‘2012 Most Astute Investors in Asian currency bonds’ by
The Asset Benchmark Research and the joint venture business in
India being recognised as the ‘Best Debt Fund House of the year’
in the Morningstar Awards 2012.
During 2012 Eastspring Investments delivered excellent
investment performance with 65 per cent of funds exceeding
their benchmarks or were peer-ranked within the top two
quartiles over a three year period.
Business performance
Net third-party infl ows (excluding Money Market Funds) of
£1,626 million were driven by net infl ows in India, Taiwan and
China. Specifi cally, strong fund-raising was seen in India for our
fi xed maturity plan range and open-ended bond funds, while the
Taiwan business saw a successful launch of the Emerging Asian
Local Fixed Income Fund in the fi rst half of the year and the
Global Aggregate Strategy High Yield Bond Fund in the second
half. In addition, Taiwan’s existing range of onshore and offshore
bond funds also generated signifi cant net infl ows in 2012. In
China, both the CSI 500 Index Fund and the Tianjin Split Bond
Fund launched in the second half of the year attracted positive
fl ows. The positive net fl ows were partially offset by redemptions
from an institutional client in Singapore and another in Korea.
Total funds under management (FUM) reached a record
£58.1 billion and represent a 16 per cent increase from a year ago
on the back of strong net infl ows and positive market movements.
Financial performance
Fee income rose by a more modest 3 per cent, refl ecting a change
in FUM mix, with a higher proportion of internal, institutional and
retail bond funds, all of which attract lower average annual
charges. At the same time costs have increased as we continue to
invest in the development of the Eastspring Investments platform
and expand into new markets. IFRS operating profi t was,
therefore, 6 per cent lower than the prior year at £75 million.
Note
Gross and net investment fl ows exclude Eastspring Money Market Funds,
that had net outfl ows of £226 million in 2012 (2011: net outfl ows £512 million).
44
Business review Prudential plc Annual Report 2012
Asset management continued
Asset management: optimise
United States
PPM America
Total IFRS operating profi t
Market overview
PPM America (PPMA) manages assets for Prudential’s US,
UK and Asia affi liates. PPMA also provides other affi liated
and unaffi liated 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 benefi ts derived from synergies with our international asset
management affi liates, and leveraging investment management
capabilities across the Prudential Group. PPMA also pursues
third-party mandates on an opportunistic basis.
AER
CER
2012 £m
2011 £m Change %
2011 £m Change %
6
4
50
4
50
Financial performance
IFRS operating profi t in 2012 was £6 million, compared
to £4 million in 2011, principally refl ecting the increase in
funds under management over the period.
At 31 December 2012, funds under management of £64 billion
were as follows:
Insurance
Unitised
CDOs
Total funds under management
Curian
Gross investment infl ows
Revenue
Costs
Total IFRS operating profi t
Total funds under management
Market overview
Curian Capital, Jackson’s registered investment adviser,
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.
AER
2012 £bn
2011 £bn
US
38
2
1
41
UK
15
1
–
16
Asia
Total
1
6
–
7
54
9
1
64
US
32
1
1
34
UK
15
1
–
16
Asia
Total
–
5
–
5
47
7
1
55
AER
CER
2012 £m
2011 £m Change %
2011 £m Change %
1,550
69
(54)
15
1,684
51
(45)
6
(8)
35
(20)
150
1,704
52
(46)
6
£7.1bn
£4.7bn
51
£4.5bn
(9)
33
(17)
150
58
Business performance
At 31 December 2012, Curian had total assets under
management of £7.1 billion, compared to £4.7 billion at the end
of 2011. Curian generated deposits of £1,550 million in 2012,
down 8 per cent from 2011. Curian’s asset growth continues to
benefi t from its prior investment platform expansions and its
signifi cant expansion in 2012 of the fi rm’s wholesaling team and
new distribution territories.
Financial performance
Curian reported an IFRS basis operating profi t of £15 million in
2012 compared to £6 million in 2011. This increase was primarily
due to higher net revenue from a larger book of assets under
management.
Asset management: United States
Prudential plc Annual Report 2012
45
AER
CER
2012 £m
2011 £m Change %
2011 £m Change %
528
(510)
18
491
(477)
14
8
(7)
29
497
(483)
14
6
(6)
29
Financial performance
NPH generated revenues of £528 million in 2012, up from
£491 million in 2011, on gross product sales of £10.5 billion
(2011: £8.6 billion). The network continues to achieve
profi table results, with 2012 IFRS operating profi t of £18 million,
a 29 per cent increase from £14 million in 2011. At 31 December
2012, the NPH network had 3,540 registered advisers
(2011: 3,636 registered advisers).
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US Broker-dealer
National Planning Holdings, Inc.
Revenue
Costs
Total IFRS operating profi t
Market overview
National Planning Holdings, Inc. (NPH) is Jackson’s affi liated
independent broker-dealer network. The business is comprised
of four broker-dealer fi rms, including INVEST Financial
Corporation, Investment Centers of America, National Planning
Corporation, and SII Investments.
NPH continues to grow the average business and revenue
per representative. By utilising high-quality, state-of-the-art
technology, Jackson provides NPH’s advisers with the tools they
need to operate their practices more effi ciently. At the same time,
through its relationship with NPH, Jackson continues to benefi t
from an important retail distribution outlet, as well as receive
valuable insights into the needs of fi nancial advisers and
their clients.
46
Business review Prudential plc Annual Report 2012
Financial review
Results summary
International Financial Reporting Standards (IFRS) basis results*
Statutory IFRS basis results
Profi t after tax attributable to equity holders of the Company
Basic earnings per share
Shareholders' equity, excluding non-controlling interests
Supplementary IFRS basis information
Operating profi t based on longer-term investment returns*
Short-term fl uctuations in investment returns on shareholder-backed business
Shareholders’ share of actuarial and other gains and losses on defi ned benefi t pension schemes
Gain on dilution of Group holdings
Amortisation of acquisition accounting adjustments arising on the purchase of REALIC
Profi t before tax attributable to shareholders
Operating earnings per share*(refl ecting operating profi t based on longer-term investment returns after
related tax and non-controlling interests)
European Embedded Value (EEV) basis results*
Operating profi t based on longer-term investment returns*
Short-term fl uctuations in investment returns
Mark to market value movements on core borrowings
Shareholders' share of actuarial and other gains and losses on defi ned benefi t pension schemes
Effect of changes in economic assumptions
Gain on dilution of Group holdings
Gain on acquisition of REALIC
Profi t before tax (including actual investment returns)
Operating earnings per share* (refl ecting operating profi t based on longer-term investment returns after
related tax and non-controlling interests)
Shareholders' equity, excluding non-controlling interests
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 (ii) and (iii)
2012
£2,197m
86.5p
£10.4bn
2011
note (i)
£1,415m
55.8p
£8.6bn
2012 £m
2,533
204
50
42
(19)
2,810
2011 £m
note (i)
2,027
(220)
21
–
–
1,828
76.8p
62.8p
2012 £m
2011 £m
4,321
538
(380)
62
(16)
42
453
5,020
3,978
(907)
(14)
23
(158)
–
–
2,922
125.0p
115.7p
£22.4bn
£19.6bn
2012
2011
25.64p
29.19p
£405bn
£5.1bn
25.19p
25.19p
£351bn
£4.0bn
Notes
(i)
Comparatives adjusted for retrospective application of the accounting policy change for deferred acquisition costs as discussed in note A5 of the
IFRS fi nancial statements.
(ii) The surpluses shown for 2012, which is estimated, and 2011 are before allowing for the fi nal dividends for 2012 and 2011 respectively.
(iii) From March 2013, the basis of calculating Jackson’s contribution to the Group’s IGD surplus will change, further detail can be found in the ‘Capital
position, fi nancing and liquidity’ section of the Chief Financial Offi cer’s overview.
Financial review
Prudential plc Annual Report 2012
47
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* Basis of preparation
Results bases
The IFRS basis results have been prepared in accordance
with the accounting policies discussed in notes A2 to A4
of the IFRS fi nancial statements.
Life insurance products are, by their nature, long-term and the
profi t on this business is generated over a signifi cant number
of years. Accounting under IFRS alone does not, in Prudential’s
opinion, fully refl ect the value of future profi t streams. Prudential
considers that embedded value reporting provides investors
with a measure of the future profi t streams of the Group’s in-force
long-term businesses and is a valuable supplement to statutory
accounts. The EEV basis results have been prepared in
accordance with the EEV principles discussed in note 1
of EEV basis supplementary information.
Operating profi t based on longer-term investment returns
The Group provides supplementary analysis of profi t before tax
attributable to shareholders so as to distinguish operating profi t
based on longer-term investment returns from the other elements
of total profi t shown. Operating profi t per share is calculated using
operating profi ts based on longer-term investment returns, aft er
related tax and non-controlling interests.
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. Results on a CER basis are also shown for the analysis
of IFRS and EEV operating profi t based on longer-term
investment returns.
48
Business review Prudential plc Annual Report 2012
Financial review continued
IFRS results
IFRS basis operating profi t based on longer-term investment returns
Insurance business
Long-term business:
Asia
US
UK
Development expenses
Long-term business profi t
UK general insurance commission
Asset management business:
M&G (including Prudential Capital)
Eastspring Investments
Curian
US broker-dealer and asset management
Other income and expenditure
RPI to CPI infl ation measure change on defi ned benefi t
pension schemesnote (ii)
Solvency II implementation costs
Restructuring costs
Total IFRS basis operating profi t based on longer-term
investment returns
2012 £m
AER
2011 £m
note (i)
CER
Change %
2011 £m
note (i)
Change %
920
964
703
(7)
709
651
683
(5)
2,580
2,038
33
371
75
15
24
3,098
(498)
–
(48)
(19)
40
357
80
6
18
2,539
(483)
42
(55)
(16)
30
48
3
(40)
27
(18)
4
(6)
150
33
22
3
(100)
13
(19)
697
659
683
(5)
2,034
40
357
79
6
18
2,534
(483)
42
(55)
(16)
32
46
3
(40)
27
(18)
4
(5)
150
33
22
3
(100)
13
(19)
2,533
2,027
25
2,022
25
Notes
(i)
Comparatives adjusted for retrospective application of the accounting policy change for deferred acquisition costs as discussed in note A5 of the
IFRS fi nancial statements.
(ii) During 2011 the Group altered its assumptions for future statutory increases to pension payments for its UK defi ned benefi t pension schemes.
This refl ects the UK Government’s decision to change the basis of indexation from RPI to CPI.
In 2012, the Group’s IFRS operating profi t based on longer-term
investment returns was £2,533 million, an increase of 25 per cent
from 2011.
In Asia, IFRS operating profi t based on longer-term investment
returns for long-term business increased by £211 million from
£709 million1 in 2011 to £920 million in 2012. Included with this
result is a £51 million one-off profi t on sale of the Group’s interest
in China Life Insurance Company of Taiwan, which was originally
acquired in 2008 when Prudential sold its Taiwanese agency
business to the company. Excluding this amount, Asia’s
long-term business operating profi t increased by 23 per cent
to £869 million, primarily refl ecting strong growth in the size
of our business in the region, particularly health and protection.
The contribution to profi ts from Indonesia, Hong Kong,
Singapore and Malaysia, Prudential’s largest markets in Asia,
continues to rise, with operating profi ts from these businesses2
up 22 per cent from £552 million in 2011 to £674 million in 2012.
High consumer demand for savings and protection in Indonesia
continues to drive growth in premiums and earnings, with
operating profi t2 up 23 per cent from £212 million to £260 million.
Hong Kong’s operating profi t2 increased by 28 per cent to
£88 million (2011: £69 million), as business mix has shifted
towards higher return products. Singapore increased by
23 per cent to £206 million (2011: £167 million)2 and Malaysia’s
operating profi t2 at £120 million (2011: £104 million) increased
by 15 per cent. Operating profi ts from our other long-term
insurance operations in the region also increased by 24 per cent
to £147 million (2011: £119 million), as these businesses increase
in size.
Notes
1 Comparatives adjusted for retrospective application of the accounting
policy change for deferred acquisition costs as discussed in note A5 of
the IFRS fi nancial statements.
2 Before non-recurring items.
Financial review
Prudential plc Annual Report 2012
49
The US long-term business operating profi t increased by
48 per cent from £651 million1 in 2011 to £964 million in 2012.
The 2011 result included an accelerated deferred acquisition cost
(DAC) amortisation of £190 million that did not recur. Excluding
this item the underlying increase refl ects the continued growth
in fee income on the separate account business offset by lower
earnings from fi xed annuities in line with the compression in
corporate spreads experienced in the course of the year. The
result also includes a £67 million contribution from REALIC
which was acquired in September 2012 and is performing in
line with our expectations.
Prudential’s UK business has sustained its performance at similar
levels to the previous year, with total IFRS operating profi t of
£736 million (2011: £723 million). Long-term business generated
£703 million (2011: £683 million) driven by an increase in profi ts
from individual annuities and bulk annuity transactions, the
latter contributing £31 million (2011: £23 million) to the total.
Shareholders with-profi ts business transfers amounted to
£272 million, compared with £293 million in 2011, in line with
reductions in policy bonus rates. Profi t from UK general
insurance commission continued to decline as expected to
£33 million (2011: £40 million) as the business matures and
in-force policy numbers fall.
Total operating profi t for 2012 from M&G and Prudential Capital
increased by 4 per cent from £357 million in 2011 to £371 million
in 2012, primarily refl ecting positive net infl ows into M&G during
2011 and 2012.
Eastspring Investments reported operating profi t of £75 million,
down by £5 million from the £80 million recognised in 2011. This
refl ects a broadly unchanged level of fee income with the effect
of higher fund values offset by a shift in business mix towards
bond mandates, together with increased costs as the business
develops the Eastspring Investments platform and expands into
new markets.
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Note
1 Comparatives adjusted for retrospective application of the accounting
policy change for deferred acquisition costs as discussed in note A5 of
the IFRS fi nancial statements.
50
Business review Prudential plc Annual Report 2012
Financial review continued
IFRS basis results – Analysis of long-term insurance business pre-tax IFRS operating profi t based on longer-term
investment returns by driver
AER
2012
Operating
profi t
£m
Average
liability
note (ii)
£m
1,074 62,174
1,077 78,807
311 95,681
Margin
note (i)
bps
173
137
33
1,032
1,669
Operating
profi t
£m
1,065
870
331
736
1,425
AER
2011
Average
liability
note (ii)
£m
57,417
68,298
93,056
Margin
note (i)
bps
185
127
36
Operating
profi t
£m
1,072
875
331
729
1,404
CER
2011
Average
liability
note (ii)
£m
57,572
68,331
92,946
Margin
note (i)
bps
186
128
36
4,195
(1,997)
(1,248) 143,321
(48)% (1,783)
(87)
3,681
(1,043) 125,715
(48)% (1,782)
(83)
3,678
(1,039) 125,903
(48)%
(82)
406
205
51
2,580
237
200
–
2,038
243
201
–
2,034
Spread income
Fee income
With-profi ts
Insurance margin
Margin on revenues
Expenses:
Acquisition costsnote (iii)
Administration expenses
DAC adjustmentsnote (iv)
Expected return on shareholder assets
Gain on China Life (Taiwan) shares
Operating profi t based on longer-term
investment returns
Notes
(i) Margin represents the operating return earned in the year as a proportion of the relevant class of policyholder liabilities excluding unallocated surplus.
(ii)
For UK and Asia, opening and closing policyholder liabilities have been used to derive an average balance for the year, as this is seen as a good proxy
for average balances throughout the year. The calculation of average liabilities for Jackson is derived from month-end balances throughout the year as
opposed to opening and closing balances only. Liabilities held in the general account for variable annuity living and death guaranteed benefi ts together
with other amounts on which no spread income is earned (eg REALIC liabilities), are excluded from the calculation of the average. In addition for REALIC,
which are included in the average liability to calculate the administration expense margin, the calculation excludes the liabilities reinsured to (and in
essence retained by) Swiss Re immediately prior to the acquisition by Jackson.
(iii) Acquisition cost ratio represents shareholder acquisition costs as a percentage of total APE including with-profi ts sales. Acquisition costs include only
those relating to shareholders.
(iv) DAC adjustments have been adjusted for the retrospective application of the accounting policy change described in the basis of preparation and
note A5 of the IFRS fi nancial statements.
Spread income earned in 2012 was £1,074 million, £9 million
higher than the amount received in the prior year of £1,065 million.
As expected the margin secured has fallen from 185 basis points
in 2011 to 173 basis points in 2012 principally due to spread
compression in the US general account business, down from
258 basis points in 2011 to 239 basis points in 2012. Further
reductions in this source of income are anticipated in the next
few years if the current low interest rate environment persists.
Fee income has increased by 24 per cent to £1,077 million driven
by the 15 per cent increase in the Group’s average unit-linked
liabilities, which principally refl ects the £8 billion net infl ows into
Jackson’s separate accounts as well as positive net fl ows in Asia’s
linked business in 2012. The fee income margin has increased
from 127 basis points in 2011 to 137 basis points in 2012 as
Jackson, where the fee margin is higher, contributes a greater
proportion to the Group total fee income.
With-profi ts income has fallen from £331 million in 2011 to
£311 million in 2012 in line with reductions in annual bonus rates
on UK with-profi ts policies.
Insurance margin has increased by 40 per cent from £736 million
in 2011 to £1,032 million in 2012 mainly due to the continued
success of the health and protection strategy in Asia and an
increase in guarantee fees in the US. 2012 also includes four
months of revenue from REALIC amounting to £87 million
following its acquisition by Jackson in September 2012.
Margin on revenues principally comprises amounts deducted
from premiums to cover acquisition costs and administration
expenses. The margin has increased by 17 per cent from
£1,425 million in 2011 to £1,669 million in 2012. This increase
is driven by Asia and primarily refl ects higher premium income
levels in the year.
Acquisition costs have increased in absolute terms to
£1,997 million, in line with the increased new business sales.
Expressed as a percentage of new business APE, 2012 has
remained constant with 2011 at 48 per cent.
Administration expenses have increased to £1,248 million,
principally refl ecting the growth of the business in the year.
Expressed as a ratio to average liabilities, acquisition costs
have increased from 83 basis points in 2011 to 87 basis points
in 2012. This refl ects changes in business mix and the increased
proportion of commission on new sales being taken by US
distributors on an annual as opposed to an initial basis.
DAC adjustments are a net benefi t to the result as the deferral
of current year's acquisition costs exceeds the amortisation
of previously deferred costs. This net benefi t increased from
£237 million in 2011 to £406 million in 2012. This increase arises
in the US (where DAC adjustments were £442 million in 2012
compared with £228 million in 2011), refl ecting a return to more
normal levels of DAC amortisation in 2012. 2011 included a
£190 million charge for accelerated DAC amortisation, representing
the reversal of the benefi t received in 2008 from the use of the
mean reversion formula.
Financial review
Prudential plc Annual Report 2012
51
IFRS basis results – Margin analysis of asset management pre-tax IFRS operating profi t based on longer-term
investment returns by driver
Operating incomenote (i)
Operating profi t based on longer-term investment returns
Average funds under management (FUM), including 49.99%
proportional share of PPM South Africa
Average FUM, excluding PPM South Africa
Margin based on operating incomenote (ii)
Cost/income rationote (iii)
Operating incomenote (i)
Operating profi t based on longer-term investment returns
Average funds under management (FUM), including
49.99% proportional share of PPM South Africa
Average FUM, excluding PPM South Africa
Margin based on operating incomenote (ii)
Cost/income rationote (iii)
2012 £m
Eastspring
Investments
PruCap
US
Total
201
75
120
51
296
39
1,351
485
M&G
note (i)
734
320
£209.0bn
£205.1bn
36 bps
59%
£55.0bn
37 bps
64%
2011 £m
Eastspring
Investments
PruCap
US
Total
196
80
122
56
249
24
1,233
461
M&G
note (i)
666
301
£195.1bn
£190.9bn
35 bps
61%
£51.4bn
38 bps
62%
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Notes
(i) Operating income is presented net of commissions and excludes performance related fees, and for M&G carried interest on private equity investments.
Following the divestment in 2012 of M&G’s holding in PPM South Africa from 75 per cent to 49.99 per cent and its treatment from 2012 as an associate,
M&G’s operating income and expense shown in the table above, no longer includes any element from PPM South Africa, with the share of associate’s
results being presented in a separate line. In order to avoid year-on-year distortion, in the table above the 2011 operating income, margin and cost/income
ratio refl ect the retrospective application of the basis of presentation for 2011 results.
(ii) Margin represents operating income as defi ned in note (i) above as a proportion of average FUM, being the average of monthly FUM, excluding
PPM South Africa. The comparatives have been altered to present 2011 on the same basis.
(iii) Cost/income ratio represents cost as a percentage of operating income as defi ned in note (i) above. M&G’s operating income and expense excludes any
contribution from M&G’s associate, PPM South Africa.
M&G’s recent growth has seen average funds under
management, excluding PPM South Africa, increase from
£190.9 billion during 2011 to £205.1 billion in 2012. This has led
to a 10 per cent increase in operating income to £734 million,
equivalent to a margin of 36 basis points, an increase from
35 basis points in 2011. M&G continues to focus on cost control
and the effi ciencies created as the scale of the business grows.
The benefi t of this operational leverage is evident in an
improvement in the cost to income ratio from 61 per cent in
2011 to 59 per cent in 2012.
At Eastspring Investments strong net infl ows and positive market
movements have led to an increase in average funds under
management from £51.4 billion to £55.0 billion, with operating
income rising from £196 million to £201 million. As the growth in
funds stemmed principally from internal clients and fi xed income
mandates, the average fee margin declined from 38 basis points
in 2011 to 37 basis points in 2012. Continued investment in
developing the Eastspring Investment platform contributed
to a higher cost to income ratio of 64 per cent in 2012
(2011: 62 per cent).
52
Business review Prudential plc Annual Report 2012
Financial review continued
IFRS basis profi t aft er tax
Operating profi t based on longer-term investment returns
Short-term fl uctuations in investment returns:
– Insurance operations
– Other operations
Shareholders’ share of actuarial and other gains and losses on defi ned benefi t pension schemes
Gain on dilution of Group holdings
Amortisation of acquisition accounting adjustments arising on the purchase of REALIC
Profi t before tax attributable to shareholders
Tax charge attributable to shareholders’ profi t
Non-controlling interests
Profi t for the year attributable to shareholders
AER
2012 £m
2,533
122
82
204
50
42
(19)
2,810
(613)
–
2,197
2011 £m
note
2,027
(100)
(120)
(220)
21
–
–
1,828
(409)
(4)
1,415
Note
Comparatives adjusted for retrospective application of the accounting policy change for deferred acquisition costs as discussed in note A5 of the
IFRS fi nancial statements.
IFRS basis profi t aft er tax
The 2012 total profi t before tax attributable to shareholders was
54 per cent higher at £2,810 million in 2012 (2011: £1,828 million)1.
The improvement predominantly refl ects the increase in
operating profi t based on longer-term investment returns, and
the positive investment market returns earned in the year.
IFRS operating profi t is based on 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 profi ts as short-term fl uctuations in investment returns.
IFRS short-term fl uctuations in investment returns
Short-term fl uctuations in investment returns for our insurance
operations of positive £122 million comprised of positive
£76 million for Asia, negative £90 million in the US and positive
£136 million in the UK.
The positive short-term fl uctuations of £76 million for our Asia
operations in 2012 relates to unrealised gains on bond assets held
across the region following the fall in long-term yields in the period.
The combination of higher equity markets and lower market volatility
in the US has reduced the technical reserves held for the variable
annuity guarantees. This favourable effect was more than offset by
the net unrealised value movement on derivative instruments held to
manage the Group’s exposure to these guarantees, producing a net
£90 million negative fl uctuation in our US operation.
The positive short-term fl uctuations of £136 million for our UK
operations primarily refl ect net valuation gains on fi xed income
assets supporting the capital of the shareholder-backed annuity
business.
Short-term fl uctuations for other operations were positive
£82 million. This primarily represents appreciation on Prudential
Capital’s bond portfolio partially offset by net realised and
unrealised losses in the year on derivatives held centrally to
manage market risks.
Shareholders’ share of actuarial and other gains
and losses on defi ned benefi t pension schemes
The shareholders’ share of actuarial and other gains and losses
on defi ned benefi t pension schemes of positive £50 million
(2011: positive £21 million) mainly refl ects the partial recognition
of actuarial surplus in the Prudential Staff Pension Scheme
following the results of the triennial valuation, further details
of which are given in note I3 of the IFRS basis results.
Gain on dilution of Group holdings
On 22 February 2012, M&G completed transactions to reduce
its majority holding in PPM South Africa from 75 per cent to
49.99 per cent. Under IFRS the transactions give rise to a gain
on dilution of £42 million, which has been excluded from the
Group’s IFRS operating profi t.
Amortisation of acquisition accounting adjustments
arising on the purchase of REALIC
On 4 September 2012, Jackson completed the acquisition of
100 per cent of the issued share capital of SRLC America Holding
Corp. (SRLC), and its primary operating subsidiary, REALIC for a
total cash consideration of £370 million. The amortisation primarily
comprises the difference between the yield on the acquired
investments based on market values at acquisition and historic
investment income on book yields recognised in IFRS operating
profi t. Movement in the fair value acquisition adjustments on the
value of business acquired and policyholder liabilities is also
included. Further details are given in note I1 of IFRS basis results.
Eff ective tax rates
The effective rate of tax on operating profi t based on longer-term
investment returns was 23 per cent (2011: 21 per cent). The 2011
effective rate had benefi ted from utilising carried forward tax
losses for which no deferred tax asset had been recognised.
The effective rate of tax on the total IFRS profi t was 22 per cent
(2011: 22 per cent). In both 2012 and 2011 we have benefi ted
from reductions in the main UK corporation tax rate – 28 per cent
to 26 per cent in 2011 and 26 per cent to 24 per cent in 2012.
Note
1 Comparatives adjusted for retrospective application of the accounting
policy change for deferred acquisition costs as discussed in note A5 of
the IFRS fi nancial statements.
Financial review
Prudential plc Annual Report 2012
53
EEV results
EEV basis operating profi t based on longer-term investment returns
Insurance business:
Asia
US
UK
Development expenses
Long-term business profi t
UK general insurance commission
Asset management business:
M&G (including Prudential Capital)
Eastspring Investments
Curian
US broker-dealer and asset management
Other income and expenditure
RPI to CPI infl ation measure change on defi ned benefi t
pension schemes(note)
Solvency II implementation costs
Restructuring costs
Total EEV basis operating profi t
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2012 £m
AER
2011 £m
(note)
CER
Change %
2011 £m
(note)
Change %
1,960
1,610
866
(7)
4,429
33
371
75
15
24
4,947
(554)
–
(50)
(22)
1,764
1,431
853
(5)
4,043
40
357
80
6
18
4,544
(536)
45
(56)
(19)
4,321
3,978
11
13
2
(40)
10
(18)
4
(6)
150
33
9
(3)
–
11
(16)
9
1,747
1,448
853
(5)
4,043
40
357
79
6
18
4,543
(536)
45
(56)
(18)
3,978
12
11
2
(40)
10
(18)
4
(5)
150
33
9
(3)
–
11
(22)
9
Note
During 2011 the Group altered its assumptions for future statutory increases to pension payments for its UK defi ned benefi t pension schemes. This refl ects the
UK government’s decision to change the basis of indexation from RPI to CPI.
Prudential Group’s total EEV basis operating profi t based on
longer-term investment returns was £4,321 million in 2012,
9 per cent higher than the £3,978 million earned in 2011.
Long-term business operating profi t generated by the Group
was £4,429 million (2011: £4,043 million). This profi t comprises:
AAAAAAAAAAAAA New business profi t of £2,452 million (2011: £2,151 million);
AAAAAAAAAAAAA In-force profi t of £1,984 million (2011: £1,897 million); and
AAAAAAAAAAAAA Negative £7 million for development expenses
(2011: negative £5 million).
New business profi t at £2,452 million was 14 per cent higher
than last year, refl ecting a 14 per cent increase in new business
APE. The higher sales volumes and pricing actions coupled with
favourable business mix mitigated the pressure on margins from
the low level of long-term interest rates.
The new business profi t for the Asia business increased by
18 per cent to £1,266 million compared to £1,076 million in
2011. The growth in new business profi t was driven by Indonesia,
Singapore and Malaysia refl ecting strong volume growth in
Indonesia and Singapore and favourable product mix changes
in Malaysia. Jackson in the US delivered new business profi t of
£873 million, an increase of 7 per cent compared to £815 million.
Throughout 2012, Jackson proactively adjusted pricing and
product features to respond to both market conditions and the
competitive environment, actions which counteracted the
adverse effect of lower long-term yields and tighter spreads.
UK new business profi t increased by 20 per cent to £313 million
in 2012 compared to £260 million in 2011 and includes the
benefi t of two bulk annuity buy-ins in 2012. This increase
refl ected higher sales volumes, and a favourable change in
product mix towards higher margin individual annuities and
with-profi ts bonds.
54
Business review Prudential plc Annual Report 2012
Financial review continued
EEV basis operating profi t based on longer-term
investment returns continued
The contribution to operating profi t from life in-force business
was £1,984 million (2011: £1,897 million) and comprises
£1,493 million (2011: £1,447 million) from the unwind of the
discount on the opening embedded value and other expected
returns, and £491 million (2011: £450 million) from the effect of
operating assumption changes, experience variances and other
items. The unwind of discount and other expected returns is
£46 million higher than 2011 with the growth in the business
more than offsetting the effect on this profi t measure of lower
interest rates. The economic effects have adversely affected the
unwind and other expected returns by an estimated £83 million.
Asia continues to be the highest contributor to the Group’s life
profi t, contributing £1,960 million in 2012 (2011: £1,764 million).
Included in Asia’s result is £694 million of profi t from in-force
business (2011: £688 million) which includes an overall positive
contribution from operating experience and assumption changes
of £95 million (2011: £75 million).
US life in-force profi t was higher at £737 million in 2012
compared to £616 million in 2011, with 2012 including £19 million
of post-acquisition profi t from REALIC. Overall experience and
operating assumption changes contributed positive £325 million
towards in-force profi ts compared to £267 million in 2011. Within
these amounts, swap transactions undertaken from 2010 to more
closely match the overall asset and liability duration contributed
enhanced profi ts with an overall spread gain of £205 million
(2011: £152 million).
UK life in-force profi t was lower at £553 million (2011: £593 million)
and included £482 million (2011: £485 million) from the unwind
of the discount rate on the opening embedded value. Other
in-force profi ts totalled £71 million (2011: £108 million) which
includes a charge of £52 million for the annuity business
refl ecting the net impact of strengthening longevity
assumptions, gains on portfolio rebalancing, and releases of
margins previously held in the balance sheet. Included in both
years are the benefi cial effects on future profi ts arising from the
reduction in UK corporation taxes enacted in both periods;
in 2012 this amounted to £87 million, while in 2011 it amounted
to £79 million.
Financial review
Prudential plc Annual Report 2012
55
EEV basis profi t aft er tax
EEV basis operating profi t based on longer-term investment returns
Short-term fl uctuations in investment returns:
– Insurance operations
– Other operations
Mark to market value movements on core borrowings
Shareholders’ share of actuarial and other gains and losses on defi ned benefi t pension schemes
Effect of changes in economic assumptions
Gain on dilution of Group holdings
Gain on acquisition of REALIC
Profi t before tax attributable to shareholders
Tax charge attributable to shareholders’ profi t
Non-controlling interests
Profi t for the year attributable to shareholders
AER
2012 £m
2011 £m
4,321
3,978
456
82
538
(380)
62
(16)
42
453
5,020
(1,207)
–
3,813
(787)
(120)
(907)
(14)
23
(158)
–
–
2,922
(776)
(4)
2,142
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EEV basis profi t aft er tax
The 2012 total profi ts before tax attributable to shareholders was
72 per cent higher at £5,020 million (2011: £2,922 million). The
improvement predominantly refl ects the increase in operating
profi t based on longer-term investment returns, improved
markets and the gain posted on this reporting basis on the
acquisition of REALIC.
EEV operating profi t is based on longer-term investment return
assumptions rather than actual investment returns achieved.
Short-term fl uctuations in investment returns represent the
difference between the actual investment return and those
assumed in arriving at the reported operating profi t.
EEV Short-term fl uctuations in investment returns
Short-term fl uctuations in investment returns for insurance
operations of positive £456 million comprised of positive
£395 million for Asia, negative £254 million for our US
operations and positive £315 million in the UK.
In Asia, positive short-term fl uctuations in investment returns
of £395 million (2011: negative £155 million) principally refl ect
unrealised bond and equity gains following market movements
in the year, principally in Hong Kong, Singapore and Taiwan.
In the US, short-term fl uctuations in investment returns were
negative £254 million (2011: negative £491 million). This includes
the net value movements on derivatives held to manage the
Group’s equity and interest rate exposures offset by the positive
impact of equity market increases on the expected level of future
fee income from the variable annuity separate accounts.
For our UK business, the short-term fl uctuations in investment
returns were positive £315 million (2011: negative £141 million).
This arises principally because the actual 2012 investment return
of the with-profi ts fund (covering policyholder liabilities and
unallocated surplus) of 9.8 per cent was higher than the
longer-term assumed rate of 5.0 per cent.
Mark to market value movement on core borrowings
The mark to market value movement on core borrowings of
negative £380 million in 2012 refl ects the effect on the market
value of Prudential’s borrowings from reductions in both interest
rates and credit spreads.
Shareholders’ share of actuarial and other gains
and losses on defi ned benefi t pension schemes
The shareholders’ share of actuarial and other gains and
losses on defi ned benefi t 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-profi ts fund. On the EEV
basis there was a gain of £62 million (2011: gain of £23 million)
mainly refl ecting the partial recognition of actuarial surplus in
the Prudential Staff Pension Scheme following the results of the
triennial valuation, further details of which are given in note 7
of EEV basis results.
56
Business review Prudential plc Annual Report 2012
Financial review continued
EEV basis profi t aft er tax continued
Eff ect of changes in economic assumptions
The effect of changes in economic assumptions of negative
£16 million, comprises negative £149 million for Asia, positive
£85 million for the US and positive £48 million for the UK.
These refl ect the aggregate effects of the reduction in long-term
yields and the associated decrease in risk discount rates across
these businesses.
The adverse changes in economic assumptions for Asia of
negative £149 million primarily refl ects the impact of lower
interest rates and projected fund earned rates in Hong Kong,
partially offset by the impact of a lower discount rate for
Indonesia and Malaysia.
In our US business, economic effects totalled positive £85 million,
principally refl ecting the 50 basis point reduction in the allowance
for short-term credit risk for our fi xed annuity business, as the
market stabilises and credit spreads reduce.
In the UK, the positive £48 million represents the net impact on
future profi ts of reduced bond yields, where the negative impact
on with-profi ts has been more than offset by the positive
shareholder annuity impact.
Gain on dilution of Group holdings
On 22 February 2012, M&G completed transactions to reduce
its majority holding in PPM South Africa from 75 per cent to
49.99 per cent, giving rise to gain on dilution of £42 million.
Gain on acquisition of REALIC
On 4 September 2012, Jackson completed acquisition of
100 per cent issued share capital of SRLC America Holding Corp.,
and its primary operating subsidiary, REALIC. The embedded
value of the acquired business at that date of £823 million was
higher than the consideration of £370 million resulting in a gain
on acquisition of £453 million. In line with fi nancial reporting
guidelines this gain has been recognised in full as a profi t in
the year.
Eff ective tax rates
The 2012 effective rate on operating profi t based on longer-term
investment returns of 26 per cent was consistent with the
equivalent rate in 2011. The 2012 effective rate of tax on total
EEV profi t of 24 per cent was lower than the equivalent rate in the
previous year (2011: 27 per cent), refl ecting changes in the
composition of non-operating items.
Financial review
Prudential plc Annual Report 2012
57
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Earnings and dividends per share
Earnings per share (EPS)
Basic EPS based on operating profi t after tax and non-controlling interests
IFRSnote
EEV
Basic EPS based on total profi t after tax and non-controlling interests
IFRSnote
EEV
2012 pence
2011 pence
76.8
125.0
86.5
150.1
62.8
115.7
55.8
84.6
Note
Comparatives adjusted for retrospective application of the accounting policy change for deferred acquisition costs as discussed in note A5 of the
IFRS fi nancial statements.
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 fi nal dividend for the year ended
31 December 2011 of 17.24 pence per ordinary share was paid
to eligible shareholders on 24 May 2012 and the 2012 interim
dividend of 8.4 pence per ordinary share was paid to eligible
shareholders on 27 September 2012.
The Board has decided to rebase the full year dividend
upwards by 4 pence, refl ecting the strong progress made in
both the earnings and free surplus generation of the business
and in the delivery of our fi nancial objectives. In line with this,
the directors recommend a fi nal dividend of 20.79 pence
per share (2011: 17.24 pence), which brings the total dividend
for the year to 29.19 pence (2011: 25.19 pence), representing
an increase of 15.9 per cent over 2011.
The 2012 fi nal dividend of 20.79 pence per ordinary share will
be paid on 23 May 2013 in sterling to shareholders on the
principal register and the Irish branch register at 6.00pm BST on
Tuesday, 2 April 2013 (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 3 June 2013.
The fi nal dividend will be paid on or about 30 May 2013 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 the close of business on
12 March 2013. 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 £532 million of shareholders’ funds.
Shareholders on the principal register and Irish branch register
will be able to participate in a Dividend Reinvestment Plan.
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 fi nancial
fl exibility and our assessment of opportunities to generate
attractive returns by investing in specifi c areas of the business.
The Board believes that in the medium term a dividend cover
of around two times is appropriate.
58
Business review Prudential plc Annual Report 2012
Financial review continued
Movement on shareholders’ funds
Operating profi t based on longer-term investment returns
Items excluded from operating profi t
Total profi t before tax
Tax and non-controlling interests
Profi t for the year
Exchange movements, net of related tax
Unrealised gains and losses on Jackson securities classifi ed
as available for salenote (b)
Dividends
New share capital subscribed
Other
Net increase in shareholders’ funds
Shareholders’ funds at beginning of the year
Shareholders’ funds at end of the year
Comprising
Long-term business:
Free surplusnote (c)
Required capital
Net worth
Value of in-force
Total
Other businessnote (d)
Total(note e)
IFRS £m
2012
2,533
277
2,810
(613)
2,197
(216)
387
(655)
17
65
1,795
8,564
10,359
2011
AER
note (a)
2,027
(199)
1,828
(413)
1,415
(105)
349
(642)
17
9
1,043
7,521
8,564
EEV £m
2012
4,321
699
5,020
(1,207)
3,813
(469)
–
(655)
17
100
2,806
19,637
22,443
2,957
3,898
6,855
15,411
22,266
177
22,443
2011
AER
3,978
(1,056)
2,922
(780)
2,142
(158)
–
(642)
17
71
1,430
18,207
19,637
2,839
3,447
6,286
13,364
19,650
(13)
19,637
Notes
(a) Comparatives adjusted for retrospective application of the accounting policy change for deferred acquisition costs as discussed in note A5 of the
IFRS fi nancial statements.
(b) Net of related changes to deferred acquisition costs and tax.
(c)
The £1,364 million free surplus generated by the long-term business (net of new business investment and market related movements and investment in
REALIC) in the year, has been used to pay £921 million to the holding company.
Shareholders’ funds for other than long-term business comprises:
(d)
Asset management operationsnote
Holding company net borrowings
Other, net
Total shareholders' funds for other business
2012 £m
2011 £m
1,937
(2,282)
522
177
1,783
(2,188)
392
(13)
Note
Including goodwill of £1,230 million for 31 December 2012 and 31 December 2011.
(e)
EEV shareholders’ funds excluding goodwill attributable to shareholders at 31 December 2012 is £20,974 million (31 December 2011: £18,172 million).
EEV shareholders’ funds
The shareholders’ funds at 31 December 2012 relating to
long-term business of £22.3 billion comprise £9.5 billion
(up 11 per cent from 31 December 2011) for our Asia
long-term business operations, £6.0 billion (up 19 per cent from
31 December 2011) for our US long-term business operations
and £6.8 billion (up 12 per cent from 31 December 2011) for our
UK long-term business operations.
At 31 December 2012, the embedded value for our Asian
long-term business operations was £9.5 billion, with £8.0 billion
(up £0.9 billion from 2011) being in the South-east Asia countries
of Indonesia, Malaysia, the Philippines, Singapore, Thailand and
Vietnam together with Hong Kong. For Prudential’s other Asian
markets, the embedded value was £1.5 billion in aggregate,
broadly unchanged from 2011.
Financial review
Prudential plc Annual Report 2012
59
Free surplus and holding company cash fl ow
Overview
The Group manages its internal cash fl ow by focusing on the free
surplus generated by the life and asset management businesses.
Remittances are, however, made as and when required by the
holding company with excess surplus being left in the businesses
where it can be redeployed most profi tably.
Free surplus generation
Sources and uses of free surplus generation from the
Group’s insurance and asset management operations
The Group’s free surplus at the end of the year 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 generation for the insurance business represents
amounts maturing from the in-force operations during the year
less the investment in new business. For asset management
operations we have defi ned free surplus generation to be the
total post-tax IFRS profi t for the year.
The Group’s free surplus generated also includes the general
insurance commission earned during the year and excludes
foreign exchange, capital movements, shareholders’ other
income and expenditure and centrally arising restructuring
and Solvency II implementation costs.
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The total movement in free surplus net of tax in the year can be analysed as follows:
Free surplus generation
Expected in-force cash fl ows (including expected return on net assets)
– Life operations
– Asset management and other operations
Changes in operating assumptions and experience variances
RPI to CPI infl ation measure change on defi ned benefi t pension schemes
Underlying free surplus generated in the year from in-force business
Investment in new business
Underlying free surplus generated in the year
Market-related items
Gain on dilution of Group holdings
Acquisition of REALIC
Free surplus generated in the year
Net cash remitted by the business units
Other movements (including foreign exchange effects) and timing differences
Total movement during the year
Free surplus at 1 January
Free surplus at end of year
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
2012 £m
2011 £m
2,405
2,019
386
295
–
2,700
(618)
2,082
(79)
42
(169)
1,876
(1,200)
(408)
268
3,421
3,689
2,957
25
707
3,689
2,335
1,972
363
168
33
2,536
(553)
1,983
(531)
–
–
1,452
(1,105)
(264)
83
3,338
3,421
2,839
29
553
3,421
60
Business review Prudential plc Annual Report 2012
Financial review continued
Free surplus and holding company cash fl ow continued
During 2012 Prudential generated underlying free surplus from
the in-force book of £2,700 million (2011: £2,536 million) despite
lower investment return conditions, refl ecting the progress we
have made in growing the portfolio of business and our focus
on managing the in-force book for value. Changes in operating
assumptions and experience variances were £295 million in 2012
compared with £168 million in 2011. These variances included
positive £80 million from Asia (2011: positive £52 million),
which in 2012 included £51 million from the sale of the Group’s
share-holding in China Life Insurance Company of Taiwan.
The US continued to record strong positive variances of
£219 million (2011: positive £154 million), which included
a signifi cant level of favourable spread experience. These
variances also included a reduced negative £4 million from
the UK (2011: negative £38 million). 2011 also benefi ted from
a one-off credit of £33 million arising from a reduction in the
liabilities of the Group’s defi ned benefi t pension schemes
following the UK Government’s decision to change the basis
of indexation from RPI to CPI, which did not reoccur in 2012.
Underlying free surplus generated from in-force business
has been used by our life businesses to invest in new business.
Investment in new business has increased by 12 per cent to
£618 million in 2012. This compares to a 14 per cent increase
in sales and a 14 per cent increase in new business profi t.
Market-related movements of negative £79 million in 2012
includes negative £330 million from the US, principally refl ecting
the valuation movements of derivatives, net of movements in
reserves held for variable annuity guarantees refl ecting market
movements in the year. Offsetting these amounts are positive
£114 million in Asia, positive £53 million from the UK and positive
£84 million from our asset management business primarily
refl ecting in part the impact of lower bond yields on bond
values in the year.
The acquisition of REALIC consumed £169 million of free surplus.
In contrast free surplus benefi ted by £42 million as a result of
the divestment of M&G’s holding in PPM South Africa from
75 per cent to 49.99 per cent.
Financial review
Prudential plc Annual Report 2012
61
2012 £m
Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
(292)
97
(195)
1,177
982
284
1,266
1,897
>20%
(281)
271
(10)
578
568
305
873
(45)
86
41
200
241
72
313
1,462
>20%
836
>20%
AER
2011 £m
Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
(297)
97
(200)
1,011
811
265
1,076
1,660
>20%
(54)
77
23
172
195
65
260
746
>20%
(202)
232
30
500
530
285
815
1,275
>20%
CER
2011 £m
Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
(295)
96
(199)
1,003
804
261
1,065
1,642
>20%
(205)
235
30
506
536
289
825
1,290
>20%
(54)
77
23
172
195
65
260
746
>20%
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Group
total
(618)
454
(164)
1,955
1,791
661
2,452
Group
total
(553)
406
(147)
1,683
1,536
615
2,151
Group
total
(554)
408
(146)
1,681
1,535
615
2,150
Value created through investment in new business by life operations
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 profi t for the year
Tax
Pre-tax new business profi t for the year
New business sales (APE)
Internal rate of returnnote
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 profi t for the year
Tax
Pre-tax new business profi t for the year
New business sales (APE)
Internal rate of returnnote
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 profi t for the year
Tax
Pre-tax new business profi t for the year
New business sales (APE)
Internal rate of returnnote
Note
The internal rate of return (IRR) is equivalent to the discount rate at which the present value of the post-tax cash fl ows expected to be earned over the lifetime
of the business written in shareholder-backed life funds is equal to the total invested capital to support the writing of the business. The capital included in the
calculation of the IRR is equal to the amount required to pay acquisition costs and set up statutory reserves less premiums received, plus encumbered capital.
The impact of the time value of options and guarantees is included in the calculation.
In the UK, we continue to manage capital with discipline and
have achieved a 20 per cent increase in new business profi t, while
investing 17 per cent less capital at £45 million (2011: £54 million).
For each £1 million of free surplus invested, therefore, we
generated £5.4 million of post-tax new business contribution to
embedded value (2011: £3.6 million) benefi ting from favourable
changes in business mix. These sustained levels of high capital
effi ciency in the UK refl ect our strategy of participating
selectively in the UK’s retirement savings and income market,
focusing on those products and distribution mechanisms which
meet our strict high return and short payback characteristics.
The average free surplus undiscounted payback period for
shareholder-backed business written in 2012 was three years
(2011: four years).
62
Business review Prudential plc Annual Report 2012
Financial review continued
Value created through investment in new business
by life operations continued
Overall, the Group wrote £4,195 million of sales on an APE
basis in 2012 (2011: £3,681 million) generating a post-tax new
business contribution to embedded value of £1,791 million
(2011: £1,536 million). To support these sales, we invested
£618 million of capital (2011: £553 million) equivalent to
23 per cent (2011: 22 per cent) of underlying free surplus
generated by the life in-force and asset management businesses.
In Asia, we generated an 18 per cent increase in new business
profi t despite investing 2 per cent less capital at £292 million
(2011: £297 million). In other words, for each £1 million of free
surplus invested we generated £3.4 million of post-tax new
business profi t (2011: £2.7 million). This improved capital
effi ciency refl ects the benefi t of pricing actions and a shift
in mix towards those products and geographies with lower
strain and higher return characteristics. The average free
surplus undiscounted payback period for business written
in 2012 was three years (2011: three years).
In the US, investment in new business was £281 million
(2011: £202 million), an increase of 39 per cent, and compares
to a 7 per cent increase in new business profi t in the year.
Consequently, for each £1 million of free surplus invested we
generated £2.0 million of post-tax new business contribution
to embedded value (2011: £2.6 million). The higher capital
consumption per unit of profi t refl ects a more punitive valuation
interest rate being used to establish liabilities upon policy
inception following recent falls in interest rates. Notwithstanding
this effect, the internal rates of return achieved in the US remain
attractive at above 20 per cent, and the fast payback nature of the
business written means that the initial capital outlay is recouped
quickly. The average free surplus undiscounted payback period
for business written in 2012 was two years (2011: one year).
Financial review
Prudential plc Annual Report 2012
63
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2012 £m
2011 £m
216
101
(4)
97
313
249
491
60
551
(107)
(103)
(210)
341
206
91
1,200
(278)
194
(158)
(47)
(289)
911
(655)
256
–
–
(32)
(43)
181
1,200
(1)
1,380
223
116
(42)
74
297
322
289
55
344
(50)
(88)
(138)
206
213
67
1,105
(282)
181
(139)
(56)
(296)
809
(642)
167
340
(333)
–
(205)
(31)
1,232
(1)
1,200
Holding company cash fl ow
Net cash remitted by business units:
UK net remittances to the Group
UK Life fund paid to the Group
Shareholder-backed business:
Other UK paid to the Group
Group invested in UK
Total shareholder-backed business
Total UK net remittances to the Group
US remittances to the Group
Asia net remittances to the Group
Asia paid to the Group:
Long-term business
Other operations
Group invested in Asia:
Long-term business
Other operations
Total Asia net remittances to the Group
M&G remittances to the Group
PruCap remittances to the Group
Net remittances to the Group from business units
Net interest paid
Tax received
Corporate activities
Solvency II costs
Total central outfl ows
Operating holding company cash fl ow before dividendnote
Dividend paid
Operating holding company cash fl ow aft er dividendnote
Issue of hybrid debt, net of costs
Repayment of subordinated debt
Hedge purchase cost (equity tail risks)
Other net cash payments
Total holding company cash fl ow
Cash and short-term investments at beginning of year
Foreign exchange movements
Cash and short-term investments at end of year
Note
Including central fi nance subsidiaries.
64
Business review Prudential plc Annual Report 2012
Financial review continued
Holding company cash fl ow continued
We continue to manage cash fl ows across the Group with
a view to achieving a balance between ensuring suffi cient net
remittances from the businesses to cover the dividend (after
corporate costs) and maximising value for shareholders through
the retention of the free surplus generated at business unit level,
so that it can be reinvested in the profi table opportunities
available to the Group. On this basis, the holding company cash
fl ow statement at an operating level should ordinarily balance
close to zero before exceptional cash fl ows, but from time to time
additional remittances from business operations will be made to
provide the Group with greater fi nancial fl exibility at the
corporate centre.
Operating holding company cash fl ow for 2012 before the
shareholder dividend was £911 million, £102 million higher than
2011. After deducting the shareholder dividend the operating
holding company cash fl ow was £256 million (2011: £167 million).
Cash remittances to the Group from business units
The holding company received £1,200 million of net cash
remittances from the business units in 2012, an increase of
9 per cent over the £1,105 million received in 2011.
Asia became the largest contributor of cash, with net
cash remittances to the Group in 2012 of £341 million
(2011: £206 million) exceeding its 2013 cash objective.
This includes non-recurring items of £27 million representing
cash received from the sale of the Group’s holdings in China
Life Insurance Company of Taiwan of £97 million offset by
repayments of funding contingent on future profi ts of the Hong
Kong Life insurance operations of £70 million. This fi nancing
was taken out in 2009 and 2010 in order to increase the fi nancial
fl exibility of the Group during the investment market crisis and
has now been repaid.
Cash received from Jackson of £249 million for 2012 is lower than
the £322 million remitted in 2011 as annual remittances return to
a more sustainable level. This follows the exceptional release of
excess surplus made in the prior year.
The UK insurance operations remitted £313 million in 2012
(2011: £297 million). Cash from the annual with-profi ts transfer
to shareholders contributed £216 million (2011: £223 million).
During 2012, surpluses in the UK’s shareholder-backed business
were utilised to repay £60 million of funding contingent on future
profi ts that was taken out in 2009 and 2010 and to remit a net
£97 million (2011: £74 million) to Group. The UK’s objective
remains £350 million of net cash remittances in 2013.
M&G and PruCap collectively remitted £297 million in 2012, as
the asset management businesses continue to remit signifi cant
portions of their annual post-tax earnings to the Group.
Net central outfl ows and other movements
Net central outfl ows improved to £289 million in 2012
(2011: £296 million) with higher corporate costs offset by
lower net interest payments, lower Solvency II costs, and
higher tax receipts.
After central costs, there was a net cash infl ow before dividend
of £911 million in 2012 compared to £809 million in 2011. The
dividend paid was £655 million in 2012 compared to £642 million
in the same period in 2011.
Outside of the normal recurring central cash fl ow items and
in light of the heightened risks surrounding the Eurozone, we
incurred a net cash fl ow of £32 million for short-dated hedges to
provide downside protection against severe equity market falls.
We also incurred £43 million of other net cash payments in 2012,
representing payments of £68 million to the UK tax authorities
following the settlement reached in 2010 on historic tax issues
offset by a receipt of £25 million from an increased bank loan in
the year. A fi nal instalment on the agreed settlement will be paid
in 2013 to the UK tax authorities at a level similar to 2012.
The overall holding company cash and short-term investment
balances at 31 December 2012 was £180 million higher than the
balance held at the end of 2011 at £1.4 billion. The company
seeks to maintain a central cash balance in excess of £1 billion.
Financial review
Prudential plc Annual Report 2012
65
EEV 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-profi ts funds
Less: Shareholders’ accrued interest in the long-term business
Core structural borrowings of shareholders’ fi nanced 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 profi t
EEV basis shareholders’ equity (excluding non-controlling interest)
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AER
2012 £m
1,469
283,428
1,380
23,976
2011 £m
(note)
1,465
250,605
1,200
19,475
310,253
272,745
260,774
10,589
271,363
(12,084)
259,279
3,554
24,977
227,075
9,215
236,290
(11,073)
225,217
3,611
24,280
287,810
253,108
22,443
19,637
2,017
8,342
10,359
12,084
22,443
2,000
6,564
8,564
11,073
19,637
Note
The 2011 comparative component of EEV shareholders’ funds for the IFRS basis shareholders’ equity and the additional EEV basis retained profi t have been
adjusted for the retrospective application of the accounting policy change for deferred acquisition costs as discussed in note A5 to the IFRS fi nancial statements.
Total EEV shareholders’ funds for 2011 are not altered by the change of IFRS policy.
Net asset value per share
EEV
IFRS
2012
878p
405p
2011
771p
336p
Investments
The Group is exposed to fi nancial risk through its fi nancial assets,
fi nancial liabilities and policyholder liabilities. The key fi nancial
risk factors that affect the Group include market risk, credit risk
and liquidity risk. Information on the Group’s exposure to
fi nancial risk factors, and our fi nancial risk management
objectives and policies, is provided in the Risk and capital
management section. Further information on the sensitivity of
the Group’s fi nancial instruments to market risk and its use of
derivatives is also provided in the IFRS fi nancial statements.
The Group’s investments are discussed in further detail in the
Risk and capital management section B.1.b ‘Credit risk’.
66
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Financial review continued
Policyholder liabilities and unallocated surplus of with-profi ts funds
Shareholder-backed business
Asia
US
UK
Total
Total
2012 £m
2011 £m
At 1 January
Premiums
Surrenders
Maturities/Deaths
Net cash fl ows
Investment related items and other movements
Acquisition of REALIC
Foreign exchange translation differences
At 31 December
With-profi ts funds
– Policyholder liabilities
– Unallocated surplus
Total at 31 December
Total policyholder liabilities including unallocated surplus
at 31 December
Policyholder liabilities and unallocated surplus
of with-profi ts funds
Policyholder liabilities relating to shareholder-backed business
grew by £29.5 billion from £133.5 billion at 31 December 2011
to £163.0 billion at 31 December 2012.
The increase refl ects positive net fl ows (premiums net of upfront
charges less surrenders, maturities and deaths) of £10.5 billion
in 2012 (2011: £9.0 billion), driven by strong infl ows in the US
£9.6 billion and Asia £2.0 billion. The negative net fl ows in UK
£1.1 billion are distorted by the fl uctuating nature of unit-linked
corporate pension scheme transfers. Net fl ows in Asia have
increased by 8 per cent to £2.0 billion in 2012 (2011: £1.8 billion)
while the overall rate of surrenders in the region (expressed as
a percentage of opening liabilities) was 10.6 per cent in 2012
(2011: 9.8 per cent). Excluding India, where the market has been
going through a signifi cant period of change following regulatory
changes in 2010, the surrender rate in 2012 was 9.7 per cent
(2011: 9.6 per cent).
18,269
4,141
(1,933)
(226)
1,982
1,539
–
(577)
21,213
69,189
14,907
(4,356)
(954)
9,597
4,241
12,912
(3,678)
92,261
46,048
3,801
(2,585)
(2,345)
(1,129)
4,586
–
–
49,505
133,506
22,849
(8,874)
(3,525)
10,450
10,366
12,912
(4,255)
162,979
122,183
20,296
(7,975)
(3,315)
9,006
1,988
–
329
133,506
97,795
10,589
93,569
9,215
108,384
102,784
271,363
236,290
Other movements include negative foreign exchange effects of
£4.3 billion (2011: positive £0.3 billion) together with investment
related and other items of £10.4 billion. Investment related and
other items increased from £2.0 billion in 2011 to £10.4 billion in
2012 principally following improvements in the bond and equity
markets. The acquisition of REALIC refl ects the liabilities
acquired at the date of acquisition.
During 2012, the unallocated surplus, which represents the
excess of assets over policyholder liabilities for the Group’s
with-profi ts funds on an IFRS basis, increased by 15 per cent
from £9.2 billion at 31 December 2011 to £10.6 billion at
31 December 2012.
Financial review
Prudential plc Annual Report 2012
67
Shareholders’ net borrowings and ratings
Shareholders’ net borrowings at 31 December 2012:
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
2012 £m
Mark to
market
value
EEV
basis
IFRS
basis
2011 £m
Mark to
market
value
120
258
378
94
64
536
–
43
579
1,866
1,089
2,955
394
313
3,662
275
196
4,133
1,823
829
2,652
300
249
3,201
250
160
3,611
(10)
120
110
56
21
187
–
17
204
IFRS
basis
1,746
831
2,577
300
249
3,126
275
153
3,554
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1,813
949
2,762
356
270
3,388
250
177
3,815
investments
(1,380)
–
(1,380)
(1,200)
–
(1,200)
Net core structural borrowings of shareholder-
fi nanced operations
2,174
579
2,753
2,411
204
2,615
Shareholders’ net borrowings and ratings
On an IFRS basis, the Group’s core structural borrowings at
31 December 2012 were broadly unchanged at £3.6 billion.
After adjusting for holding company cash and short-term
investments of £1,380 million, net core structural borrowings
at 31 December 2012 were £2,174 million compared with
£2,411 million at 31 December 2011. The decrease of
£237 million represents the net fall in borrowings of £57 million,
mainly refl ecting the foreign exchange movements in the year,
together with a £180 million rise in holding company cash and
short-term investments.
In addition to its core structural borrowings set out above,
Prudential also has in place an unlimited global commercial paper
programme. As at 31 December 2012, commercial paper issued
under this programme totalled £183 million, US$1,512 million,
¤493 million, CHF20 million and AU$12 million. The central
treasury function also manages our £5 billion medium-term note
(MTN) programme, covering both core and non-core borrowings.
In November 2012 Prudential issued a £300 million three-year senior
note to pre-fi nance a £250 million senior note maturing in January
2013 for operational funding. Also in January 2013 Prudential
issued a new US$700 million 5.25 per cent perpetual Innovative
Tier 1 hybrid under this programme, primarily to Asian retail
investors. Under the MTN programme at 31 December 2012 the
outstanding subordinated debt was £835 million, US$1,300 million
and ¤20 million and the senior debt outstanding was £550 million.
In addition, Prudential’s holding company has access to £2.1 billion
of syndicated and bilateral committed revolving credit facilities,
provided by 17 major international banks, expiring between 2013
and 2017. Apart from small draw downs to test the process, these
facilities have never been drawn, and there were no amounts
outstanding at 31 December 2012. 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 Prudential’s holding company and
are intended to maintain a strong and fl exible funding capacity.
Prudential manages the Group’s core debt within a target level
consistent with its current debt ratings. At 31 December 2012, the
gearing ratio (debt, net of cash and short-term investments, as a
proportion of EEV shareholders’ funds plus net debt) was 8.8 per cent,
compared with 10.9 per cent at 31 December 2011. Prudential plc
has strong debt ratings from Standard & Poor’s, Moody’s and Fitch.
Prudential’s long-term senior debt is rated A+, A2 and A from
Standard & Poor’s, Moody’s and Fitch, while short-term ratings are
A-1, P-1 and F1 respectively. All ratings from Fitch and Moody’s are
on stable outlook, and all ratings from Standard & Poor’s are on
negative outlook.
The fi nancial strength of PAC is rated AA by Standard & Poor’s,
Aa2 by Moody’s and AA by Fitch.
Jackson National Life Insurance Company’s fi nancial strength is
rated AA by Standard & Poor’s, A1 by Moody’s and AA by Fitch.
Financial strength of the UK Long-term Fund
On a realistic valuation basis, with liabilities recorded on a market
consistent basis, the free assets were valued at approximately
£7.0 billion at 31 December 2012 (31 December 2011: £6.1 billion),
before a deduction for the risk capital margin. The value of the
shareholders’ interest in future transfers from the UK with-profi ts
fund is estimated at £2.1 billion (31 December 2011: £2.0 billion).
Despite the continued volatility in fi nancial markets,
Prudential UK’s With-Profi ts fund performed relatively
strongly achieving a 9.8 per cent pre-tax investment return
for policyholder asset shares during 2012.
68
Business review Prudential plc Annual Report 2012
Risk and capital management
As a provider of fi nancial services, including insurance,
the management of risk lies at the heart of Prudential’s
business. As a result, eff ective risk management
capabilities represent a key source of competitive
advantage for the Group.
The Group’s risk framework includes the Group’s appetite for risk
exposures as well as its approach to risk management. Under this
approach, Prudential continuously assesses the Group’s top risks
and monitors its risk profi le against approved limits. Prudential’s
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.
The two measures used to monitor the volatility of earnings
are European Embedded Value (EEV) operating profi t and
International Financial Reporting Standards (IFRS) operating
profi t, although EEV and IFRS total profi ts are also considered.
Liquidity: the objective is to ensure that the Group is able to
generate suffi cient cash resources to meet fi nancial obligations
as they fall due in business as usual and stressed scenarios.
Capital requirements: the limits aim to ensure that:
the Group meets its internal economic capital requirements;
a
b the Group achieves its desired target rating to meet its
business objectives; and
c supervisory intervention is avoided.
A. Group risk appetite
(Audited)
Prudential defi nes and monitors aggregate risk limits based on
fi nancial and non-fi nancial stresses for its earnings volatility,
liquidity and capital requirements.
Earnings volatility: the objectives of the limits are to ensure that:
a
the volatility of earnings is consistent with the expectations
of stakeholders;
b the Group has adequate earnings (and cash fl ows) to service
debt, expected dividends and to withstand unexpected
shocks; and
c earnings (and cash fl ows) are managed properly across
geographies and are consistent with funding strategies.
The two measures used are the EU Insurance Groups Directive
(IGD) capital requirements and internal economic capital
requirements. In addition, capital requirements are monitored
on both local statutory and future Solvency II regulatory bases.
Prudential’s risk appetite framework forms an integral part of
its annual business planning cycle. The Group Risk Committee
is responsible for reviewing the risks inherent in the Group’s
business plan and for providing the Board with input on the
risk/reward trade offs implicit therein. This review is supported
by the Group Risk function, which uses submissions by business
units to calculate the Group’s aggregated position (allowing for
diversifi cation effects between business units) relative to the
limits contained within the risk appetite statements.
B. Risk exposures
(Audited)
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 below:
Category
Risk type
Defi nition
Financial risks
Market risk
Credit risk
Insurance risk
The risk of loss for the Group’s business, or of adverse change in the
fi nancial situation, resulting, directly or indirectly, from fl uctuations
in the level or volatility of market prices of assets and liabilities.
The risk of loss for the Group’s business or of adverse change in the
fi nancial position, resulting from fl uctuations in the credit standing
of issuers of securities, counterparties and any debtors in the form of
default or other signifi cant credit event (eg downgrade or spread widening).
The risk of loss for the Group’s business or of adverse change in the value
of insurance liabilities, resulting from changes in the level, trend, or
volatility of a number of insurance risk drivers. This includes adverse
mortality, longevity, morbidity, persistency and expense experience.
Liquidity risk
The risk of the Group being unable to generate suffi cient cash resources
or to meet fi nancial obligations as they fall due in business as usual and
stress scenarios.
Non-fi nancial risks
Operational risk
The risk of loss arising from inadequate or failed internal processes, or
from personnel and systems, or from external events other than those
covered by business environment risk.
Business
environment risk
Exposure to forces in the external environment that could signifi cantly
change the fundamentals that drive the business’s overall strategy.
Strategic risk
Ineff ective, ineffi cient or inadequate senior management processes for
the development and implementation of business strategy in relation to
the business environment and the Group’s capabilities.
Risk and capital management
Prudential plc Annual Report 2012
69
The key fi nancial and non-fi nancial risks and uncertainties faced
by the Group, that have been considered by the Group Risk
Committee, and Prudential’s approaches to managing them,
are described below:
B.1 Financial risks
a Market risk
i Equity risk
(Audited)
In the UK business, most of Prudential’s equity exposure
is incurred in the with-profi ts fund, which includes
a large inherited estate estimated at £7.0 billion as at
31 December 2012 (31 December 2011: £6.1 billion). This
can absorb market fl uctuations 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, Prudential’s shareholder exposure to equities relates
to revenue from unit-linked products and, from a capital
perspective, to the effect of falling equity markets on the
with-profi ts businesses.
In the US, where we are a leading provider of variable annuities,
there are risks associated with the guarantees embedded in our
products. We provide guaranteed minimum death benefi ts
(GMDB) on substantially all policies in this class, guaranteed
minimum withdrawal benefi ts (GMWB) on a signifi cant
proportion of the book, and guaranteed minimum income
benefi ts (GMIB) on only 3 per cent. To protect the shareholders
against the volatility introduced by these embedded options,
we use both a comprehensive hedging programme and
reinsurance. The GMIB is no longer offered, with existing
coverage being reinsured.
The Jackson IFRS shareholders’ equity and US statutory capital
are sensitive to the effects of policyholder behaviour on the
valuation of GMWB guarantees, but to manageable levels.
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 of the strength of our
operational platform.
It is our philosophy not to compete on price; rather, we seek to
sell at a price suffi cient to fund the cost we incur to hedge or
reinsure our risks and to achieve an acceptable return for
our shareholders.
We use a macro approach to hedging that covers the risks
inherent across the US business. Within this macro approach we
make use of the natural offsets that exist between the variable
annuity guarantees and the fi xed index annuity book, and then
use a combination of over-the-counter (OTC) options and
exchange traded derivatives to hedge the remaining risk,
considering signifi cant 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.
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Jackson hedges the economics of its products rather than the
accounting result. This focus means that we accept a degree of
variability in our accounting results in order to ensure we achieve
the appropriate economic result. Accordingly, while Jackson’s
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.
ii Interest rate risk
(Audited)
Interest rate risk arises from Prudential’s investments in long-term
debt and fi xed income securities, and 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 Asia, the exposure to interest rate risk arises from the
guarantees of some non-unit-linked investment products. This
exposure arises because it may not be possible to hold assets
which will provide cash fl ows to match exactly those relating to
policyholder liabilities. This results in a mismatch due to the
duration and uncertainty of the liability cash fl ows and the lack of
suffi cient assets of a suitable duration. While this residual asset/
liability mismatch risk can be managed, it cannot be eliminated.
In the US, there is interest rate risk across the portfolio. The
majority of Jackson’s fi xed 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. For
variable annuities, interest rate changes will infl uence the level of
reserves held for certain guaranteed benefi ts. With its large fi xed
annuity and fi xed 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.
In the UK, the investment policy for the shareholder-backed
annuity business is to match the annuity payments with the cash
fl ows from investments. As a result, assets and liabilities are
closely matched by duration. The impact on profi t of any residual
cash fl ow mismatching can be adversely affected by changes in
interest rates; therefore the mismatching position is regularly
monitored. The guarantees of the with-profi t business give rise
to some interest rate discounting risk as falling rates may result
in an increase in the cost of guarantees. Except for severe stress
scenarios where shareholders’ support may be required, this
risk is borne by the with-profi ts fund.
iii Foreign exchange risk
(Audited)
Prudential principally operates in the UK, the US and in
Asia. The geographical diversity of its businesses means that
Prudential is inevitably subject to the risk of exchange rate
fl uctuations. Prudential’s international operations in the US and
Asia, which represent a signifi cant proportion of its operating
profi t and shareholders’ funds, generally write policies and invest
in assets denominated in local currency. Although this practice
limits the effect of exchange rate fl uctuations on local operating
results, it can lead to signifi cant fl uctuations in Prudential’s
consolidated fi nancial statements when results are expressed
in pounds sterling.
70
Business review Prudential plc Annual Report 2012
Risk and capital management continued
The Group retains revenues locally to support the growth of the
Group’s business and capital is held in the local currency of the
business to meet local regulatory and market requirements,
accepting the balance sheet translation risks this can produce.
However, in cases where a surplus arising in an overseas
operation supports Group capital or shareholders’ interest
(ie remittances), this exposure is hedged if it is economically
optimal to do so. The Group does not have appetite for signifi cant
shareholder exposures to foreign exchange risks in currencies
outside the local territory. Currency borrowings, swaps and other
derivatives are used to manage exposures.
b Credit risk
(Audited)
In addition to business unit and Group-wide operational limits
on credit risk, Prudential monitors closely its counterparty
exposures at Group level, highlighting those that are large or of
concern. Where appropriate, Prudential will reduce its exposure,
purchase credit protection or make use of collateral
arrangements to control its levels of credit risk.
The Group’s balance sheet held the following total investments at 31 December 2012:
Debt securities
Equity
Property investments
Mortgage loans
Other loans
Deposits
Other investments
Total
2012 £bn
2011 £bn
Participating
funds
Unit-linked
and variable
annuities
Shareholder-
backed
62.0
25.1
8.7
1.3
1.4
9.5
4.7
112.7
9.5
73.9
0.6
–
–
1.4
–
85.4
68.6
1.0
1.6
4.8
4.3
1.8
3.2
85.3
Total
Group
140.1
100.0
10.9
6.1
5.7
12.7
7.9
283.4
Total
Group
124.5
87.3
10.8
5.7
4.0
10.7
7.6
250.6
The table below presents the balances of investments related to shareholder-backed operations at 31 December 2012.
Shareholder-backed investments:
Asia life
UK life
US life
Other
Total
2012 £bn
2011 £bn
8.7
31.3
42.0
3.3
85.3
7.1
28.5
34.0
3.8
73.4
Shareholders are not directly exposed to value movements on assets backing participating or unit-linked operations, with sensitivity
mainly related to shareholder-backed operations.
i Debt portfolio
(Audited)
The investments held by the shareholder-backed operations are predominantly debt securities, of which 95 per cent are rated,
either externally or internally, as investment grade (31 December 2011: 95 per cent).
The Group’s total debt securities portfolio on an IFRS basis comprised the following at 31 December 2012:
Insurance operations:
UK
Jackson National Life
Asia long-term business
Other operations
Total
2012 £bn
2011 £bn
Participating
funds
Unit-linked
and variable
annuities*
Shareholder-
backed
Total
Group
Total
Group
50.5
–
11.5
–
62.0
6.3
–
3.2
–
9.5
27.1
33.0
6.7
1.8
68.6
83.9
33.0
21.4
1.8
78.0
27.0
17.7
1.8
140.1
124.5
* Jackson’s variable annuity separate account assets comprise equity securities and portfolio holdings in unit trusts (including mutual funds), the majority of
which are equity based.
Risk and capital management
Prudential plc Annual Report 2012
71
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UK
The UK’s debt portfolio on an IFRS basis is £83.9 billion as
at 31 December 2012, including £50.5 billion within the UK
with-profi ts fund. Shareholders’ risk exposure to the with-profi ts
fund is limited as the solvency is protected by the large inherited
estate. Outside the with-profi ts fund there is £6.3 billion in
unit-linked funds where the shareholders’ risk is limited, with
the remaining £27.1 billion backing the shareholders’ annuity
business and other non-linked business (of which 75 per cent is
rated AAA to A-, 23 per cent BBB and 2 per cent non-investment
grade). The UK shareholder-backed portfolio did not experience
any default losses in 2012.
US
At 31 December 2012, Jackson’s fi xed income debt securities portfolio consisted of:
Summary
Corporate and government security and commercial loans:
Government
Publicly traded and SEC Rule 144A securitiesnote
Non-SEC Rule 144A securities
Total
Residential mortgage-backed securities (RMBS)
Commercial mortgage-backed securities (CMBS)
Other debt securities
Total US debt securities
2012 £m
2011 £m
4,126
19,699
3,542
27,367
2,400
2,639
587
32,993
2,163
16,281
3,198
21,642
2,591
2,169
620
27,022
Note
A 1990 SEC rule that facilitates the resale of privately placed securities that are without SEC registration to qualifi ed institutional investors. The rule was
designed to develop a more liquid and effi cient institutional resale market for unregistered securities.
Of the £23.2 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
8 per cent of the portfolio. Our largest sector exposures in the
investment grade corporate debt portfolio are Energy and
Utilities at 15 per cent and 13 per cent, respectively. We actively
manage the portfolio and will sell exposures as events dictate.
Within the RMBS portfolio of £2.4 billion, the portion guaranteed
by the US government sponsored agencies is 57 per cent.
The CMBS portfolio of £2.6 billion is performing strongly, with
40 per cent of the portfolio rated AAA and less than 2 per cent rated
below investment grade. The entire portfolio has an average credit
enhancement level of 31 per cent. This level provides signifi cant
protection, since it means the underlying collateral has to incur
a 31 per cent loss, net of recoveries, before our holding is at risk.
Jackson’s debt securities experienced total credit-related losses
in 2012 of £47 million (2011: £52 million). This includes a loss
net of recoveries of £10 million (2011: gains of £10 million) on
credit-related sales of impaired bonds. IFRS write-downs on debt
securities were £37 million (2011: £62 million). Of this amount of
write-downs, £8 million (2011: £21 million) was in respect to
RMBS securities. In addition to the amounts for debt securities,
there were £5 million (2011: £28 million) of write-downs on
Jackson’s commercial mortgage loan portfolio. In 2012 and 2011,
Jackson did not experience any defaults on its debt securities.
The impairment process refl ects a 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 balance sheet. 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
were £2,807 million at 31 December 2012, compared to
£2,057 million at 31 December 2011. The gross unrealised
loss position was £178 million at 31 December 2012
(31 December 2011: £246 million). Gross unrealised losses
on securities priced at less than 80 per cent of face value totalled
£53 million at 31 December 2012 compared to £158 million at
31 December 2011.
Asia
Asia’s debt portfolio totalled £21.4 billion at 31 December 2012.
Of this, approximately 69 per cent was in unit-linked and
with-profi ts funds with minimal shareholders’ risk. The remaining
31 per cent is shareholder exposure and is invested predominantly
(65 per cent) in investment grade bonds. The Asian portfolio has
performed very well, and did not experience any default losses
in 2012.
Asset management
The debt portfolio of the Group’s asset management operations
of £1.8 billion as at 31 December 2012 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.
ii Group sovereign debt exposure
(Audited)
Sovereign debt represented 15 per cent or £10.4 billion of
the debt portfolio backing shareholder business (excluding
unit-linked business) at 31 December 2012 (2011: 16 per cent and
£9.2 billion respectively). 38 per cent of this was rated AAA and
92 per cent investment grade (2011: 43 per cent and 94 per cent
respectively). Of the Group’s holdings in Continental Europe of
£564 million, 79 per cent was AAA rated (2011: £690 million and
87 per cent respectively). Shareholder exposure to the Eurozone
sovereigns of Portugal, Italy, Ireland, Greece and Spain (PIIGS) is
£52 million (2011: £44 million). The Group does not have any
sovereign debt exposure to Greece, Portugal or Ireland.
72
Business review Prudential plc Annual Report 2012
Risk and capital management continued
The exposure of the Group’s shareholder and with-profi ts funds to sovereign debt (including credit default swaps that are referenced
to sovereign debt) at 31 December 2012 is as follows.
31 December 2012 £m
31 December 2011 £m
Shareholder
sovereign
debt
With-profi ts
sovereign
debt
Shareholder
sovereign
debt
With-profi ts
sovereign
debt
51
1
52
444
68
564
3,432
3,585
2,867
10,448
59
31
90
469
41
600
2,306
1,169
271
4,346
43
1
44
598
48
690
3,254
2,448
2,850
9,242
52
33
85
602
62
749
2,801
2,615
332
6,497
Prudential actively mitigates the level of Group-wide credit risk
(invested credit and counterparty) through a comprehensive
system of hard limits, collateralisation agreements and centrally
managed ‘watch lists’.
Of the £68.6 billion of debt securities backing shareholder
business, excluding holdings attributable to external holders of
consolidated unit trusts, 3 per cent or £2.2 billion was in Tier 1
and Tier 2 hybrid bank debt. A further £3.2 billion was in the
form of senior debt.
In terms of shareholder exposures to the bank debt of PIIGS,
Prudential held £260 million at 31 December 2012
(31 December 2011: £328 million). This comprised £130 million
of covered bonds, £93 million senior debt, £3 million Tier 1 debt
and £34 million Tier 2 debt. There was no direct exposure to
Greek banks.
Continental Europe:
Italy
Spain
Germany
Other Europe (principally Belgium and Isle of Man)
United Kingdom
United States
Other, predominantly Asia
Total
Holdings of UK government debt accounted for £3.4 billion of the
shareholder sovereign debt portfolio at 31 December 2012. Post
year end, the United Kingdom no longer has a unanimous AAA
rating, as Moody’s on 22 February 2013 lowered its rating to Aa1.
However, given that the vast majority of the debt backs sterling
liabilities, the downgrade has not resulted in large price
fl uctuations in the gilt market and that the rating remains very
strong, the downgrade is not expected to signifi cantly impact
the Group’s balance sheet and earnings.
iii Exposure to bank debt securities
(Audited)
Prudential expects that any second order sovereign credit
exposures would most likely be concentrated in the banking
sector. The Group’s bank exposure is a function of its core
investment business, as well as of the hedging and other activities
undertaken to manage its various fi nancial risks. Prudential relies
on public information and credit research sources to identify
banks with large concentrations of indirect exposure.
Prudential has a range of controls and processes to manage
credit exposure. In addition to the control frameworks that cover
shareholder and policyholder credit risk within each business
unit, the Group Credit Risk Committee oversees shareholder
credit risk across the Group. The Committee receives
comprehensive management information, including details of
counterparty and invested credit exposure (including structured
credit and loans), secured and unsecured cash balances, top
30 credit exposures, and an analysis of shareholder exposure by
industry/country and rating. The business units and the Group
Risk function also continually monitor the portfolio for emerging
credit risks through various tools and processes.
Risk and capital management
Prudential plc Annual Report 2012
73
The Group held the following direct exposures to banks’ debt securities of shareholder-backed business at 31 December 2012.
Bank debt securities – shareholder-backed business £m
Senior debt
Subordinated debt
Covered
Senior
Total senior
debt
Tier 2
Tier 1
Total
subordinated
debt
31 Dec 2012
Total
31 Dec 2011
Total
Portugal
Ireland
Italy
Greece
Spain
Austria
France
Germany
Luxembourg
Netherlands
United Kingdom
Total Europe
–
–
–
–
130
130
–
18
–
–
–
486
634
37
16
29
–
11
93
–
62
33
–
16
181
385
United States
Other, predominantly
–
1,770
37
16
29
–
141
223
–
80
33
–
16
667
1,019
1,770
Asia
Total
30
664
334
364
2,489
3,153
1,740
–
–
–
–
3
3
–
43
–
–
80
99
225
6
220
451
–
–
10
–
27
37
11
115
18
–
166
799
1,146
473
572
37
16
39
–
168
260
11
195
51
–
182
1,466
2,165
2,243
936
2,191
5,344
24
13
81
–
210
328
9
149
29
–
152
1,083
1,750
1,716
841
4,307
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In addition to the exposures held by the shareholder-backed business, the Group held the following banks’ securities at 31 December 2012
within its with-profi ts funds.
Bank debt securities – participating funds £m
Senior debt
Subordinated debt
Covered
Senior
Total senior
debt
Tier 2
Tier 1
Total
subordinated
debt
31 Dec 2012
Total
31 Dec 2011
Total
Portugal
Ireland
Italy
Greece
Spain
Austria
France
Germany
Luxembourg
Netherlands
United Kingdom
Total Europe
–
6
–
–
173
179
–
16
–
–
–
725
920
6
–
71
–
12
89
–
78
–
–
136
423
726
United States
Other, predominantly
–
1,837
6
6
71
–
185
268
–
94
–
–
136
1,148
1,646
1,837
Asia
Total
48
968
340
388
2,903
3,871
1,257
–
–
–
–
1
1
–
7
–
–
–
7
15
6
61
82
–
–
4
–
1
5
–
63
–
–
2
756
826
246
267
6
6
75
–
186
273
–
157
–
–
138
1,904
2,472
2,083
655
1,339
5,210
7
–
96
5
138
246
–
144
7
7
122
1,550
2,076
2,052
746
4,874
–
–
10
–
24
34
11
72
18
–
86
700
921
467
352
–
–
4
–
–
4
–
56
–
–
2
749
811
240
206
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Risk and capital management continued
iv Other possible impacts of a Eurozone crisis
(Audited)
Other knock on impacts of a Eurozone crisis may represent some
risk to the Group, both in terms of fi nancial market impact and
potential operational issues. These third order exposures are
intrinsically more diffi cult to quantify. However, as well as the
monitoring routines noted above, Prudential has also developed
tools to identify the Group’s exposure to counterparties at risk
(including contingent credit exposures), and has in place
Group-wide processes to facilitate the management of such
risks should they materialise.
In respect of operational risks, we believe we have strong
investment operations, counterparty risk and change
management capabilities that enable us to manage
the transition to a new Eurozone regime if events require
it to do so.
v Loans
(Audited)
Of the total Group loans of £11.8 billion at 31 December 2012,
the following are held by shareholder-backed operations.
Asia insurance operationsnote (i)
US insurance operationsnote (ii)
UK insurance operationsnote (iii)
Asset management operationsnote (iv)
Total loans held by shareholder-backed
operations
2012 £bn
2011 £bn
Mortgage
loans
Other
loans
–
3.5
1.3
–
4.8
0.4
2.7
–
1.2
4.3
Total
0.4
6.2
1.3
1.2
9.1
Mortgage
loans
Other
loans
–
3.6
1.1
–
4.7
0.4
0.6
–
1.3
2.3
Total
0.4
4.2
1.1
1.3
7.0
Notes
(i)
The majority of Asia insurance operations loans are commercial loans held by the Malaysian operation that are rated investment grade by two local
rating agencies.
(ii) The US insurance operations held £6.2 billion of loans, comprising £3.5 billion of commercial mortgage loans and £2.7 billion of policy loans.
Approximately £1.8 billion of the policy loans are held as collateral related to the three reinsurance treaties with Swiss Re, which are off set by a funds
withheld liability. These loans are carried at fair value. All other loans are accounted for at amortised cost, less any impairment. All commercial mortgage
loans held by US insurance operations are collateralised by properties. 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. Jackson incurred
write downs of £5 million on its commercial mortgage book (2011: write-downs of £28 million).
(iii) The majority of mortgage loans held by UK insurance operations are mortgage loans collateralised by properties.
(iv) Relates to bridging loan fi nance managed by Prudential Capital.
vi Counterparty credit risk
(Audited)
The Group enters into a variety of exchange traded and
over-the-counter derivative fi nancial 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, with the
exception of some Asian 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 Group’s exposure to derivative counterparty and
reinsurance counterparty credit risk is subject to the same
framework of Group-wide operational limits and monitoring as
its invested credit risk. Where appropriate, Prudential will reduce
its exposure, purchase credit protection or make use of additional
collateral arrangements to control its levels of counterparty
credit risk.
c Insurance risk
(Audited)
The processes of determining the price of Prudential’s products
and reporting the results of its long-term business operations
require Prudential to make a number of assumptions. In common
with other industry players, the profi tability of Prudential’s
businesses depends on a mix of factors including mortality
and morbidity levels and trends, persistency, investment
performance, unit cost of administration and new business
acquisition expenses.
Prudential continues to conduct research into longevity risk using
data from its 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 transferring longevity risk (via reinsurance
and other external solutions) is regularly evaluated. These
are used as risk management tools where it is appropriate and
attractive to do so.
Prudential’s morbidity risk is mitigated by appropriate
underwriting and use of reinsurance and the morbidity
assumptions refl ect recent experience and expectation
of future trends for each relevant line of business.
Risk and capital management
Prudential plc Annual Report 2012
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Prudential’s persistency assumptions refl ect 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
(Audited)
The parent company has signifi cant internal sources of liquidity
which are suffi cient to meet all of its 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 2013 and 2017. In
addition, the Group has access to liquidity via the debt capital
markets. 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 decade. Liquidity uses and
sources have been assessed at the Group and at a business unit
level under base case and stressed assumptions. The liquidity
resources available and the subsequent Liquidity Coverage Ratio
are regularly monitored and have been assessed to be suffi cient
under both sets of assumptions.
B.2 Non-fi nancial risk
(Unaudited)
Prudential is exposed to operational, business environment
and strategic risk in the course of running its businesses.
Prudential is exposed to operational risk through the course of
running its business. It is dependent on the successful processing
of a large and complex number of transactions, utilising various
IT applications and platforms, across numerous and diverse
products. It also operates under the ever evolving requirements
set out by different regulatory and legal regimes (including tax),
as well as utilising a signifi cant number of third parties to
distribute products and to support business operations.
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
UK Corporate Governance Code and the Hong Kong Code on
Corporate Governance Practices. Group Head Offi ce and
business units confi rm that they have implemented the
necessary controls to evidence compliance with the Manual.
Prudential 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 and
control assessments, scenario analysis, internal incidents and
external incidents, is reported by the business units 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; and determination of the adequacy of
Prudential’s corporate insurance programme.
With regard to business environment risk, including the impacts
of regulatory developments, the Group has a wide-ranging
programme of active and constructive engagement with
governments, policymakers and regulators in its 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 and assess their potential impact
on the Group. Where appropriate, the Group provides
submissions and technical input to offi cials and others, either
via submissions to formal consultations or through interactions
with offi cials.
With regard to strategic risk, both business units and the Group
Head Offi ce 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
identifi cation 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 profi le is
also considered to ensure that strategic initiatives are within
risk appetite.
Solvency II represents a regulatory risk due to the uncertainty
of what the rules will be when fi nalised, their potential impacts,
and the timing of their introduction. The risks are that the Group
may not be able to respond suffi ciently quickly to the strategic
implication of the change given levels of uncertainty around the
content and timing; operational risk in terms of the scale and
complexity of the delivery and uncertainty over timelines; and
the additional capital that the Group may be required to hold.
Solvency II is covered in more detail in the Capital Management
section below.
B.3 Risk factors
Our disclosures covering risk factors can be found at the end
of this document.
C. Capital management
C.1 Regulatory capital (IGD)
(Audited)
Prudential is subject to the capital adequacy requirements
of the European Union Insurance Groups Directive (IGD) as
implemented by the Financial Services Authority (FSA) in the
UK. The IGD capital adequacy requirements involve aggregating
surplus capital calculated on a FSA consistent basis for regulated
subsidiaries, from which Group borrowings, except those
subordinated debt issues that qualify as capital, are deducted.
No credit for the benefi t of diversifi cation is permitted under
this approach.
Prudential’s capital position remains strong. Prudential has
continued to place emphasis on maintaining the Group’s fi nancial
strength through optimising the balance between writing
profi table new business, conserving capital and generating cash.
Prudential estimates that its IGD capital surplus is £5.1 billion at
31 December 2012 (before taking into account the 2012 fi nal
dividend), with available capital covering its capital requirements
3.0 times. This compares to a capital surplus of £4.0 billion at the
end of 2011 (before taking into account the 2011 fi nal dividend).
76
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Risk and capital management continued
The movements in 2012 mainly comprise:
AAAAAAAAAAAAA Net capital generation mainly through operating earnings
(in-force releases less investment in new business, net of tax)
of £2.5 billion.
Offset by:
AAAAAAAAAAAAA Negative impact arising from market movements estimated
at £0.2 billion;
AAAAAAAAAAAAA Final 2011 dividend of £0.5 billion and interim 2012 dividend
of £0.2 billion;
AAAAAAAAAAAAA External fi nancing costs and other central costs, net of tax,
of £0.4 billion; and
AAAAAAAAAAAAA Negative impact arising from foreign exchange movements
of £0.1 billion.
IGD surplus represents the accumulation of surpluses across
all of our operations based on local regulatory minimum
capital requirements with some adjustments, pursuant to the
requirements of Solvency I. The calculation does not fully adjust
capital requirements for risk nor does it capture the true
economic value of assets. Global regulatory developments, such
as Solvency II and ComFrame, aim to ensure that the calculation
of regulatory surplus continues to evolve over time into a more
meaningful economic measure.
There is broad agreement that ultimately it would be benefi cial
to replace the IGD regime with a regime that would be more risk
based. Solvency II was supposed to provide such a framework
but we now know that it will not be implemented before
31 December 2015. The structure of the Group and the approach
we have taken to managing our risks, with a sizeable credit
reserve in the UK annuity book, a strong inherited estate in UK
with profi ts and the relatively low risk nature of our asset
management and Asian operations, together with a high level of
IGD surplus, means we have positioned ourselves well for future
regulatory developments and stresses to our business.
(Unaudited)
In March 2013, we have agreed with the FSA to amend the
calculation of the contribution Jackson makes to the Group’s IGD
surplus. Until now, the contribution of Jackson to the reported
IGD was based on an intervention level set at 75 per cent of US
Risk-Based Capital Company Action Level (CAL). Going forward,
the contribution of Jackson to IGD surplus will equal the surplus
in excess of 250 per cent of CAL. This is more in line with the level
at which we currently report free surplus, which we have set
at 235 per cent of CAL. In the absence of an agreed Solvency II
approach, we believe that this change makes the IGD surplus a more
meaningful measure and one that is more closely aligned with
economic reality. The revised IGD surplus calculation has no impact
on the way that the US business is managed or regulated locally.
Note
1 The estimated position at 28 February 2013 allows for economic conditions
and surplus generation since 31 December 2012 and is stated before the fi nal
dividend and the eff ect of the Thanachart acquisition and aft er allowing for
a reduction in Jackson’s contribution to IGD surplus of £1.3 billion.
* The impact of the 100 basis points reduction in interest rates is exacerbated by
the current regulatory permitted practice used by Jackson, which values all
interest rate swaps at book value rather than fair value for regulatory
purposes. At 31 December 2012, removing the permitted practice would have
increased reported IGD surplus by £0.3 billion. As at 31 December 2012, it is
estimated that a 100 basis point reduction in interest rates (subject to a fl oor of
zero) would have resulted in an IGD surplus of £4.9 billion, excluding the
permitted practice. The eff ect of the revised calculation of Jackson’s
contribution to IGD surplus as at 31 December 2012 would have been to
increase the sensitivity to equity market falls by approximately £50 million.
(Unaudited)
On this revised basis, the IGD surplus at 28 February 2013
is estimated at £4.4 billion1 (equivalent to a capital cover of
2.5 times) which includes the £0.4 billion of subordinated debt
raised in January 2013 and is after deducting £1.3 billion in
respect of the Jackson change from 75 per cent to 250 per cent
of CAL.
Prudential continues to have further options available to manage
available and required capital. These could take the form of
increasing available capital (for example, through fi nancial
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. A number
of such options were utilised through the last fi nancial crisis in
2008 and 2009 to enhance the Group’s IGD surplus. One such
arrangement allowed the Group to recognise a proportion of
the shareholder’s interest in future transfers from the UK’s
with-profi ts business and this remained in place, contributing
£0.36 billion to the IGD at 31 December 2012. We will phase this
out in two equal steps, reducing the credit taken to £0.18 billion
from January 2013 and we expect to take zero credit from
January 2014.
In addition to its strong capital position, on a statutory (Pillar 1)
basis, the total credit reserve for the UK shareholder annuity
funds also protects its capital position in excess of the IGD
surplus. This credit reserve as at 31 December 2012 was
£2.1 billion. This credit risk allowance represents 40 per cent
of the bond portfolio spread over swap rates, compared to
33 per cent as at 31 December 2011.
Stress testing
(Unaudited)
As at 31 December 2012, stress testing of our IGD capital
position to various events has the following results:
AAAAAAAAAAAA An instantaneous 20 per cent fall in equity markets from
31 December 2012 levels would reduce the IGD surplus
by £450 million;
AAAAAAAAAAAA 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 £950 million;
AAAAAAAAAAAA A 100 basis points reduction (subject to a fl oor of zero) in
interest rates would reduce the IGD surplus by £850 million*;
and
AAAAAAAAAAAA Credit defaults of ten times the expected level would reduce
IGD surplus by £700 million.
Risk and capital management
Prudential plc Annual Report 2012
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Prudential believes that the results of these stress tests,
together with the Group’s strong underlying earnings capacity,
its established hedging programmes and its additional areas of
fi nancial fl exibility, demonstrate that it is in a position to withstand
signifi cant deterioration in market conditions.
Prudential also uses an economic capital assessment to monitor
its capital requirements across the Group, allowing for realistic
diversifi cation benefi ts and continues to maintain a strong position.
This assessment provides valuable insights into its risk profi le.
C.2 Solvency II and other global regulatory
developments
(Unaudited)
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. The new approach is based on the
concept of three pillars – minimum capital requirements,
supervisory review of fi rms’ assessments of risk, and enhanced
disclosure requirements.
Specifi cally, 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 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 are intended to be aligned more closely
with economic capital methodologies and may allow Prudential
to make use of internal economic capital models if approved by
the relevant supervisory authority.
Representatives from the European Parliament, the European
Commission and the Council of the European Union are currently
discussing the Omnibus II Directive which, once approved, will
amend certain aspects of the original Solvency II Directive. In
addition the European Commission is continuing to develop, in
consultation with stakeholders including industry, the detailed
rules that will complement the high-level principles of the
Directive, referred to as ‘implementing measures’. The
Omnibus II Directive is not currently scheduled to be fi nalised
until late 2013, while the implementing measures cannot be
fi nalised until after Omnibus II.
There is a signifi cant uncertainty regarding the fi nal outcome
from this process. In particular, the Solvency II rules relating
to the determination of the liability discount rate and to the
treatment of US business remain unclear and Prudential’s capital
position is sensitive to these outcomes. With reference to the
liability discount rate, solutions to remove artifi cial volatility from
the balance sheet have been suggested by policymakers as the
regulations continue to evolve. These solutions, along with
transitional arrangements for the treatment of the US business,
are continuing to be considered by policymakers as part of the
process to reach agreement on the Omnibus II Directive. There
is a risk that the effect of the measures fi nally adopted could be
adverse for Prudential, including potentially that a signifi cant
increase in capital may be required to support its business and
that Prudential may be placed at a competitive disadvantage to
other European and non-European fi nancial services groups.
Prudential is actively participating in shaping the outcome
through our involvement in industry bodies and trade
associations, including the Chief Risk Offi cer and Chief Financial
Offi cer Forums, together with the Association of British Insurers
and Insurance Europe (formerly known as the Comité Européen
des Assurances).
The delays in fi nalising the Omnibus II Directive and
implementing measures are expected to result in a deferral of the
Solvency II implementation date for fi rms beyond the previously
anticipated date of 1 January 2014. At this stage, it remains
unclear exactly when Solvency II will come into force, although
a deferral until 1 January 2016 or beyond appears likely.
Having assessed the 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. Prudential is continuing its preparations to
adopt the regime when it eventually comes into force and is
undertaking in parallel an evaluation of the possible actions to
mitigate its effects. Prudential regularly reviews its range of
options to maximise the strategic fl exibility of the Group. This
includes consideration of optimising the Group’s domicile as a
possible response to an adverse outcome on Solvency II.
Over the coming months Prudential will remain in regular contact
with the FSA as it continues to engage in the ‘pre-application’
stage of the approval process for the internal model. In addition,
Prudential also expects to engage in the initial stage of the FSA’s
proposed ‘Individual Capital Adequacy Standards Plus (ICAS+)’
regime, which will ultimately enable its UK insurance entities to
leverage the developments made in relation to the Solvency II
internal model for the purpose of meeting existing ICAS regime.
Currently there are also a number of other prospective global
regulatory developments which could impact the way in which
Prudential is supervised in its many jurisdictions. These include
the Dodd-Frank Act in the US, the work of the Financial Stability
Board (FSB) on Globally Systemically Important Financial
Institutions (G-SIFIs) and the Common Framework for the
Supervision of Internationally Active Insurance Groups
(ComFrame) being developed by the International Association
of Insurance Supervisors (IAIS).
The Dodd-Frank Act represents a comprehensive overhaul of the
fi nancial services industry within the United States that, among
other reforms to fi nancial services entities, products and markets,
may subject fi nancial institutions designated as systemically
important to heightened prudential and other requirements
intended to prevent or mitigate the impact of future disruptions in
the US fi nancial system. The full impact of the Dodd-Frank Act on
Prudential’s businesses is not currently clear, however, as many
of its provisions have a delayed effectiveness and/or require
rulemaking or other actions by various US regulators over the
coming years.
C.4 Risk mitigation and hedging
(Unaudited)
Prudential manages its actual risk profi le against its tolerance of
risk. To do this, Prudential maintains risk registers that include
details of the risks Prudential has identifi ed and of the controls
and mitigating actions it employs in managing them. Any
mitigation strategies involving large transactions such as a
material derivative transaction involving shareholder business
are subject to review at Group level before implementation.
Prudential 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 manage insurance risk; implementing corporate
insurance programmes to limit the impact of operational risks;
and revising business plans where appropriate.
78
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Risk and capital management continued
As part of a global initiative to identify G-SIFIs, in May 2012,
the IAIS published proposed assessment methodology for
designating Globally Systemically Important Insurers (G-SIIs).
For those groups that are designated by the FSB as G-SII then
additional policy measures including enhanced supervision,
introduction of recovery and resolution plans and higher loss
absorbency requirements could be proposed. Further detail of
the proposals is expected during 2013 and implementation is
likely to be over a period of years. Furthermore, the FSA is
considering the designation of Domestically Systemically
Important Insurer (DSII) for those UK insurers that are
signifi cant in UK terms. It is not yet clear what the impact
of this designation may be.
ComFrame is also being developed by the IAIS to provide
common global requirements for supervision of insurance
groups. The framework is designed to develop common
principles for supervision and so may increase the focus of
regulators in some jurisdictions. It is also possible that some
prescriptive requirements, including group capital, could be
proposed. Further clarity on ComFrame is expected during
the second half of 2013.
C.3 Capital allocation
(Unaudited)
Prudential’s approach to capital allocation is to attain a balance
between risk and return, investing in those businesses that
create shareholder value. In order to effi ciently allocate capital,
Prudential measures the use of, and the return on, capital.
Prudential uses a variety of metrics for measuring capital
performance and profi tability, including traditional accounting
metrics and economic returns. Capital allocation decisions are
supported by this quantitative analysis, as well as strategic
considerations.
The economic framework measures risk adjusted returns on
economic capital, a methodology that ensures meaningful
comparison across the Group. Capital utilisation, return on
capital and new business value creation are measured at the
product level as part of the business planning process.
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Corporate responsibility review
Creating social and
economic value
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Corporate responsibility (CR) is integral to the way
we do business at Prudential. This review gives an
overview of our activities. Prudential also publishes
an annual CR report which is available online at
www.prudential.co.uk
Creating social and economic value
As a business that provides savings, income, investment and
protection products and services, we create social value through
our day-to-day operations. We provide customers with ways to
help manage uncertainty and build a more secure future. By
playing a key role in fi nancial markets, we provide long-term
capital that fi nances businesses, builds infrastructure and
fosters growth in both developed and developing countries.
At Prudential, we aim to be sustainable in the broadest sense –
fi nancially, socially and environmentally. Sustainability is integral
to the way we do business. Our commitments to our customers
and our employees, as well as our support for communities and
our responsibility towards the environment, are rooted in our aim
of continuing to deliver strong fi nancial performance sustainably.
As a Group with a long-term view, we believe it is 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 public policy in all our markets.
The complexities and challenges surrounding ageing populations
have signifi cant policy implications in many countries around
the world. For example, through our partnership with the
Washington DC-based think tank, the Center for Strategic and
International Studies (CSIS), we have continued to contribute to
the debate, through events and seminars with policymakers
promoting the Global Aging Preparedness Index.
We commissioned additional demographic research in
partnership with CSIS, looking, in further detail, at retirement
expectations in Asia. Based on a survey conducted by CSIS in
six East Asia countries, it explores how rapid development
and rapid ageing are transforming retirement behaviour
and expectations in the emerging world. The fi ndings of
the study were published in 2012 and it is available at
http://gapindex.csis.org
Serving our customers
Today we serve around 24 million insurance customers in diverse
markets where people’s specifi c savings, investment and
protection needs are different. However, what is common among
all our customers is that the fi nancial decisions they make are
among the most important of their lives.
The insurance industry plays a unique role in society by helping
people manage uncertainty and gain security. Prudential has
been meeting customers’ needs for 165 years and we are
always looking for new ways to ensure that we understand our
customers’ long-term fi nancial goals and provide them with
the right products to help them plan for the future. We do not
underestimate how important these decisions are for our
customers, nor do we take for granted the trust they place in
us to deliver for them over the long term. Our customers have
made a choice to purchase from us, and we value highly their
decision and their loyalty.
We want our customers to stay with us for the long term. We
know this means we must constantly listen to them to understand
their changing needs, and that we must provide them with fair
and transparent products – and customer service – that
maintains their trust and faith in our business.
Asia
In the emerging markets of Asia, where we now have 13 million
insurance customers, the demand for savings and protection
products continues to grow as people seek greater fi nancial
security and peace of mind. We continue to broaden our offering
to help meet our customers’ goals.
Prudential Corporation Asia launched a number of tailored
products in 2012. PRUmyhealth medical plan was launched in
Hong Kong, offering comprehensive health protection with
lifetime global coverage, and in Malaysia PRUFlexi Med was
launched, which provides customers with the fl exibility to choose
a number of medical benefi ts based on their needs.
Across the region, we have a highly trained tied agency force,
and we provide support to new and experienced agents so that
they can deliver the best possible service for our customers.
In Hong Kong, we have developed the ‘Certifi ed Agency Builder
Programme’, through which fi nancial professionals follow a series
of certifi ed training courses.
Our four guiding CR principles
In line with our federal operating model, we believe that
corporate responsibility is best managed by those closest
to our customers and stakeholders. Underpinning this
approach are our four guiding principles. These provide
clarity to our businesses on where they should focus their
eff orts and resources.
AAAAAAAAAAAAA Serving our customers: we aim to provide fair and
transparent products which meet our customers’ needs;
AAAAAAAAAAAAA Valuing our people: we aspire to retain and develop highly
engaged employees;
AAAAAAAAAAAAA Supporting local communities: we seek to make a positive
contribution to our communities through long-term
partnerships with charitable organisations that make
a real diff erence; and
AAAAAAAAAAAAA Protecting the environment: we take responsibility for the
environment in which we operate.
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US
Founded over 50 years ago, Jackson National Life is one of the
largest life insurance companies in the United States, providing
retirement savings and income solutions, with approximately
4 million customers.
Asset management
M&G, Prudential’s UK and European asset management
business, has served retail and institutional investors for over
80 years, investing customers’ money in equities, fi xed income
and real estate.
M&G is a long-term investor that takes its responsibilities
as a shareholder seriously, often working closely with the
management of the companies in which it invests. Active voting
is an integral part of M&G’s investment approach. We believe that
exercising our votes both adds value and protects our interests as
shareholders. The M&G website provides an overview of voting
history: www.mandg.co.uk/Corporate/CorporateResponsibility
/CorporateGovernance/Votinghistory.jsp
M&G’s retail business launched the Bond Vigilantes blog
providing market insight straight from the trading fl oor. In
addition to the constant stream of market views posted by M&G,
comments are posted by users, establishing the blog as a genuine
discussion forum.
Valuing our people
We aim to create an environment that enables our people to fi nd
value and meaning in their work, and to deliver outstanding
performance for our customers, shareholders and communities.
This is essential to our continued success, and is performed
through our focus on four key areas – diversity and inclusion,
talent development, employee engagement, and performance
and reward.
Diversity and inclusion
We provide opportunities for our people regardless of their
gender, ethnicity, disability status, age, religion, caring
responsibilities or sexual orientation.
Our diversity and inclusion 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 in our Group Code of Business Conduct,
which sets expected standards of employee behaviour.
We maintain an inclusive culture that is sensitive to the needs of
employees with a disability. We continue employing people who
become disabled, and provide training and career development
opportunities for all. We also give full and fair consideration and
encouragement to all applicants with suitable aptitude and
abilities, regardless of disability.
The US is the world’s largest retirement savings market, with
considerable cohorts of the 78 million baby-boomers1 reaching
retirement age each year, creating signifi cant demand for
retirement income products.
Jackson has established a signifi cant presence in the alternative
investments market, in a period where customers seek greater
security in times of economic uncertainty, and is a leader in
alternative investments in the retail adviser market.
Elite Access was created in 2012 to make Jackson’s products
available to a much greater range of customers. Elite Access is a
variable annuity designed to combat the volatility of the market
by providing investors with the opportunity for greater portfolio
diversifi cation through the use of alternative asset classes.
UK
In the UK, challenging economic conditions continued to persist
in 2012 and have led customers, more than ever, to seek fi nancial
products that offer them the highest level of security from
companies they feel they can trust.
Annuities are a key product for Prudential UK and market rates
were at near historic lows during 2012. This means that it is more
important than ever for customers looking to take income from
their pensions to make informed choices. Our UK business paid
out £2.9 billion in income to UK annuitants in 2012.
Over the last decade, Prudential has been widely recognised as
the UK’s leading with-profi ts manager. Our long-term approach
to the management of the with-profi ts fund has continued to
benefi t customers during 2012, as it helps to provide protection
from the full impact of volatile market conditions. The fund has
consistently outperformed the FTSE All-Share Index. Over the
last 15 years, the fund has delivered a cumulative investment
return of 184.3 per cent on investments covering policyholder
liabilities. This compares favourably with the FTSE All-Share
Index total return of 106.5 per cent over the same period.
Total bonus payments are expected to top £2 billion in 2013,
and our policyholders will typically see year-on-year increases
of between 3.5 per cent and 6.5 per cent in accumulating
with-profi ts policy values. Since 2003, an estimated £22 billion
has been added to policy values.
We are committed to responding to customer concerns quickly
and effi ciently. The details of our approach to customers are
published on the Prudential UK website in line with FSA
guidance at www.pru.co.uk/about_us/complaints_data/
Prudential UK was in the best performing 8 per cent, up from
15 per cent in 2011, of fi nancial companies included in data
published by the Financial Ombudsman Service.
Note
1 Source: US Census Bureau
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We have several initiatives in place to maintain our commitment
to diversity and inclusion. These include:
AAAAAAAAAAAAA Apprenticeship schemes and support for underprivileged
students to provide entry-level positions for young people;
AAAAAAAAAAAAA Training in unconscious bias to improve inclusion throughout
Employee engagement
We strive to create a work environment and conditions that are
conducive to a culture of engagement. Engaging our employees
is critical to sustaining a high-performing business and retaining
talent. In 2012, we utilised a range of mechanisms to drive
engagement at all levels.
At Group Head Offi ce, the Connect programme of lunchtime
events brings together colleagues on subjects ranging from
learning about developments in the business and Prudential’s
heritage, to themes like parenting.
The wellbeing of our employees is paramount. We have a series
of initiatives, including assessments, activity programmes and
access to confi dential telephone and face-to-face coaching and
counselling with professionals.
Across Prudential, we encourage continuous dialogue to engage
with our employees. Through events and ‘open forums’ – such as
the M&G Staff Consultative Committee and the Employee Forum
within Prudential UK – employees can engage directly with their
executive teams and raise questions. In addition, our businesses
in the UK have a long-standing relationship with the union Unite.
The success of our engagement efforts have been recognised
internally and externally. Engagement surveys in various
business units have shown excellent results and several of our
businesses have won prestigious awards. For example, M&G was
named one of the best places to work in the City by the website
Here is the City News, and was also the highest-rated asset
management fi rm in a survey voted for by employees, and a
number of our businesses in Asia, including our Life business in
Singapore, were awarded The People Developer Standard.
Performance and reward
We offer reward packages that support a high-performing
organisation, in order to attract, retain and motivate talented
people. Each individual contributes to the success of the Group
and should be rewarded accordingly.
Rewards are linked to the delivery of business goals and
expected behaviours. We place emphasis on goals being met in
an appropriate manner. To ensure this, employees are not only
regularly assessed on ‘what’ they have achieved, but also on
‘how’ they did so.
We believe it is important for our employees to have the
opportunity to benefi t from the Group’s success through share
ownership. In the UK, we operate two all-employee share plans:
a Share Incentive Plan (SIP) and a Save As You Earn (SAYE)
scheme. In 2012, a majority of eligible employees participated in
one or both of these plans.
In Asia, we operate two SAYE schemes, similar to those in the UK.
Participation in these schemes continues to grow strongly among
our employees and agents.
the organisation;
AAAAAAAAAAAAA Pay reviews to prevent systematic concerns around equal pay
and opportunity by gender, ethnic group and working
patterns; and
AAAAAAAAAAAAA Collaborative partnerships with organisations that strengthen
and further the diversity and inclusion agenda, such as the
Diversity and Inclusion in Asia Network (DIAN), and
Peckham, an American non-profi t community rehabilitation
organisation. In the UK, we are also sponsors of the 2012
Working Mums Top Employer Awards, and co-sponsors
of the inaugural Women in Investment Management event
targeting female students.
Talent development
All employees are encouraged to take responsibility for
driving their own development and agreeing plans with their
managers. To support them, the organisation provides on-going
development activities. The majority of these activities sit within
our business units, while Group HR focuses on programmes for
senior leaders across the organisation.
At Group level, the emphasis is on succession planning for senior
roles and development of our overall leadership talent pipeline.
In support of this, there are a number of new Group-wide
programmes. In addition to The Top 100 initiative, which
focuses on individually tailored development for our most
senior executives, we provide programmes that are specifi cally
designed to enhance colleagues’ cross-business unit/functional
leadership skills and experience.
Within our businesses, there are several programmes that
demonstrate our commitment to furthering talent. Prudential
Corporation Asia developed a holistic Talent Development
Framework with clear segmentation, to enable the identifi cation of
talent in each market, as well as the design and accurate targeting
of ‘top of the class’ leadership development programmes.
In the US, The Jackson University continues to provide
business-specifi c development activities for employees.
Jackson’s senior management team play a central role in shaping
the curriculum, ensuring it aligns to major corporate initiatives
for the business. In addition, the LEAP programme for senior
leaders aims to accelerate their leadership potential and
organisational impact.
In our UK-based businesses, we have various programmes
designed to create focused learning networks and active talent
communities. These include: M&G’s Cornerstone, focused on
senior management; Catalyst, aimed at junior talent; Investor
Development Programmes; and Sales Business Leadership
Programmes. Prudential UK provides Career Development
Centres for middle managers, and at Group Head Offi ce,
Enhance offers employees the opportunity to hone their
skills for working effectively and to develop in areas such
as cross-cultural awareness and building effectiveness
partnerships.
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Supporting local communities
As a long-term business, we are committed to supporting the
long-term well-being of the communities in which we operate.
The social value of our business – helping customers manage
uncertainty and build a more secure future, as well as our
investments providing long-term capital that fi nances businesses,
builds infrastructure and fosters economic growth – is further
underpinned by our community programmes and activities.
Each of Prudential’s businesses has community investment
programmes in place which provide support to charitable
organisations, both through funding and the experience and
expertise of our employees.
Last year more than 7,350 employees across the Group gave
up their time to help in their communities, using their skills and
knowledge to benefi t others.
We establish long-term relationships with our charity partners
to ensure that the projects we support are sustainable, and we
work closely with them to ensure that our programmes
continuously improve.
The diversity of our markets means that our programmes vary
from region to region, but a shared focus for our community
investment is education and life skills. These activities include
fi nancial education, support to improve social mobility and
employee volunteering.
Financial education
Financial education forms an important part of our educational
activity. We believe that encouraging people to manage their
money prudently helps to underpin overall economic
development and success for communities.
Cha-Ching, PCA’s fl agship regional fi nancial education
programme, gathered greater momentum in 2012.
Cha-Ching was launched in seven countries in 2011, to help
parents in Asia develop money-smart values among children
from the ages of seven to 12. The programme has produced a
series of three-minute music videos with sing-a-long subtitles
that teach children about four key money management concepts
– Earn, Save, Spend and Donate – through a band of six
characters. These videos have been shown daily on the Cartoon
Network, Asia’s most watched children’s channel. Cha-Ching is
supported by an interactive website (www.cha-ching.com) and
mobile applications offering digital resources for parents,
children and teachers.
In 2012, Cha-Ching was developed with the launch of ‘Season
Two’, featuring three new music videos on budgeting, credit
and investing. A new online game, Cha-Ching Saver World Tour,
and a fi rst mobile game app, Cha-Ching Band Manager, were
also launched.
Over the last year, Cha-Ching has received signifi cant support
across the region, with more than 20,000 children and teachers
benefi ting from the programme to date. In April 2012, the
Philippines Department of Education signed a Memorandum
of Agreement to incorporate Cha-Ching into the curriculum of
public primary schools, and NGOs including Junior Achievement
have organised Cha-Ching workshops for children in Hong Kong
and Thailand. Singapore Airlines and Garuda Indonesia have
incorporated the music videos into their in-fl ight entertainment
content for travelling families.
In the US, Jackson, alongside employees from across the Group,
provided more than 5,000 volunteer hours in support of fi nancial
literacy as part of its work with Junior Achievement, a charity
which teaches young people about money management and how
business works. Jackson is one of only 10 companies across the
US to have been awarded a Bronze US President’s Volunteer
Service Award for the 2011-2012 programme.
Improving education and skills
In Asia, with the support of the Ministry of Education, PCA
partnered with the China Insurance Regulatory Commission
and the Chinese Academy of Social Sciences to develop an
insurance educational course that could be taught across schools
in China. Since its launch in 2007, more than 57,000 children
have benefi ted from the course to date, strengthening their
knowledge of insurance and how it relates to their everyday lives.
In the UK, the Business Class programme, run by Business in the
Community, gives Prudential UK colleagues the opportunity to
use their knowledge, experience and skills to help with some of
the most pressing issues in local schools. Businesses partner
with schools in the most deprived areas, and work strategically
for three years on an action plan driven by the school’s needs,
covering areas such as leadership, curriculum and achievement.
In 2012, the programme helped 15 schools, 7,500 students and
90 teachers.
Through the partnership, 86 volunteers are working with schools
in Reading, Stirling and Westminster. As well as supporting
performance management training and people management
skills for senior teachers and school leaders, a ‘menu of
activities’ has been created to help young people understand
the opportunities available to them when they leave school, as
well as working with young people to improve their confi dence
and motivation.
At Group Head Offi ce, a new charitable partnership was
established in 2012 with Greenhouse, a London-based charity
which assists young people in some of the most deprived areas
of the city. It uses sport, including basketball, to turn young lives
around. Sports coaches work full-time in schools to help young
people improve their health and fi tness, while mentoring them to
increase their engagement with their education and community.
Prudential’s support enables over 1,000 disadvantaged
young people to participate weekly through Greenhouse’s
basketball programme.
Employee volunteering
We believe in sharing the skills of our global workforce with their
local communities. Many of our employees play an active role
through volunteering, charitable donations and fundraising.
Financial support is always important, but it is the combination
of all these resources that means we can make a far more positive
contribution to all our communities across the globe. We
recognise that employee volunteering brings benefi t not only to
the charities, but also to the development of our people, and we
actively encourage colleagues to participate in our programmes.
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Since its launch in Asia eight years ago, the ‘Investing in Your
Future’ volunteer-led fi nancial literacy programme has reached
more than 38,000 women. These seminars teach basic fi nancial
planning skills for different stages in their lives. Female volunteers
from Prudential donate their time and expertise to deliver the
seminars in China, India, Indonesia and Vietnam. The project works
closely with the All-China Women’s Federation, the Women’s
Association and Labour Union in Vietnam, and the Ministry of
Women’s Empowerment and Child Protection in Indonesia.
Prudential RideLondon
Prudential is sponsoring RideLondon, an annual two-day festival
of cycling which was formally launched in February 2013 with the
Mayor of London, Boris Johnson, who predicted the event will
become a living legacy of the London Olympic and Paralympic
Games of 2012. Prudential RideLondon will be a world-class
festival of cycling, starting in August 2013, that combines a free
family ride in central London, a world-class professional cyclists’
race and an amateur cyclists’ race to raise money for charity.
Disaster relief and preparedness
Many of our customers in Asia are located in areas prone to
natural disasters. For a number of years we have supported local
initiatives to support relief efforts following disasters in countries
where we operate, and we also maintain a disaster relief fund
which can be activated in emergencies. Our commitment to
disaster relief also often goes beyond fi nancial aid, with our
people helping on the ground.
In October 2011, many areas of northern and central Thailand
were hit by severe fl ooding caused by tropical storm Nalgae.
More than 13 million people were affected by the catastrophe
which caused the loss of 750 lives.
In the aftermath of the disaster, Prudential partnered with Help
Age International and FOPDEV (Foundation for Older Persons
Development) to provide help where it was needed most. In June
2012, a team of 65 PRUvolunteers from 10 countries across Asia,
supported by our Thai colleagues, travelled to Fang District in
northern Thailand for six days to help build and renovate
fl ood-resistant homes for old people in Mai Ai, as part of the
‘New House for New Life’ project. The team also helped
renovate a school, built a dam for improved water management,
and participated in an evacuation simulation exercise with the
residents to better prepare them for future fl oods.
In 2012, the Prudence Foundation was established in Asia as a
unifi ed platform to coordinate charitable activity in the region.
As part of the creation of the Prudence Foundation, Prudential
Corporation Asia’s approach has turned to disaster
preparedness. A designated fund has been established to help
communities develop preventative programmes before disasters
occur to improve the ability of communities to better prepare for,
cope with and recover from any unfortunate natural disasters.
In the US, Jackson staff gave over 6,500 volunteer hours in
2012, providing support to local charities benefi ting children
and the elderly.
In the UK, 43 per cent of Prudential UK employees took part in
volunteering during 2012, mentoring schoolchildren, supporting
the elderly and skills-sharing with local charities.
At M&G, 118 employees have been actively involved in initiatives
with community organisations, charities and schools in and
around Chelmsford and London.
Chairman’s Challenge
In 2012, 4,500 employees volunteered through Prudential’s
fl agship international programme, the Chairman’s Challenge.
The programme encourages employees from across the Group
to volunteer on projects initiated by our global charity partners,
including Plan International, Help Age International and Junior
Achievement. It allows us to support many different charities
with volunteers, as well as fi nancial support. Prudential donates
£150 to our charity partners for every employee who registers for
the programme. Charity partners use this money to seed-fund
charitable projects for Prudential volunteers.
Each year, employees across the Group vote for the shortlisted
project they believe has made the greatest impact. In 2012, the
winning project was ‘Learning About Earning’. This programme
– in partnership with Junior Achievement – benefi ted 234
impoverished children from a small village outside Jakarta,
through the commitment of 430 employees from Prudential
Corporation Asia’s Indonesian business, who helped the
children develop basic communication and fi nancial skills.
Shortlisted projects 2012:
AAAAAAAAAAAAA The Taiwan Fund For Children and Families (TFCF) –
Children’s Financial Camp Annual Child Protection Campaign
and Wishing Doll Fundraising Campaign. 766 employees
volunteered in 2012, 30 of whom used their business skills to
design and deliver four fi nancial camps to 120 disadvantaged
children, while the remainder supported the TFCF’s
protection and fundraising campaign;
AAAAAAAAAAAAA Snehasadan, Mumbai – Holistic Development of Children.
The programme rehabilitates homeless children and gives
them education, life skills and professional training to make
them independent. 50 volunteers supported the project for
the fi rst time in 2012, benefi ting 240 children;
AAAAAAAAAAAAA Junior Achievement, US – Economic Gardening: Growing
Success One Student At A Time. 528 Jackson employees were
involved in volunteering activities either in the classroom
delivering fi nancial literacy sessions or through
fundraising; and
AAAAAAAAAAAAA Junior Achievement Thailand – Cha-Ching in Ourselves.
140 Prudential Corporation Asia employees dedicated
volunteering time to educate young people in fi nancial
literacy skills.
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Charitable donations
We calculate our community investment spend using the
internationally recognised London Benchmarking Group
standard. This includes cash donations to registered
charitable organisations, as well as a cash equivalent for
in-kind contributions.
In 2012, the Group spent £12.6 million supporting community
activities, an increase of 39.5 per cent on 2011.
The direct cash donations to charitable organisations amounted
to £9.6 million, of which approximately £4.0 million came from
our EU operations, which are principally our UK insurance
operation and M&G, with the remaining £5.6 million being
contributed to charitable organisations by Jackson National Life
Insurance Company and Prudential Corporation Asia.
The cash contribution to charitable organisations from our
EU operations is broken down as follows: education £1.3 million;
social, welfare and environment £2.4 million; cultural £0.2 million
and staff volunteering £0.1 million.
Political donations
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 defi ned in the Political Parties, Elections and
Referendums Act 2000. The Group did not make any such
donations or incur any such expenditure in 2012.
Protecting the environment
We recognise that managing our buildings effi ciently and
minimising our greenhouse gas emissions is not only benefi cial
to the environment but also makes good business sense.
We aim to ensure that we minimise the impact of our activities
on the environment. Our strategy focuses on reducing the direct
impact of the properties we occupy, as well as the properties we
manage through PRUPIM (Prudential Property Investment
Managers Limited), which is a top-25 global real estate fund
manager, with £16 billion of assets under management
(at 31 December 2012).
Reducing our direct impact: occupied properties
We monitor energy consumption, carbon dioxide emissions,
water consumption, waste, paper use and recycling at all our UK
sites, and at Jackson’s main premises in North America in Lansing,
Michigan, Denver, Colorado, and Nashville, Tennessee. We also
monitor energy consumption and carbon dioxide emissions from
46 occupied properties in Asia, where Prudential Corporation
Asia occupies approximately 20,000 square feet or more, for a
combined total of 2.45 million square feet.
The Carbon Reduction Commitment (CRC) Energy Effi ciency
Scheme is a mandatory UK scheme aimed at improving energy
effi ciency and cutting carbon dioxide emissions in large public
and private sector organisations, which are responsible for
around 12 per cent of the UK’s emissions. The scheme features
a range of reputational and fi nancial drivers, which aim to
encourage organisations to develop energy management
strategies that promote a better understanding of energy usage.
All CRC participants must measure and report carbon emissions
annually. The fi rst CRC performance league table, which is due
to be updated later this year, placed Prudential ahead of its
insurance peer group. In 2012, for the fi rst time, participants had
to purchase allowances from the Government before the end of
July. Prudential’s annual carbon emission for the 2011/12
compliance year was 75,742 tonnes of CO2, 5,438 tonnes
less than in 2010/11, which translated into a fi nancial liability
of £908,904.
Corporate Property continues to maintain certifi cation
to ISO 14001 (an internationally recognised standard for
environmental management) for services it provides to UK
Business Units. Compliance with ISO 14001 drives improved
environmental performance.
The Environmental Forum, a sub-group of Prudential plc’s
Environment Health and Safety Council, is supporting
Corporate Property’s UK Environmental Employee Engagement
programme. This initiative focuses on encouraging employees
to make their own contribution to help their Business Unit
improve its environmental performance. Each UK Business Unit
has signed up to the programme to meet the challenge by a mix
of intranet campaigns, competitions, employee forums and
attitude surveys.
There will be a new mandatory greenhouse gas emissions
reporting requirement for all listed companies on the London
Stock Exchange. Prudential plc will include a carbon footprint
report in its Annual Report 2013.
Corporate responsibility review
Prudential plc Annual Report 2012
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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 2012, 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 22 days
(2011: 22 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 certifi cation, an industry benchmark of recognised
good practice.
Reducing our impact: property investment portfolio
The fundamental principle behind PRUPIM’s approach to
Responsible Property Investment is that by having a leading
position we are better able to protect and enhance
performance for its clients. This strategy focuses on four
areas: ensuring portfolio resilience; driving environmental
improvements; building strong relationships; and responsibility
in its own operations.
PRUPIM’s focus on delivering energy reductions across its
managed portfolio has achieved some signifi cant results. For
example, in the UK, PRUPIM has reduced carbon emissions
intensity by 17 per cent at 23 of its largest multi-let offi ces and
16 per cent at its shopping centres, generating savings of over
£3.6 million for its occupiers. Its UK shopping centres now divert
80 per cent of waste from landfi ll and 49 per cent of waste is
diverted from landfi ll at our ISO 14001 offi ces.
We have also achieved the environmental standard ISO 14001
at nine shopping centres and 27 multi-let offi ces, which together
account for 64 per cent of the carbon emission under
management control.
PRUPIM’s approach and progress can be found in its annual
Responsible Property Investment report at www.prupim.com/rpi
Accountability and governance
The Board
The Board regularly reviews the Group’s CR performance and
scrutinises and approves the Group CR report and strategy on
an annual basis.
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 98
for more information.
Local governance
In M&G, Jackson and Prudential UK there are governance
committees in place – with senior management representation –
which agree strategy and spend. In Asia, the Prudence
Foundation has been established as a unifi ed charitable platform
to align and maximise the impact of community efforts across
the region.
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Section 3
Governance
Prudential plc Annual Report 2012
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88
93
110
111
Role of the Board and Governance Framework
Board of directors
Corporate Governance report:
93
100 Audit Committee report
103
104
105
107
Additional disclosures
Index to principal directors’ report disclosures
Nomination Committee report
Risk Committee report
Risk governance
Relations with shareholders
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Governance Prudential plc Annual Report 2012
Board of directors
Chairman
Paul Manduca
Chairman
Appointments
Board: October 2010
Chairman of the Board: July 2012
Chairman of the Nomination
Committee: July 2012
Paul Manduca was the Senior
Independent Director prior to his
appointment as Chairman. He was
also a member of the Audit and
Remuneration Committees from
October 2010 to June 2012 and
a member of the Nomination
Committee from January 2011.
Paul was a non-executive director
of Wm Morrison Supermarkets Plc
(Morrisons) from September
2005 until March 2011. During
that time, he was the Senior
Independent Director, a member
of the Nomination Committee and
Chairman of the Remuneration
Committee of Morrisons, and
prior to that he chaired the Audit
Committee of Morrisons. Paul
retired as Chairman of JPM
European Smaller Companies
Investment Trust Plc in December
2012 and was the Chairman of
Aon UK Limited until September
2012. He was also a non-executive
director and Chairman of the
Audit Committee of KazMunaiGas
Exploration & Production until the
end of September 2012.
Paul was the Senior Independent
Director and Chairman of the
Audit Committee 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.
Prior to that, he 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, a former Chairman of
the Association of Investment
Companies from 1991 to 1993,
and former member of the
Takeover Panel. He is also the
Chairman of Henderson
Diversifi ed Income Limited.
Age 61.
Group Chief Executive
Tidjane Thiam
Group Chief Executive
Appointments
Board: March 2008
Group Chief Executive:
October 2009
Tidjane was the Chief Financial
Offi cer from March 2008 until
his appointment as Group Chief
Executive in 2009.
Tidjane spent the fi rst part of his
professional career with McKinsey
& Company in Paris 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 and one
of the leaders of their Financial
Institutions practice before joining
Aviva in 2002. He worked at Aviva
until 2008, holding successively
the positions of Group Strategy
and Development Director,
Managing Director of Aviva
International, Group Executive
Director and Chief Executive
Offi cer, Europe.
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) and he
was appointed as Chairman in
July 2012. He is a member of
the Council of the Overseas
Development Institute (ODI)
in London, a member of the
Africa Progress Panel chaired
by Kofi Annan and a sponsor of
Opportunity International. Tidjane
is a member of the UK-ASEAN
Business Council and of the
Strategic Advisory Group on UK
Trade and Investment. In January
2012, Tidjane was appointed to
the Prime Minister’s Business
Advisory Group and has been a
member of the European Financial
Round Table (EFR) since January
2013. Tidjane was awarded the
Légion d’Honneur by the French
President in July 2011. Age 50.
Board of directors
Prudential plc Annual Report 2012
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Executive Directors
Nicolaos Nicandrou ACA
Chief Financial Offi cer
John Foley
Group Chief Risk Offi cer
Appointments
Board: October 2009
Appointments
Board: January 2011
Robert Devey
Executive Director
Appointments
Board: November 2009
Michael McLintock
Executive Director
Appointments
Board: September 2000
Before joining Prudential, Nic
Nicandrou worked at Aviva, where
he held a number of senior fi nance
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 47.
John Foley has been Group Chief
Risk Offi cer since 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 56.
Rob Devey has been the Chief
Executive of Prudential UK and
Europe since 2009. Before joining
Prudential, Rob worked at Lloyds
Banking Group from 2002, where
he held a number of senior
leadership roles across insurance
and retail banking. Prior to joining
Lloyds Banking Group, Rob was
a consultant with the Boston
Consulting Group (BCG) in the
UK, US and Europe.
Rob chairs the London
Leadership Team of Business
in The Community and is also
a trustee of the LloydsTSB
Foundation for England and
Wales. Age 44.
Michael McLintock is the Chief
Executive of M&G, a position
he held at the time of M&G’s
acquisition by Prudential in
1999, having joined M&G in
1992. Michael has been a Trustee
of the Grosvenor Estate since
October 2008 and was appointed
as a non-executive director of
Grosvenor Group Limited in
March 2012. He previously served
on the board of Close Brothers
Group plc as a non-executive
director from 2001 to 2008 and
has been a member of the Finance
Committee of the MCC since
October 2005. Age 51.
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Governance Prudential plc Annual Report 2012
Board of directors continued
Executive Directors continued
Non-Executive Directors
Barry Stowe
Executive Director
Appointments
Board: November 2006
Michael Wells
Executive Director
Appointments
Board: January 2011
Mike Wells is 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
Offi cer of Jackson for the last nine
years. During this period he has
led the development of Jackson’s
variable annuity business and
been responsible for IT, strategy,
operations, communications,
distributions, Curian and the
retail broker dealers. Age 52.
Barry Stowe is the Chief Executive
of Prudential Corporation Asia, a
position he has held since October
2006. Before joining Prudential,
he was President, Accident &
Health Worldwide for AIG Life
Companies. He joined AIG in
1995, and prior to that was
President and CEO of Nisus, a
subsidiary of Pan-American Life,
from 1992 to 1995. Before joining
Nisus, Barry spent 12 years at
Willis Corroon in the US.
Barry is a member of the Board
of Directors of the International
Insurance Society and was a
director of the Life Insurance
Marketing Research Association
(LIMRA) and the Life Offi ce
Management Association (LOMA)
from October 2008 to October
2011. He is also a member of the
Board of Visitors of Lipscomb
University, a member of the Board
of Managers of the Hong Kong
International School and Chairman
of Save the Children (HK) Ltd.
Age 55.
He is Chairman of the Breach
Candy Hospital Trust and 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 Senior Advisor to Sony
Group in India.
Before he retired from Unilever
in 2005, Keki was Director, Home
and Personal Care, responsible
for the HPC business of Unilever
worldwide, a Board member of
Unilever PLC and Unilever N.V.,
and a member of Unilever’s
Executive Committee. He joined
Hindustan Lever Ltd in India in
1973 and in 1987, he joined the
Board of Hindustan Lever and
became Chairman in 1996.
Age 67.
Keki Dadiseth FCA
Independent
non-executive director
Appointments
Board: April 2005
Remuneration Committee:
April 2005
Keki was a member of the Audit
Committee from 2005 to 2007
and was appointed as a member
of the Prudential Corporation Asia
Audit Committee in July 2012.
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, JM Financial
Limited, JM Financial Services
Limited, Piramal Enterprises
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 adviser to
Fleishman-Hillard Inc and is
Chairman of Marsh & McLennan
Companies Group, India.
Board of directors
Prudential plc Annual Report 2012
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Non-Executive Directors
Sir Howard Davies
Independent
non-executive director
Appointments
Board: October 2010
Chairman of the Risk Committee:
October 2010
Audit Committee:
November 2010
Nomination Committee: July 2012
Sir Howard is chairman of the
Phoenix Group, and a Professor
at Institut d’Études Politiques
(Sciences Po). He is also Chairman
of the UK Government’s Airports
Commission. He chairs the
International Advisory Board of
the China Securities Regulatory
Commission and is a member of
the International Advisory Board
of the China Banking Regulatory
Commission. He is also an
independent director of Morgan
Stanley Inc and a Director of the
National Theatre. Age 62.
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Alexander Johnston
(Alistair) CMG FCA
Independent
non-executive director
Appointments
Board: January 2012
Audit Committee: January 2012
Alistair was a partner of KPMG
from 1986 to 2010. He joined
KPMG (then Peat Marwick
Mitchell) in 1973 and held a
number of senior leadership
positions. These included Vice
Chairman of UK Financial Services
and Head of UK Insurance
Practice, International Managing
Partner – Global Markets and UK
Vice Chairman. Latterly he served
as a Global Vice Chairman of
KPMG from 2007 to 2010.
Alistair acted as a non-executive
director of the Foreign &
Commonwealth Offi ce from 2005
to 2010 and chaired the audit
committee until 2009. He was an
Association Member of BUPA
until January 2012. Alistair is a
member of the Strategy and
Development Board and a Visiting
Professor at Cass Business School.
In February 2012 Alistair was
appointed as a Trustee of the
Design Museum in London.
Age 60.
Michael Garrett
Independent
non-executive director
Appointments
Board: September 2004
Remuneration Committee:
September 2004
Michael Garrett 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-
Pacifi c 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, a
think tank and forum for dialogue
promoting free trade, from 2001
to 2011. 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
Swaziland International Business
Advisory Panel under the auspices
of the Global Leadership Foundation
(GLF) London, as well as being
a member of the Development
Committee of the International
Business Leaders Forum (IBLF) until
stepping down in 2011. Age 70.
Ann Godbehere FCGA
Independent
non-executive director
Appointments
Board: August 2007
Chairman of the Audit Committee:
October 2009
Risk Committee: November 2010
Nomination Committee: July 2012
Ann was a member of the Audit
Committee from 2007.
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
Offi cer of Swiss Re Life & Health,
North America. In 1997 she was
made Chief Executive Offi cer of
Swiss Re Life & Health, Canada.
She moved to London as Chief
Financial Offi cer of Swiss Re Life
& Health Division in 1998 and
joined the Property & Casualty
Business Group, based out of
Zurich, as Chief Financial Offi cer
on its establishment in 2001. From
2003 until February 2007, Ann
was Chief Financial Offi cer of the
Swiss Re Group.
Ann is also a non-executive
director of British American
Tobacco plc, Rio Tinto plc, Rio
Tinto Limited, UBS AG, Arden
Holdings Limited, Atrium
Underwriting Group Limited and
Atrium Underwriters Limited.
From its nationalisation in 2008
until January 2009, Ann was
Interim Chief Financial Offi cer and
Executive Director of Northern
Rock. Age 57.
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Governance Prudential plc Annual Report 2012
Board of directors continued
Non-Executive Directors continued
Kaikhushru Nargolwala FCA
Independent
non-executive director
Appointments
Board: January 2012
Remuneration and Risk
Committees: January 2012
Kai Nargolwala was the
non-executive Chairman of
Credit Suisse Asia Pacifi c until
December 2011, having joined
Credit Suisse in 2008 as a member
of the Executive Board and CEO
of the Asia Pacifi c region.
From 1998 to 2007, Kai worked for
Standard Chartered PLC where he
was a Group Executive Director
responsible for Asia Governance
and Risk. His responsibilities
included developing strategy and
business performance across Asia,
as well as strategic merger and
acquisition activity. Prior to that,
he spent 19 years at Bank of
America and from 1990 was
based in Asia as Group Executive
Vice President and Head of the
Asia Wholesale Banking Group.
From 2004 to 2007, he was
a non-executive director at
Tate & Lyle plc and at Visa
International, where he served
on the Asia Pacifi c Board.
Kai is currently a non-executive
director and lead independent
director of Singapore
Telecommunications Limited,
a member of the Board of the
Casino Regulatory Authority
of Singapore, a non-executive
director of PSA International
Pte. Limited, Chairman of
the Governing Board of the
Duke-NUS Graduate Medical
School and a director and
Chairman of Clifford Capital Pte.
Limited. Age 62.
Philip Remnant CBE ACA
Senior Independent Director
Appointments
Board: January 2013
Remuneration, Audit, Nomination
Committees: January 2013
Philip Remnant is a senior
adviser at Credit Suisse, a Deputy
Chairman of the Takeover Panel,
a non-executive director of UK
Financial Investments Limited
(since 2009) and Chairman of City
of London Investment Trust plc
(since 2011). He was previously
a Vice Chairman of Credit Suisse
First Boston (CSFB) Europe and
Head of the UK Investment
Banking Department. Philip was
seconded to the role of Director
General of the Takeover Panel,
which administers the UK’s code
on takeovers and mergers, from
2001 to 2003 and again in 2010.
He served on the Board of
Northern Rock plc from 2008 to
2010 and from 2007 to 2012 was
Chairman of the Shareholder
Executive, which manages the
relationships between the UK
Government and the businesses in
which it is a shareholder. Age 58.
Lord Turnbull KCB CVO
Independent
non-executive director
Appointments
Board: May 2006
Chairman of the Remuneration
Committee: June 2011
Risk Committee: November 2010
Nomination Committee:
June 2011
Lord Turnbull was a member of the
Remuneration Committee from
November 2010, and a member of
the Audit Committee from January
2007 to November 2010.
Lord Turnbull 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 a non-executive
director of Frontier Economics
Limited and The British Land
Company PLC. He was formerly
Chairman of BH Global Limited
until January 2013 and 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 68.
Corporate governance
Prudential plc Annual Report 2012
93
Corporate governance
Good governance through
leadership and accountability
Paul Manduca
Chairman
Your Chairman’s view:
Prudential’s governance framework makes a vital
contribution to the long-term success of the Group. To ensure
that our business is both successful and sustainable, the
Board works closely with management in evaluating the
opportunities and risks we face. We ensure that the Group’s
strategy remains appropriate and that rigorous oversight is
in place across our geographically diverse business.
The Board, which I lead, is responsible for ensuring that our
governance is strong, clear and appropriate, and plays the
best possible part in supporting our business and its growth.
Like all aspects of business, governance is constantly
evolving, and we ensure that we are well prepared for new
developments. As well as complying with the relevant codes,
we keep a close eye on upcoming changes to those codes, and
carry out intensive work to prepare our policies, structures
and procedures well in advance.
We are committed to reporting on our governance in a clear
and transparent way, and will continue to ensure that our
governance is the best in its class and a central part of how
we do business.
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Compliance with Corporate Governance Codes
UK Corporate Governance Code and the Corporate
Governance Code for Hong Kong
In line with its premium and main listings on the London and
Hong Kong stock exchanges, Prudential applies the principles
of the UK Corporate Governance Code (the ‘UK Code’) and the
Corporate Governance Code issued by the Hong Kong Stock
Exchange (‘the HK Code’) to its governance framework.
The Board confi rms Prudential is currently in compliance with
the UK Code provisions although, during the year, there was a
period when the Company was without a Senior Independent
Director (in accordance with Code Provision A.4.1) due to the
appointment of Paul Manduca as Chairman in July 2012.
Following this appointment, the search for a new Senior
Independent Director commenced and was successfully
concluded with the appointment of Philip Remnant, who joined
the Board in January 2013. Throughout the search process, the
Company ensured that the non-executive directors were
available for shareholders to contact should they have had any
concerns and the Company believes that the governance of the
Board and the Company as a whole was not adversely affected
during the period while a successor was sought.
The Board confi rms that it has also complied with the HK Code
throughout the period other than in respect of the responsibilities
of the Remuneration Committee as regards making
recommendations to the Board in respect of the remuneration
of non-executive directors. It would be inconsistent with the
principles of the UK Code for the Remuneration Committee,
which is comprised solely of non-executive directors, to be
involved in the setting of their own fees.
The principles of the UK and HK Codes have been applied as set
out below and in the Directors’ remuneration report, which can
be found on pages 113 to 143.
The UK Code can be viewed on the Financial Reporting Council’s
website, with a copy of the HK Code available on the website of
the Hong Kong Stock Exchange.
Leadership
Role of the Board
The Board is accountable for the long-term success of the Group
and for providing leadership within a framework of effective
controls. The control environment enables the Board to identify
signifi cant risks and apply appropriate measures to manage and
mitigate them. The Board is responsible for setting strategic
targets and for ensuring that the Group is suitably resourced to
achieve those targets. In doing so, the Board takes account of
its responsibilities to the Group’s stakeholders, including the
Group’s employees, shareholders, suppliers and the communities
in which Prudential operates.
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Governance Prudential plc Annual Report 2012
Corporate governance continued
The Board has terms of reference which specifi cally set out
matters reserved for its decision. These are kept under regular
review and include matters such as setting the Group’s strategy
and monitoring its implementation, the approval of annual
budgets and business plans, as well as the risk appetite of the
Group and its capital and liquidity positions. The Board has
approved a governance framework and under these procedures,
all business units are required to seek approval from the Board for
matters exceeding pre-determined authority limits. The terms of
reference are regularly reviewed and enable the Board to
exercise effective control over the Group’s affairs.
The Board has delegated authority to a number of Board
committees which assist the Board in delivering its
responsibilities and ensuring that there is appropriate
independent oversight of internal control and risk management.
Each of these committees has established terms of reference and
is comprised of independent non-executive directors, with the
exception of the Nomination Committee which, in keeping with
the provisions of UK Code, is chaired by the Chairman.
The Board has also delegated authority for the operational
management of the Group’s businesses to the Group Chief
Executive for execution or further delegation by him in respect of
matters which are necessary for the effective day-to-day running
and management of the business. The chief executive of each
business unit has authority for the management of that respective
business unit and each has established a management board
comprising its most senior executives.
In performing its duties, the Board has access to the services
of the Group Company Secretary who advises on corporate
governance matters, Board procedures and compliance with the
applicable rules and regulations. Directors have the right to seek
independent professional advice at the Group’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.
Powers of the Board
The Board may exercise all powers conferred on it by the
Company’s 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.
Table 1
Number of meetings held
Chairman
Harvey McGrath (retired 2 July 2012)1
Paul Manduca (appointed 2 July 2012)2,3
Executive directors
Tidjane Thiam
Nic Nicandrou
Rob Devey
John Foley
Michael McLintock
Barry Stowe
Mike Wells
Non-executive directors
Keki Dadiseth
Howard Davies4
Michael Garrett
Ann Godbehere4
Alistair Johnston
Kai Nargolwala6
Kathleen O'Donovan (retired 31 March 2012)
Lord Turnbull7
Board
(scheduled)
Board
(additional)
Audit
Committee
Remuneration
Committee
Nomination
Committee
Risk
Committee
10
5
9
10
10
10
10
9
10
10
9
10
10
10
10
10
1
10
7
5
6
7
6
7
7
6
4
4
3
5
6
7
7
6
1
7
12
–
5
–
–
–
–
–
–
–
–
12
–
12
12
–
3
–
5
–
3
–
–
–
–
–
–
–
4
–
5
–
–
5
–
5
9
2
8
–
–
–
–
–
–
–
–
2
–
2
–
–
4
9
5
–
–
–
–
–
–
–
–
–
–
5
–
5
–
4
–
5
Notes
1 Harvey McGrath did not attend Nomination Committee meetings when it dealt with the appointment of the successor to his Chairmanship, in accordance
with the UK Code.
2 Paul Manduca was the Senior Independent Director and attended all scheduled Audit and Remuneration Committee meetings prior to his appointment
as Chairman on 2 July 2012.
3 Paul Manduca missed one Nomination Committee meeting and one additional Board meeting due to a confl ict of interest.
4 Appointed as members of the Nomination Committee on 2 July 2012.
5 There was one additional Remuneration Committee meeting and two additional Risk Committee meetings during the year.
6 Kai Nargolwala was unable to attend one additional Risk Committee meeting and one additional Remuneration Committee meeting.
7 Lord Turnbull was unable to attend one additional Risk Committee meeting.
Corporate governance
Prudential plc Annual Report 2012
95
Chairman
The roles of Chairman and Group Chief Executive are separate
and clearly defi ned. 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 ensuring that suffi cient time is available for
discussion of all agenda items. The Chairman also facilitates the
contribution of the non-executive directors and constructive
relationships between the non-executive and executive directors
by promoting a culture of openness and debate.
Harvey McGrath retired as Chairman of the Board in July 2012
and was succeeded by Paul Manduca.
The Board was satisfi ed that during 2012 the Chairman’s external
commitments did not hinder the day-to-day performance of his
duties for Prudential 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 88.
Chief Executive
The Group Chief Executive is responsible for the management
of the Group and the implementation of the strategy and policy
approved by the Board. In discharging his responsibilities, the
Group Chief Executive is advised and assisted by the Group
Executive Committee which comprises business unit heads
and a Group Head Offi ce team of functional specialists.
Senior Independent Director
Paul Manduca was the Senior Independent Director until July
2012 when he succeeded Harvey McGrath as Chairman of the
Board. The Nomination Committee concluded its search for a
suitable replacement in December 2012, with the appointment
of Philip Remnant. Philip’s appointment became effective on
1 January 2013.
The Senior Independent Director is responsible for maintaining
contact with shareholders with a view to understanding their
concerns and issues, as well as providing ongoing support to
the Chairman and acting as an intermediary for the other
non-executive directors if required. The Senior Independent
Director is accessible to all stakeholders, including debt
investors, particularly if they have concerns and where contact
through the normal channels may have failed or would be
inappropriate.
The Senior Independent Director is also responsible for leading
the performance evaluation of the Chairman.
Meetings
During 2012, the Board met on 10 scheduled occasions and held
seven additional meetings. A separate off-site strategy event was
also held. A detailed forward agenda has been in operation for
a number of years and this is kept updated to refl ect not only
regular items of business but also any topical matters arising
during the year.
Given the geographical spread of the Group’s business, at least
one board meeting a year is held overseas at one of the Group’s
business operations. These meetings facilitate a fuller
understanding of operations in that jurisdiction and provide an
opportunity for the directors to meet with senior members of the
management teams in those countries. The overseas meeting for
2012 was held in Singapore.
Where a director was unable to attend board meetings, their
views were canvassed by the Chairman prior to the meeting.
During the year, the Chairman met with the non-executive
directors without the executive directors being present on four
occasions.
Table 1 on page 94 details the number of board and committee
meetings attended by each director during the year.
Eff ectiveness
Composition
At the date of this report, the Board comprised the Chairman,
seven executive directors and eight independent non-executive
directors.
On 1 January 2012, Kai Nargolwala and Alistair Johnston joined
the Board as non-executive directors. Kathleen O’Donovan
retired as a non-executive director on 31 March 2012. Harvey
McGrath retired as a director on 2 July 2012 and was succeeded
as Chairman by Paul Manduca. Philip Remnant was appointed as
the Senior Independent Director with effect from 1 January 2013.
The biographies of all current directors are set out on pages 88
to 92.
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 UK and HK Codes and the
Company’s Articles of Association.
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96
Governance Prudential plc Annual Report 2012
Corporate governance continued
Terms of appointment for non-executive directors
Non-executive directors are usually appointed for an initial
three-year term commencing with their election by shareholders
at the fi rst Annual General Meeting following their appointment
by the Board and are subject to annual re-election by
shareholders. 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 offi ce 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. Non-executive directors serving a third term are subject
to rigorous annual review.
Re-election
Directors appointed to the Board since the 2012 Annual
General Meeting will stand for election for the fi rst time and,
in accordance with the provisions of the UK Code, all other
serving directors will offer themselves for re-election at the
Annual General Meeting to be held on 16 May 2013. The Board
believes that the non-executive directors bring a wide range
of business, fi nancial and international experience to the Board
and its committees.
Succession planning
The Board is actively engaged in succession planning for
both executive and non-executive roles to ensure that Board
composition is regularly refreshed 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 103. The Board
considers annually the outcome of the review and actions arising
from the review are implemented as part of the management
development agenda.
Diversity
The Group seeks, through its diversity policy, to encourage
the recruitment and retention of talented women at all levels.
Furthermore, the Board remains committed to inclusion in all its
forms and believes that leading companies seek out, and not
simply tolerate, diversity.
The inclusion of women extends to the Board and is an important
consideration during searches for new Board members.
Prudential embraces the proposition that more women on boards
would be advantageous to companies as well as to society at
large. The Group remains duty-bound to recruit the best available
talent, and although the Board does not endorse quotas, it does
commit to having an increasing representation of women in
senior positions in the Group and on the Board.
Independence
The independence of the non-executive directors is determined
with reference to the UK and HK Codes. Prudential is required to
affi rm annually the independence of all non-executive directors
under the Hong Kong Listing Rules 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 confl icts 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 UK and HK Codes. The Company has received confi rmation
of independence from each of the independent non-executive
directors as required by the Hong Kong Listing Rules.
Paul Manduca succeeded Harvey McGrath as Chairman in
July 2012 and is considered to have met the independence
requirements of the UK Code on appointment. As the ongoing
test of independence is not appropriate in relation to the
Chairman under the UK Code, and to ensure a consistent
approach in how the Chairman is described in all corporate
communications, the Chairman has not been asked to provide
confi rmation of his independence for the purposes of the Hong
Kong Listing Rules for the fi nancial year 2012 and will not be
asked to do so in future.
Keki Dadiseth and Barry Stowe serve as non-executive directors
of ICICI Prudential Life Insurance Company Limited, an Indian
company which is owned 26 per cent 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 per cent by Prudential. The Board does not consider
that these appointments in any way affect Keki’s status as an
independent director of Prudential.
Alistair Johnston was a partner in the Company’s auditor, KPMG,
from 1986 to 2010. However, he did not audit the Prudential
Group and he no longer has any fi nancial or other interest in
KPMG. The Board does not consider that this former relationship
with KPMG affects Alistair’s status as an independent director
of Prudential.
Prudential is one of the UK’s largest institutional investors and
the Board does not believe that this situation compromises the
independence of those non-executive directors who are 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.
Corporate governance
Prudential plc Annual Report 2012
97
Performance evaluation
In respect of 2011, there was a formal and rigorous review of
the Board, its Committees and their effectiveness which was
undertaken by an external consultancy. Areas of improvement
were identifi ed and good progress was made against these
during the course of 2012.
In respect of 2012, the review was carried out internally and
was facilitated by the Group Company Secretary. The review
was conducted using a combination of face-to-face meetings and
questionnaires, and the fi ndings will be presented to the Board
in March 2013. Opportunities to improve Board performance
will be documented and an action plan for 2013 agreed.
The performance of the non-executive directors and the Group
Chief Executive is evaluated by the Chairman in individual
meetings. 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.
Confl icts of interest
Directors have a statutory duty to avoid confl icts of interest with
the Company. The Company’s Articles of Association allow the
directors to authorise confl icts of interest and the Board has
adopted a policy and effective procedures to manage and, where
appropriate, approve confl icts or potential confl icts 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
confl icts or could give rise to a potential confl ict. The Nomination
Committee, or the Board where appropriate, evaluates and
approves each such situation individually where applicable.
Directors’ interests
Individual directors’ interests are set out on page 133 of the
Directors’ remuneration report.
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Induction and development
The Group Company Secretary supports the Chairman in
providing tailored induction programmes for new directors
and ongoing 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
briefi ngs on the Group’s principal businesses, its product range,
the markets in which it operates and the overall competitive
environment. These sessions are facilitated through meetings
with executive management and other senior members of the
management team. Other areas addressed include the directors’
obligations under the different listing regimes, legal issues
affecting directors of fi nancial services companies, the Group’s
governance arrangements and its investor relations programme,
as well as its remuneration policies.
Throughout their period in offi ce, directors are regularly updated
on the Group’s businesses and the regulatory and industry-specifi c
environments in which it operates as well as on their legal and
other duties and obligations as directors where appropriate. The
scope of these updates is reviewed in line with the requirements
of the business and can be in the form of written reports to the
Board, or presentations by senior executives or by external
advisers where appropriate. In order to enhance their knowledge
and effectiveness throughout their term in offi ce, non-executive
directors serving on key committees are updated regularly
on matters specifi c to the relevant committee and receive
presentations from senior executives on topics of interest
to them.
Ongoing professional development was undertaken by all
directors during 2012. This included a number of sector-specifi c
and business issues as well as legal, accounting and regulatory
changes and developments, and covered an update on key
changes applicable to companies listed on the Hong Kong Stock
Exchange. A number of business unit chief executive offi cers
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 offi ce functions presented
to the Board on the key issues currently facing their function and
directors received briefi ngs on Solvency II. 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.
Non-executive directors have also received updates and
briefi ngs relevant to their duties as directors of a company listed
on the Hong Kong Stock Exchange.
98
Governance Prudential plc Annual Report 2012
Corporate governance continued
External appointments
Directors may hold directorships or other signifi cant interests
in companies outside the Group which may have business
relationships with the Group.
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 confl icts of interest and any possible issues
arising out of the time commitments required by the new role
can be identifi ed and addressed appropriately. The major
commitments of our non-executive directors are detailed in
their biographies set out on pages 90 to 92.
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 confl icts of interest. In line with the UK
Code, executive directors would be expected to hold no more
than one non-executive directorship, nor the chairmanship, 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 131 and major
commitments of our executive directors are detailed in their
biographies on pages 88 to 90.
Directors’ indemnities and protections
Suitable insurance cover is in place in respect of legal action
against directors and senior managers of companies within the
Prudential Group. Protection for directors, and certain senior
managers, of companies within the Group, against personal
fi nancial exposure which may be incurred in their capacity as
such, is also provided. These include qualifying third party
indemnity provisions (as defi ned by the Companies Act 2006) for
the benefi t 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 2012 and remain in force.
In addition, the Articles of Association of the Company permit the
directors and offi cers of the Company to be indemnifi ed in
respect of liabilities incurred as a result of their offi ce.
Accountability
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 fi nancial 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 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 system is regularly reviewed and complies with the UK and
HK Codes, as well as the relevant provisions of Sarbanes-Oxley.
In complying with the UK Code, 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 2013, covering all material controls, including
fi nancial, operational and compliance controls, risk management
systems and the adequacy of the resources, qualifi cations and
experience of staff of the Group’s accounting and fi nancial
reporting function. The system is designed to manage rather
than eliminate the risk of failure to achieve business objectives
and gives reasonable, but not absolute, assurance. The Board
confi rms that there is an ongoing process for identifying,
evaluating and managing the signifi cant risks faced by
the Group, which has been in place throughout the period
and up to the date of this report.
Corporate governance
Prudential plc Annual Report 2012
99
The chief executive and chief fi nancial offi cer of each business
unit, as well as the senior management in Group Head Offi ce,
annually certify compliance with the Group’s governance,
internal control and risk management requirements. The risk
management function reviewed any matters identifi ed by the
certifi cation process, 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
identifi ed and reported by other Group Head Offi ce oversight
functions and the fi ndings from the work of the internal audit
function, which executes risk-based audit plans throughout
the Group. The results were reported to and reviewed by the
Audit Committee.
In line with the Turnbull Guidance, the certifi cation provided
above does not apply to certain material joint ventures where
the Group does not exercise full management control. In these
cases, the Group satisfi es 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.
Our committee structure
The Business Review provides further detail on Prudential’s
risk appetite and exposures on pages 68 to 78 and corporate
responsibility activities on pages 79 to 85.
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 105 and 106.
The internal control and risk management systems described
above and also under the sections on Risk Governance on page 105
and the Audit Committee on page 101, cover the Company’s
fi nancial reporting process and the Group’s process for the
preparation of consolidated fi nancial statements.
Committees
The Board has established Audit, Remuneration, Nomination and
Risk Committees as principal standing committees of the Board.
Each committee has written terms of reference which are kept
under regular review. These committees are key elements of the
Group’s corporate governance framework and reports on each
committee are included below.
Audit Committee
Remuneration Committee
Risk Committee
Nomination Committee
Prudential plc
Board of directors
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Group Chief Executive
Group Executive Committee
Management Committees
100
Governance Prudential plc Annual Report 2012
Corporate governance continued
Audit Committee report
Ann Godbehere
Chairman of the Audit Committee
Membership
The Audit Committee (the Committee) is comprised of the
independent non-executive directors as set out below:
AAAAAAAAAAAA Ann Godbehere (Chairman)
AAAAAAAAAAAA Sir Howard Davies
AAAAAAAAAAAA Alistair Johnston
AAAAAAAAAAAA Paul Manduca (to 2 July 2012)
AAAAAAAAAAAA Kathleen O’Donovan (to 31 March 2012)
AAAAAAAAAAAA Philip Remnant (from 1 January 2013)
The membership is selected to provide a broad range of fi nancial,
commercial and other experience relevant to meet the
Committee’s objectives.
In performing its duties, the Committee has access to employees
and their fi nancial or other relevant expertise across the Group
and to the services of the Group-wide Internal Audit Director and
the Group Company Secretary. The Committee may also seek
external professional advice at the Company’s expense.
The Board has determined that Ann Godbehere, the Committee
Chairman, has recent and relevant fi nancial experience in respect
of the fi nancial reporting period under review and for the
purposes of the UK Code and the Hong Kong Listing Rules. In
March 2012, the Board designated Ann Godbehere as its audit
committee fi nancial expert for Sarbanes-Oxley Act purposes.
This will be reviewed during 2013 in conjunction with the
publication of Form 20-F.
Full biographical details of the members of the Committee are set
out on pages 88 to 92.
Meetings
The Committee meets at least fi ve times a year and gives
consideration to the fi nancial statements of the Group and the
Group’s system of internal control, as well as its internal and
external audit providers. The Chairman of the Committee is a
member of the Risk Committee and works closely with that
committee in fulfi lling the Audit Committee’s responsibilities.
By invitation, the Chairman of the Board, the Group Chief
Executive, the Chief Financial Offi cer, the Group Chief Risk
Offi cer and the Group General Counsel, as well as other senior
staff from the Group fi nance, internal audit, risk, compliance and
security functions attended the meetings to contribute to the
discussions relating to their respective areas of expertise. The
lead and other partners of the external auditor also attended the
meetings.
During 2012, the Committee held 12 scheduled meetings and
details of Committee members’ attendance is set out on page 94.
A detailed forward agenda has been in operation for a number of
years and is reviewed and updated regularly to ensure all matters
for which the Committee is responsible are addressed at the
appropriate time of year.
The Committee’s responsibilities consist of oversight over
fi nancial reporting, the eff ectiveness of the internal control
systems and monitoring auditor independence. Its duties
include gaining assurance on the control over fi nancial
processes and the integrity of the Group’s fi nancial reports,
monitoring the performance, objectivity and independence
of the external auditor, reviewing the work of the internal
auditor and providing oversight to the Group
Compliance function.
During 2012, the Audit Committee continued to focus on
ensuring the Group’s fi nancial reporting remained clear,
robust and informative, and continued to work closely
with the Risk Committee to ensure an integrated approach
to risk assurance and risk management was achieved. The
Committee met regularly with the Group-wide Internal Audit
Director and the Audit Partner from the external auditor.
The principal responsibilities of the Committee are to:
AAAAAAAAAAAAA monitor the integrity of the fi nancial statements,
including the review of half and full-year results, the
annual report and accounts and other signifi cant fi nancial
announcements and review the critical accounting
policies and key judgmental areas contained therein;
AAAAAAAAAAAAA monitor the framework and eff ectiveness of the Group’s
systems of internal control, including the Turnbull
compliance statement and Sarbanes-Oxley procedures;
AAAAAAAAAAAAA monitor auditor independence and the external auditor’s
plans and audit strategy, the eff ectiveness of the external
audit process, the external auditor’s qualifi cations,
expertise and resources, and make recommendations for
the re-appointment of the external auditor;
AAAAAAAAAAAAA review the internal audit plan and resources, and monitor
the audit framework and eff ectiveness of the internal audit
function;
AAAAAAAAAAAAA monitor the eff ectiveness of compliance processes and
controls, and performance against the Group Compliance
Plan;
AAAAAAAAAAAAA review the anti-money laundering procedures in place,
as well as the review of procedures operated for handling
allegations from whistleblowers; and
AAAAAAAAAAAAA review the eff ectiveness of the business unit audit
committees.
The Audit Committee has received balanced and timely
information over the course of the year which has enabled
it to provide eff ective oversight of the Group’s key fi nancial
reporting risks and internal controls.
Corporate governance
Prudential plc Annual Report 2012
101
The Committee also received in-depth presentations on a
range of topics and received the minutes of both the Disclosure
Committee and the Assumptions Approval Committee. Further
information on the Disclosure Committee appears under the
heading ‘US corporate governance and regulations’ on page 109.
The Assumptions Approval Committee reviews the economic
assumptions to be used for EEV reporting, business planning,
forecasting and the IAS 19 valuation of the three UK defi ned
benefi t pension schemes. Further information on risk governance
appears on pages 105 and 106 respectively.
The Committee Chairman reported to the Board on matters of
particular signifi cance after each meeting and the minutes were
circulated to all Board members. The terms of reference for the
Committee are kept under regular review and are updated where
required. A copy of these can be found on the Company’s website.
The Committee recognises the need to meet without the
presence of executive management. Such sessions were held
with the external auditor in July and October 2012, and with the
internal auditor in July 2012. At all other times management and
auditors had open access to the Chairman and the Committee.
Financial reporting
The Committee is regularly briefed by management on
developments in International Financial Reporting Standards and
focussed on the critical accounting policies and practices as part
of its review of fi nancial statements prior to recommending their
publication to the Board. The Committee also reviewed any
changes or decisions requiring a major element of judgement,
unusual transactions, clarity of disclosures, signifi cant audit
adjustments (of which there were none in 2012), the going
concern assumption, compliance with accounting standards,
and compliance with obligations under applicable laws,
regulations and governance codes.
Confi dential reporting
A standing agenda item of the Committee is to review a report
on the use of the confi dential reporting procedures, which are
available to employees to enable them to communicate
confi dentially, 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
Every business unit has its own audit committee which provides
oversight to the respective business unit and reports any relevant
matters to the Committee. The members and chairmen are
comprised primarily of senior management who 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 fi nance, 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 local
requirements or particular requirements of the business. The
terms of reference of those committees were reviewed during the
year and all include escalation of signifi cant matters to the
Committee, recommendations for approval of the business unit
internal audit plans and overseeing the adequacy of internal audit
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resources. 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.
Eff ectiveness of business unit audit committees
Group-wide Internal Audit has reviewed the effectiveness
of each business unit audit committee using an established
evaluation tool. The evaluation comprises an annual review
questionnaire which is divided into specifi c areas for appraisal
and a walk through of each committee’s terms of reference,
assessing whether these are appropriate for the business unit
and if the committee has fulfi lled its responsibilities under the
terms. A memorandum summarising the fi ndings of the review,
as well as any action points, is compiled for each business unit
audit committee.
The fi ndings were reviewed by the Group-wide Internal Audit
business unit audit director in conjunction with the Chairman and
discussed by the respective business unit audit committees. In
addition, the Chairman of each business unit audit committee has
confi rmed that, in their opinion, the current members have the
appropriate balance of skills, knowledge and expertise to oversee
the relevant business unit.
On completion of the review, Group-wide Internal Audit
concluded that the overall arrangements for the business unit
audit committees remained appropriate for the nature and
purpose of each business unit and that each business unit audit
committee continued to meet the responsibilities as set out in
their respective terms of reference.
Internal control and risk management
The Committee reviewed the Group’s statement on internal
control systems prior to its endorsement by the Board.
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
fi nancial reporting. Further details are provided below.
Group-wide 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 fulfi l its responsibilities under the UK and HK
Codes, as well as the Sarbanes-Oxley Act, and provides
independent assurance on the Group’s processes of
identifi cation and control of risk. 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 approved internal audit
headcount across the Group was 148 at 31 December 2012.
The Group-wide Internal Audit Director reports functionally
to the Committee and for management purposes to the
Chief Financial Offi cer.
102
Governance Prudential plc Annual Report 2012
Corporate governance continued
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. A further
external effectiveness review of Group-wide Internal Audit was
undertaken in quarter four 2012, the fi ndings of which were
reported to the Committee in detail in February 2013. The
purpose of the review was to ensure that the activities and
resources of internal audit continue to be effectively organised
to support the oversight responsibilities of the Committee.
The review, performed by PriceWaterhouseCoopers,
confi rmed that Group-wide Internal Audit continued to
remain in general conformance with the Institute of Internal
Auditors (IIA) International Standards with no material
exceptions and demonstrated a noted enhancement of
GwIA processes and practices, since the last review in 2011.
The Committee approved the Group-wide Internal Audit annual
audit plan of assurance work to be undertaken during 2013.
Group Compliance
The Committee receives regular reports from Group Compliance,
who are responsible for assessing the risks posed to the Group as
a result of non-compliance with relevant regulations, including
those in respect of anti-money laundering and sanctions. Each
business unit has its own compliance function, and the role of
Group Compliance is to assess the effectiveness of these
functions, as well as to provide oversight and support in the
identifi cation, mitigation and reporting of regulatory risks arising
from both current business activities and from changes in the
regulatory environment.
During 2012, the Committee reviewed and approved the target
operating model, as well as the plan of work to be undertaken
by Group Compliance during 2013.
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 has established an Auditor
Independence Policy which ensures that the independence and
objectivity of the external auditor is not impaired. The four key
principles of the policy underpin the provision of non-audit
services by the external auditor, namely that the auditor should
not audit its own fi rm’s work, make management decisions for the
Group, have a mutuality of fi nancial 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 2012 the Committee approved
fees payable of £14.3 million to its auditor, KPMG Audit Plc.
Within this total, the Committee approved fees payable of
£2.6 million to KPMG for services not related to audit work which
accounted for 18 per cent of total fees payable to the external
auditor in the year. 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 confi rmed
to be permissible for the external auditor to undertake as defi ned
by the Sarbanes-Oxley Act. The Committee reviewed the
non-audit services provided to the Group by KPMG at regular
intervals during 2012. These included tax services, due diligence
services, attestation reports on internal controls not required by
legislation, agreed-upon procedures, other reports, certifi cations
and examinations required by regulators, risk and compliance
work, advising on accounting standards and regulatory rules and
provision of comfort letters. A summary of fees payable to the
auditor for the year ended 31 December 2012 is provided in
note I6 to the Group fi nancial statements.
Auditor performance and independence
The Committee assessed the performance, as well as the
independence and objectivity, of the external auditor and
the effectiveness of the audit process. The review of the
effectiveness of the external audit process was conducted
through a questionnaire-based exercise administered by
Group Finance.
The Committee also 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 confi rmation of its independence in line
with industry standards.
Re-appointment of auditor
The Group operates a policy under which at least once every fi ve
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 and it again considered this in February 2012, concluding
that there was nothing in the performance of the auditor which
required a change.
In line with the Auditing Practices Board Ethical Statements
and the Sarbanes-Oxley Act, the lead audit partner who was
appointed by KPMG Audit Plc in 2007, was replaced by a new
lead audit partner in respect of the 2012 fi nancial year.
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 16 May 2013.
Review of Committee eff ectiveness
The effectiveness of the Committee was reviewed as part of the
internally facilitated review of the Board and its committees. The
fi ndings will be discussed by the Board in March 2013.
The Committee is satisfi ed, taking into account the fi ndings of
the internal 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.
Corporate governance
Prudential plc Annual Report 2012
103
Nomination Committee report
Paul Manduca
Chairman of the
Nomination Committee
Membership
The Nomination Committee (the Committee) is comprised of the
Chairman and the independent non-executive directors as set
out below:
The Nomination Committee plays a leading role in assessing
the balance of skills and experience on the Board and the
Group’s principal committees. The Committee identifi es the
roles and capabilities required to meet the demands of the
business and, with due regard to diversity, ensures that
suitable succession planning is in place. Candidates continue
to be considered on merit against specifi c criteria determined
by the Committee.
The Committee also reviews confl icts of interest or potential
confl icts of interest raised by directors between Board
meetings and for prospective Board members. In cases where
there might be an actual or potential confl ict of interest the
Committee has powers to authorise any such actual or
potential confl ict 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 confl ict or
potential confl ict should be authorised and if any specifi c
terms should be included in the authorisation.
During 2012, the Committee, under the leadership of
Lord Turnbull, led the search for a new Chairman and, once
the Chairman had been appointed, embarked on the search
for a Senior Independent Director led by the Chairman.
The principal responsibilities of the Committee are to:
AAAAAAAAAAAAA review the size, structure and composition of the Board,
including the skills, knowledge, experience and diversity
of Board members, and make recommendations to the
Board with regard to changes;
AAAAAAAAAAAAA identify and nominate candidates for appointment to the
Board, based on merit and against objective criteria;
AAAAAAAAAAAAA make recommendations to the membership of the audit,
risk, remuneration and nomination committees in
consultation with the Chairmen of those committees; and
AAAAAAAAAAAAA consider and, where necessary, authorise any actual or
potential situational confl icts, upon such terms and
conditions as the Committee considered appropriate,
arising out of a proposed new appointment, the changed
circumstances of an existing appointment or that of a
director’s connected person.
The Committee will continue to review the time commitment
required from each of our non-executive directors and, going
into 2013, the Committee will continue to review and refresh
the skills required to pursue our strategic objectives
successfully.
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AAAAAAAAAAAAA Harvey McGrath (Chairman to 2 July 2012)
AAAAAAAAAAAAA Paul Manduca (Chairman from 2 July 2012)
AAAAAAAAAAAAA Sir Howard Davies (from 2 July 2012)
AAAAAAAAAAAAA Ann Godbehere (from 2 July 2012)
AAAAAAAAAAAAA Kathleen O’Donovan (to 31 March 2012)
AAAAAAAAAAAAA Philip Remnant (from 1 January 2013)
AAAAAAAAAAAAA Lord Turnbull
In performing its duties, the Committee has access to the services
of the Group Company Secretary. The Committee may also seek
external professional advice at the Company’s expense.
Full biographical details of the members of the Committee are set
out on pages 88 to 92.
Meetings
The Committee meets at least twice a year to consider the Board
composition and membership of the principal Committees and
to consider the suitability of all directors standing for re-election
at the AGM. In addition, the Committee meets to consider
candidates for appointment to the Board. The Group Chief
Executive is closely involved in the work of the Committee and is
invited to attend and contribute to meetings. By invitation, the
Group HR Director also attends the meetings.
The Committee met on nine occasions during 2012 and details
of Committee members’ attendance is set out on page 94.
As part of the process for appointing any new director,
the Committee gives consideration to the balance of skills,
experience and knowledge on the Board and, in light of this
evaluation, prepares a description of the role and capabilities
required for a particular appointment, as well as the expected
time commitment. Appointments are made based on merit,
against objective criteria set by the Committee.
The focus of the Committee during the year was the search for
a new Chairman and a replacement for the role of the Senior
Independent Director. Harvey McGrath, the retiring Chairman,
was not involved in the selection or appointment of the new
Chairman, a process which was led by Lord Turnbull. Once this
appointment had been made, the Committee, led by Paul
Manduca, initiated the process for fi nding a Senior Independent
Director. The Committee used the services of Spencer Stuart,
Korn Ferry International and Ridgeway Partners, executive
search agencies to facilitate both of these searches. None of
these fi rms undertook any other signifi cant projects for the Group.
The effectiveness of the Committee was reviewed as part of
the internally facilitated review of the Board and its committees.
The fi ndings will be discussed by the Board in March 2013.
The Chairman reported to the Board on matters of particular
signifi cance after each meeting. The terms of reference for the
Committee are kept under regular review and are updated where
required. A copy of these can be found on the Group’s website.
104
Governance Prudential plc Annual Report 2012
Corporate governance continued
Risk Committee report
Sir Howard Davies
Chairman of the
Risk Committee
The Risk Committee continued its work during 2012 with the
specifi c objectives of furthering the in depth understanding
of the risks facing the business and enhancing the risk
reporting framework with a view to ensuring that the various
stakeholders received both timely and suitable information
around risk exposures.
The Committee provides leadership, direction and oversight
in relation to the Group’s overall risk appetite and tolerance
and the risk management framework. Oversight of the
framework includes reviewing the Group’s risk policies and
standards, supporting risk limits, methodologies adopted and
the processes and controls in place for assessing the Group’s
risks. During the year the Committee carried out an in depth
review of a number of policies and other components forming
part of the overall Group Risk Framework and recommended
improvements to the Board, providing eff ective oversight
with regard to the Group’s risk appetite, tolerance and risk
management framework. The Committee also provides
oversight in respect of the Group Chief Risk Offi cer’s
responsibilities.
The principal responsibilities of the Committee are to:
AAAAAAAAAAAAA review the Group risk, capital and liquidity management
framework, as well as the Group’s risk appetite, its risk
policies and standards, including the parameters used and
methodologies and processes adopted for identifying and
assessing risks;
AAAAAAAAAAAAA review the material and emerging risk exposures of the
Group, including market, credit, insurance, operational,
liquidity and economic and regulatory capital risks as well
as regulatory and compliance matters;
AAAAAAAAAAAAA oversee the Group’s processes and policies for determining
risk tolerance and reviewing management’s measurement
and eff ectiveness of the Group’s risk tolerance levels;
AAAAAAAAAAAAA receive and review Group-wide Internal Audit reports on
the risk management function;
AAAAAAAAAAAAA assist the Board in reviewing the risks inherent in the
business plans; and
AAAAAAAAAAAAA provide qualitative and quantitative advice to the
Remuneration Committee on risk weightings applied
to performance objectives incorporated in executive
remuneration and evaluate whether the remuneration
approach for senior executives was positioned within the
Group’s overall risk appetite framework.
The Committee also continued to build synergies with the
Audit Committee, to ensure that areas of overlap were
managed appropriately.
Membership
The Risk Committee (the Committee) is comprised of the
independent non-executive directors as set out below:
AAAAAAAAAAAA Sir Howard Davies (Chairman)
AAAAAAAAAAAA Ann Godbehere
AAAAAAAAAAAA Kai Nargolwala
AAAAAAAAAAAA Lord Turnbull
In performing its duties, the Committee has access to the Group
Chief Risk Offi cer and the services of the Group Company
Secretary. The Committee may seek external professional advice
at the Company’s expense.
Full biographical details of the members of the Committee are set
out on pages 91 to 92.
Meetings
The Committee meets at least four times a year to consider the
Group’s risk appetite and provide oversight to the management
of risk within the Group. The Chairman of the Committee is a
member of the Audit Committee and works closely with that
committee in fulfi lling the Risk Committee’s responsibilities.
The Chairman of the Board, the Group Chief Executive, the
Chief Financial Offi cer, the Group Chief Risk Offi cer, Group-wide
Internal Audit Director, the Group General Counsel and the
Group Risk Directors are invited to attend the meetings.
During 2012, the Committee held fi ve scheduled meetings and
details of Committee members’ attendance is set out on page 94.
The Committee undertook the identifi cation and comprehensive
analysis of the Group’s key risks and approved the enhancements
to the management information provided to the Group Risk
Committees and the Board. The Committee further received
presentations from certain of the business units on the particular
risks inherent in those businesses, as well as the systems and
controls in place to monitor and manage those risks. The
Committee approved and subsequently reviewed the process for
approving large credit risk exposures; it also approved a framework
which provides separate limits for global counterparties in respect
of counterparty risk exposures. The Committee also reviewed the
Group-wide risk appetite framework, including risk appetite
statements and limits by risk type. The Committee worked closely
with the Audit Committee to ensure any risk assurance relevant to
fi nancial reporting was referred to the Audit Committee and with
the Remuneration Committee on providing input in respect of risk
adjustment measures for the executive remuneration policy. In
addition, the role of the Committee includes responding to the
needs of the business and carrying out reviews of specifi c areas of
risk as they arise. The Committee worked closely with
management and the Group-wide Internal Audit Director during
the year and assisted the Board by providing oversight over
requests for specifi c risk assessments.
The Chairman reviewed the work of the Committee and the Group’s
risk framework as part of the ongoing dialogue with the regulator.
The effectiveness of the Committee was reviewed as part of
the internally facilitated review of the Board and its committees.
The fi ndings will be discussed by the Board in March 2013.
The Committee Chairman reported to the Board on matters of
signifi cance after each meeting. The terms of reference for the
Committee are kept under regular review and are updated where
required. A copy of these can be found on the Group’s website.
Risk governance
Risk governance
Prudential plc Annual Report 2012
105
Principles and objectives
Risk is defi ned 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. The Group’s current approach is to retain such risks
where doing so contributes to value creation and the Group is
able to withstand the impact of an adverse outcome, and has
the necessary capabilities, expertise, processes and controls
to appropriately manage the risk.
In keeping with this philosophy, the Group has fi ve objectives
for risk and capital management which are as follows:
Framework: to design, implement and maintain a capital
management and risk oversight framework, which is consistent
with the Group’s risk appetite and philosophy towards risk taking;
Monitoring: to establish a ‘no surprises’ risk management culture
by identifying the risk landscape, assessing and monitoring risk
exposures and understanding change drivers;
Control: to implement suitable risk mitigation strategies and
remedial actions where exposures are deemed inappropriate,
and to manage the response to potentially extreme events;
Communication: to effectively communicate the Group risk,
capital and profi tability position to both internal and external
stakeholders; and
Culture: to foster a risk management culture, providing quality
assurance and facilitating the sharing of best practice.
Diagram 1: Group level framework
Board
Board
Nomination Committee
Remuneration Committee
Risk Committee
Audit Committee
1st line of defence
2nd line of defence
3rd line of defence
Executives
GEC
BSCMC
Management
Group CEO
GERC
CFO
Group CRO
TAC
GCRC
GORC
GCC
STOC
Group Security
Group Compliance
Group Risk
Group-wide Internal Audit
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Key
Board-level Committees
Executive personnel
Exec / Management Committees
GHO Functions
Direct Reporting Line
Regular Communication
and Escalation
Group Executive Committee
GEC
BSCMC Balance Sheet & Capital Management Committee
GERC Group Executive Risk Committee
TAC
GCRC Group Credit Risk Committee
GORC Group Operational Risk Committee
GCC
STOC
Group Compliance Committee
Solvency II Technical Oversight Committee
Technical Actuarial Committee
106
Governance Prudential plc Annual Report 2012
Risk governance continued
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’ comprising risk taking and management, risk control
and oversight and independent assurance.
Diagram 1 on page 105 outlines the Group-level framework.
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 in respect of the Group’s signifi cant risks, and with the
Group Chief Executive and the chief executives of each of the
Group’s business units.
Risk management
Risk taking and the management thereof forms the fi rst line of
defence and is facilitated through both the Group Executive
Committee (GEC) and the Balance Sheet and Capital
Management Committee (BSCMC).
The GEC is comprised of the chief executives of each of the
Group’s major business units, as well as a number of functional
specialists, and supports the Group Chief Executive in the
executive management of the Group.
The BSCMC is comprised of functional specialists and supports
the Chief Financial Offi cer in the management of the Group’s
balance sheet, as well as providing oversight to the activities of
Prudential Capital, which undertakes the treasury function for
the Group.
Risk oversight
Risk control and oversight constitutes the second line of defence,
and is achieved through the operation of a number of Group-level
risk committees, chaired by either the Chief Financial Offi cer or
the Group Chief Risk Offi cer, which monitor and keep risk
exposures under regular review. These committees are as follows:
Group Executive Risk Committee: the committee meets
monthly to oversee the Group’s risk exposures, including market,
credit, liquidity, insurance and operational risks, and also
monitors the Group’s capital position;
Group Credit Risk Committee: the committee reports
directly to the Group Executive Risk Committee and meets
monthly to review the Group’s investment and counterparty
credit risk positions;
Group Operational Risk Committee: the committee meets
quarterly to oversee the Group’s operational risk exposures.
The committee reports directly to the Group Executive Risk
Committee;
Solvency II Technical Oversight Committee: the committee
normally meets ten times per year to provide ongoing technical
oversight and advice to the Board and executive in respect of
their duties with regard to the Group’s Internal Model. The
committee reports to the Group Executive Risk Committee;
Technical Actuarial Committee: the committee reports to the
Group Executive Risk Committee and usually meets monthly to
set the methodology for valuing Prudential’s assets, liabilities and
capital requirements under Solvency II and the Group’s internal
economic capital basis; and
Group Compliance Committee: the committee reports to the
Group Executive Risk Committee and meets every two months to
oversee the effectiveness of risk and capital management for all
fi nancial and non-fi nancial risks faced by the Group and has
responsibility to consider Group-wide regulatory compliance
risks and controls.
The Group-level risk committees are supported by the Group
Chief Risk Offi cer, with functional oversight provided by Group
Security, Group Compliance and Group Risk. Group Security is
responsible for developing and delivering appropriate security
measures with a view to protecting the Group’s staff, physical
assets and intellectual property. Group Compliance provides
verifi cation of compliance with regulatory standards and informs
the Board, as well as the Group’s management, on key regulatory
issues affecting the Group. Group Risk has responsibility for
establishing and embedding 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
The third line of defence comprises the Group-wide Internal
Audit function, which provides independent and objective
assurance to the Board, GEC, Audit and Risk Committees on
the overall effectiveness of risk management, control and
governance processes across the Group.
Reporting
The Risk Committee is provided with regular reports on the
activities of the risk function and, where it affects the results
of the assurances under the Turnbull compliance statement,
the Audit Committee also receives appropriate reporting from
the same function. Reports to the Risk Committee include
information on the activities of the Group Executive Risk
Committee, the Group Operational Risk Committee, the Group
Credit Risk Committee, the Solvency II Technical Oversight
Committee, the Technical Actuarial Committee and the Group
Compliance Committee, as well as reports from Group-wide
Internal Audit.
The Group’s capital position and overall position against risk
limits are reviewed regularly by the Group Executive Risk
Committee, the Group Risk Committee and the Board. Key
economic capital metrics, as well as risk-adjusted profi tability
information, are included in the business plans which are
reviewed by the Group Executive Risk Committee, the Group
Risk Committee and the Board.
Routine internal reporting by the business units vary according
to the nature of the business, with each business unit responsible
for ensuring that its risk reporting framework meets both the
needs of the respective business unit and the standards set by
the Group Risk function. Clear escalation criteria and processes
are in place for the timely reporting of risks and incidents by
business units to the various Group-level risk committees and,
where appropriate, the Board.
Each business unit reviews the risks inherent in their business
operations as part of the annual preparation of their business
plan, and subsequently, these opportunities and risks are
regularly reviewed against business objectives with Group Risk.
The impact of large transactions or divergences from the agreed
business plan are also reviewed and reported by Group Risk.
Remuneration
The report on the responsibilities and activities of the
Remuneration Committee can be found in the Directors’
remuneration report, which is set out on pages 113 to 143.
Risk governance/Relations with shareholders
Relations with shareholders
Prudential plc Annual Report 2012
107
Relations with shareholders
Communication with shareholders
Being a major institutional investor, the Company is very
aware of the importance of maintaining good relations with its
shareholders, as well as with its debt investors. Discussions are
held regularly with major shareholders and a programme of
meetings took place throughout the year. In addition, Prudential
regularly holds a conference for investors to provide further
insight on selected areas of the business. In 2012, the conference
was held in New York during November.
The latest analysts’ and brokers’ reports on the Company and
the sector are circulated regularly to Board members to develop
further their knowledge and understanding of external views
about the Company. The Chairman and the non-executive
directors also provided feedback to the Board on topics raised
with them by major shareholders. Major shareholders and debt
investors are welcome to meet with newly appointed directors,
or any of the directors generally.
The Group maintains a corporate website containing a wide
range of relevant information for private and institutional
investors, including the Group’s fi nancial calendar. The
shareholder information section on pages 396 and 397 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
16 May 2013 at 11.00am.
The Annual General Meeting is an important forum for
both institutional and private shareholders and the Company
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.
The Company has continued its practice of calling a poll on all
resolutions and the voting results, including all proxies lodged
prior to the meeting, are displayed at the meeting and published
on the Company’s website. This practice provides shareholders
present with suffi cient information regarding the level of support
and opposition to each resolution and ensures all votes cast
either at the meeting or through proxies are included in the result.
Details of the 2012 AGM, including the major items discussed
at the meeting and the results of the voting, can be found on
the Company’s website. All directors in offi ce at the time of the
Annual General Meeting held on 17 May 2012 attended the
AGM, with the exception of Michael Garrett, who was unable
to do so due to a prior commitment.
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In accordance with the relevant legislation, shareholders holding
5 per cent or more of the fully paid up issued share capital of the
Company, are able to require the directors to hold a general
meeting. If the shareholders’ request identifi es a resolution to
be moved at the meeting, the resolution must be included in the
notice of meeting. Where such a request has been duly lodged
with the Company, the directors are obliged to call a general
meeting within 21 days of becoming subject to the request and
must set a date for the meeting not more than 28 days from the
date of the issue of the notice. Shareholders can also require the
Company to circulate a statement of not more than 1,000 words
on the subject matter of the resolution. Shareholders need not
cover the costs of circulating such statements where the requests
relate to the annual general meeting of a public company and
provided suffi cient requests to require the circulation are
received prior to the fi nancial year end preceding the meeting.
Written shareholder requests should be addressed to the Group
Company Secretary at the registered offi ce.
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 Memorandum and Articles of
Association are available on the Group’s website.
Any change to the Articles must be approved by special
resolution of the shareholders in accordance with the provisions
of the Companies Act 2006. There were no changes to the
Company’s constitutional documents during 2012.
Share capital
The Company’s issued share capital as at 31 December 2012,
which is set out in note H11 on page 287, consisted of
2,557,242,352 (2011: 2,548,039,330) ordinary shares of 5 pence
each, all fully paid up and listed on the London Stock Exchange
and the Hong Kong Stock Exchange. Subject to applicable local
securities law, the Company’s shares may be registered on the
main register in the UK or the Company’s branch registers in
Ireland or Hong Kong. The number of accounts on the share
register at 31 December 2012 was 60,522 (2011: 63,338).
The Company also maintains secondary listings on the New York
Stock Exchange in the form of American Depositary Receipts
which are referenced to ordinary shares on the main UK register,
under a depositary agreement with J.P. Morgan, and on the
Singapore Stock Exchange in the form of interests in shares,
which are referenced to the shares on the Hong Kong register
under a depository agreement with the Central Depository (Pte)
Limited (the ‘CDP’).
The Company has maintained a suffi ciency of public fl oat
throughout the reporting period as required by the Hong Kong
Listing Rules.
A number of dividend waivers are in place and these relate to
shares issued but not allocated under the Group’s employee
share plans. These shares are held by the Trustees and will, in
due course, be used to satisfy requirements under the Group’s
employee share plans.
108
Governance Prudential plc Annual Report 2012
Relations with shareholders continued
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 except that if
a proxy is appointed by more than one member, the proxy has
one vote for and one vote against if 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 benefi cial 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 12 March 2013, Trustees held 0.34 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 308.
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 any successor organisation, and the
Hong Kong Stock Exchange, 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. All directors are required to obtain a number of
qualifi cation shares within one year of appointment, which they
would also be expected to retain under guidelines approved by
the Board and as described on page 129 of the Directors’
remuneration report.
Signifi cant shareholdings
The Company had received notifi cation of interests in the shares
of Prudential plc as at 31 December 2012 and in accordance with
Rule 5.1.2 R of the Disclosure and Transparency Rules of the
Financial Services Authority, from Legal & General Group plc of
3.99 per cent, from Norges Bank of an interest in 4.03 per cent,
from BlackRock, Inc. of an interest in 5.08 per cent and from
Capital Group International Inc., of an interest in 10.39 per cent.
No further notifi cations have been received between the end of
2012 and the date of this report.
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 fi rst 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 5 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 16 May 2013.
Details of shares issued during 2012 and 2011 are given in
note H11 on page 287.
In accordance with the terms of a waiver granted by the Hong
Kong Stock Exchange, the Company confi rms 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.
Relations with shareholders
Prudential plc Annual Report 2012
109
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 2012. 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 16 May 2013.
Model code for securities transactions by directors
The Company confi rms that it has adopted a code of conduct
regarding securities transactions by directors on terms no less
exacting than required by Appendix 10 to the Hong Kong Listing
Rules, and that the directors of the Company have complied with
this code of conduct throughout the period.
In discharging these objectives, the Committee helps to support
the certifi cations by the Group Chief Executive and the Chief
Financial Offi cer 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 fi nancial reporting in its annual report on Form 20-F, which
is fi led 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 fi nancial 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.
In addition, the Disclosure Committee evaluates whether or not
a particular matter requires disclosure to the market, taking into
account relevant regulations and reviews all forward looking
statements.
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 Offi cer
and comprising members of senior management. The objectives
of this Committee are to:
AAAAAAAAAAAAA Assist the Group Chief Executive and the Chief Financial
Offi cer in designing, implementing and periodically evaluating
the Company’s disclosure controls and procedures;
AAAAAAAAAAAAA Monitor compliance with the Company’s disclosure controls
and procedures;
AAAAAAAAAAAAA Review and provide advice to the Group Chief Executive
and the Chief Financial Offi cer with regard to the scope and
content of all public disclosures made by the Company which
are of material signifi cance to the market or investors; and
AAAAAAAAAAAAA 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 Audit
Committee, the internal auditors or the external auditor on
the Company’s internal controls.
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110
Governance Prudential plc Annual Report 2012
Additional disclosures
The following additional disclosures are made in compliance with
the Companies Act 2006, the Disclosure and Transparency Rules
and the UK and HK Codes.
Post-balance sheet events
Important events affecting the Company after the end of the
fi nancial year are detailed in note I11 on page 314.
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 signifi cant 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.
At no time during the year did any director hold a material interest
in any contract of signifi cance with the Company or any
subsidiary undertaking.
Compensation for loss of offi ce
None of the terms of employment of the Company’s directors
includes provisions for payment of compensation for loss of offi ce
or employment that occurs as a result of a change of control.
Terms applying on a termination of their offi ce 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 change of control.
Customers
The fi ve largest customers of the Group constituted in aggregate
less than 30 per cent of its total sales for each of 2011 and 2012.
For the year ended 31 December 2012, 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.
Financial reporting
The directors have a duty to report to shareholders on
the performance and fi nancial position of the Group and
are responsible for preparing the fi nancial statements on
pages 147 to 323 and the supplementary information on
pages 326 to 362. It is the responsibility of the auditor to
form independent opinions, based on its audit of the fi nancial
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 325 and 364.
Company law requires the directors to prepare fi nancial
statements for each fi nancial 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 fi nancial statements
are set out in the statement of directors’ responsibilities on
page 324 and page 363.
The directors are further required to confi rm 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 confi rmation is included in the statement
of directors’ responsibilities on page 324 and page 363.
The Chief Financial Offi cer’s overview provides, on pages 68 to
78, a description of the Group’s risk and capital management,
which includes a description of the Group’s liquidity position.
The Group has considerable internal and external fi nancial
resources and the directors believe that the Group is well placed
to manage its business risks successfully.
The directors who held offi ce at the date of approval of this
directors’ report confi rm that, so far as they are each aware,
there is no relevant audit information of which the Company’s
auditor is unaware; 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
confi rmation is given and should be interpreted in accordance
with the provisions of Section 418 of the Companies Act 2006.
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 14 to 67.
The risks facing the Group’s capital and liquidity positions and
their sensitivities are referred to in the Chief Financial Offi cer’s
overview. Specifi cally, the Group’s borrowings are detailed in
Note H13 on pages 289 to 291, the market risk and liquidity
analysis associated with the Group’s assets and liabilities can
be found in note G2 on pages 269 to 272, policyholder liability
maturity profi le by business units in notes D2, D3, D4 on
pages 212, 230 and 237 respectively, cash fl ow details in the
consolidated statement of cash fl ows and provisions and
contingencies in Note H14. The directors therefore have
continued to adopt the going concern basis of accounting
in preparing the fi nancial statements.
Additional disclosures/Index to principal directors’ report disclosures
Prudential plc Annual Report 2012
111
Index to principal directors’ report disclosures
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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 offi ce during the year
Principal activities
Dividend recommended for the year
Business review
Additional disclosures
Additional disclosures
Board of directors
Business review
Business review
Section in Annual Report
Page number(s)
11-85
110
110
88-92; 95
Cover; 20-45
57
98
Details of qualifying third-party indemnity provisions
Corporate governance report
Corporate responsibility governance
Corporate responsibility review
79-85
Political and charitable donations and expenditure
Corporate responsibility review
Financial instruments – risk management objectives
and policies
Business review
Post balance sheet events
Note I11 of the Notes on the Group fi nancial
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 signifi cant shareholders
Corporate governance report
84
65
314
10
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85
107-108
Rules governing appointments of directors
Corporate governance report
95-96
Rules governing changes to the articles of association
Corporate governance report
Powers of directors
Corporate governance report
Signifi cant agreements impacted by a change of control
Additional disclosures
Agreements for compensation for loss of offi ce or employment
on takeover
Additional disclosures
107
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110
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In addition, the risk factors set out on pages 386 to 391 and the
additional unaudited fi nancial information set out on pages 366
to 384, are incorporated by reference into this directors’ report.
Signed on behalf of the Board of directors
Alan F Porter
Group Company Secretary
12 March 2013
112
Prudential plc Annual Report 2012
Section 4
Directors’
remuneration
report
114
Directors’ remuneration report
116
122
136
Remuneration policy report
2012 implementation of remuneration policy
Supplementary information
Prudential plc Annual Report 2012
113
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114
Directors’ remuneration report Prudential plc Annual Report 2012
Directors’ remuneration report
Lord Turnbull
Chairman of the
Remuneration Committee
Dear Shareholder
I am pleased to present the Remuneration Committee’s report
on directors’ remuneration for the year to 31 December 2012.
As I indicated in my letter last year, during 2012 the Committee
reviewed Prudential’s executive director remuneration
architecture for 2013 and beyond. These are the fi rst major
changes to the architecture since current arrangements were
implemented in 2006.
The Group has developed substantially over recent years
and we believe that it is essential that our executive reward
arrangements remain closely aligned with the Group’s
business strategy and ambitions.
Our aims
Our aim in undertaking the review was to develop and
implement reward structures which provide lasting
competitive advantage for the Group in order to:
AAAAAAAAAAAA Attract and retain the high calibre executives required
to lead and develop the Group; and
AAAAAAAAAAAA Reward executives for delivering our business plans
and generating sustainable growth and returns for
shareholders.
The proposed changes
Where aspects of the previous reward architecture
remain appropriate and eff ective, we have retained them.
For example, we have not proposed changes to executives’
maximum incentive opportunities as a percentage of salary.
We have made revisions where there was scope for better
alignment with our aims. Some of the key changes are:
AAAAAAAAAAAA A more consistent approach will apply to the deferral
of annual bonuses across the senior executive team;
AAAAAAAAAAAA Enhanced clawback provisions will apply to future
deferred bonus awards;
AAAAAAAAAAAA Shareholding guidelines for executive directors will
be increased; and
AAAAAAAAAAAA A new long-term incentive plan is proposed for
shareholder approval. We have designed this plan to
reward the achievement of IFRS profi t targets and the
delivery of superior shareholder returns.
These changes are described in detail in the fi rst pages
of this report.
Directors’ remuneration report
Prudential plc Annual Report 2012
115
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We have consulted widely on the proposals
We have undertaken extensive consultation with our
key institutional investors on the changes to the reward
architecture. I have personally met with shareholders and
their representatives who together comprise more than half
of our shareholder base.
I would like to take this opportunity to thank shareholders
for their feedback, which we have taken into account when
developing these proposals.
Rewarding 2012 performance
During 2012, the Group delivered further increases in new
business profi tability, IFRS profi tability and cash generation.
This was accomplished in the context of continuing
macroeconomic uncertainty. The Group exceeded the
targets that the Committee set at the start of the year as
well as the results delivered in 2011.
This outstanding growth was achieved while operating within
the Group’s risk appetite, risk framework, and maintaining
appropriate levels of capital. The 2012 bonuses that we
awarded to executive directors refl ect these achievements.
The excellent results delivered in 2012 built on strong
fi nancial performance over recent years. This has generated
signifi cant returns for shareholders over the period 2010 to
2012 through share price growth and dividends paid. These
returns have signifi cantly outstripped those produced by
our peers in the international insurance sector over the
same period.
The 2010 Group Performance Share Plan awards, which have
a performance condition of relative total shareholder return,
will therefore be released in full.
Clear information provided in this report
The UK Government continues to develop its proposals aimed
at increasing the information available to shareholders in
remuneration reports. This report refl ects some aspects of the
draft requirements. Once the fi nal requirements are clear, we
will incorporate them into our report for 2013.
I look forward to receiving your support for the directors’
remuneration report at our AGM.
Lord Turnbull
Chairman of the Remuneration Committee
12 March 2013
116
Directors’ remuneration report Prudential plc Annual Report 2012
Remuneration policy report
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 16 May 2013.
This report has been drawn up in accordance with the UK
Corporate Governance Code, Schedule 8 of the Large and
Medium Sized Companies and Groups (Accounts and Reports)
Regulations 2008, the UK Listing Authority Listing Rules and
the Corporate Governance Code in Appendix 14 to the Rules
Governing the Listing of Securities on the Stock Exchange of
Hong Kong. KPMG Audit Plc has audited the information
provided on pages 134 to 142.
During the year, the Company has complied with
the provisions of Section D and Schedule A of the
UK Corporate Governance Code which are in force
regarding directors’ remuneration.
The Remuneration Committee
The Committee is responsible for:
AAAAAAAAAAAA Determining the remuneration of the Chairman and
approving the remuneration of the executive directors
of the Company; and
AAAAAAAAAAAA The oversight of the remuneration of a defi ned leadership
population and for individuals with the opportunity to earn
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.
Remuneration strategy and principles
The aims of Prudential’s remuneration structure are:
AAAAAAAAAAAA To attract and retain the high calibre executives required to
lead and develop the Group; and
AAAAAAAAAAAA To reward executives for delivering our business plans and
generating sustainable growth and returns for shareholders.
As part of the review of remuneration architecture which took place
during 2012, the Committee revisited the aims and operation of
Prudential’s remuneration strategy. The table below summarises
how the Remuneration Committee achieves these aims:
To attract and retain the high calibre executives
required to lead and develop the Group
Reward must be:
AAAAAAAAAAAA Valued by executives; and
AAAAAAAAAAAA Competitive, to engage executives who are in demand in
the global talent market and, if required, support hiring the
best external talent.
To reward executives for delivering our business plans and
generating sustainable growth and returns for shareholders
Reward must be:
AAAAAAAAAAAA Determined by delivery of the Group’s annual and
longer-term business objectives;
AAAAAAAAAAAA Aligned with shareholder value creation; and
AAAAAAAAAAAA Consistent with the Group’s risk appetite so that the
delivery of the business plan can be sustained.
The remuneration strategy is underpinned by a number of
remuneration principles:
AAAAAAAAAAAAA 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;
AAAAAAAAAAAAA A signifi cant element of performance-related reward is
deferred and provided in the form of shares;
AAAAAAAAAAAAA The total remuneration package for each executive director
is set with reference to the relevant employment market(s);
AAAAAAAAAAAAA The performance of executive directors responsible for
business units is measured at both a business unit and
Group level;
AAAAAAAAAAAAA Performance measures include absolute fi nancial measures
and a relative measure of Total Shareholder Return, as
appropriate;
AAAAAAAAAAAAA Reward structures are designed to deliver fair and equitable
remuneration for all employees; and
AAAAAAAAAAAAA Reward arrangements are designed to be consistent with
the Group’s risk framework and appetite, and minimise
regulatory and operational risk.
This strategy and 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 this strategy and these principles regularly.
The remuneration strategy and principles outlined in this
section are cascaded to other employees within the Company.
Employees receive remuneration which is appropriate given their
skills and experience, is competitive within the relevant market(s)
and which rewards strong performance.
Remuneration architecture review
In 2012, the Committee undertook a review of all aspects of the
Group’s executive remuneration architecture. The aim of the
review was to ensure that the Group’s remuneration structures
continue to be aligned with the Group’s business strategy and
ambitions, and with the remuneration strategy set out above,
giving the Company a competitive advantage in the international
talent market. This was a review of remuneration structures and
did not result in any changes to incentive opportunities as a
percentage of salary.
Remuneration policy report
Prudential plc Annual Report 2012
117
Key features of the proposed architecture
Salary and benefi ts
No changes were made to the
policy on salary and benefi ts.
Cash bonus
Deferred bonus
Prudential Long Term
Incentive Plan
Share ownership guidelines
Bonus opportunities, as a
percentage of salary, are
unchanged.
Bonuses reward annual
performance using a range
of measures linked to the
annual business plan.
60 per cent of bonus is
payable immediately in cash.
All executive directors defer
40 per cent of bonus into
shares for three years.
Deferred awards are subject
to strengthened clawback
provisions.
Long-term incentive
opportunities, as a
percentage of salary,
are unchanged.
Prudential Long Term
Incentive Plan awards are
made in shares and vesting
will be dependent on two
performance measures:
IFRS operating profi t
(50 per cent of award); and
Relative TSR
(50 per cent of award).
Prudential's performance
against these metrics is
measured over the three
fi nancial years starting
from the year of award.
Share ownership guidelines
have increased to:
350 per cent of salary for
the Group Chief Executive;
and
200 per cent of salary for
other executive directors.
Guidelines have been
introduced below the Board.
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Note
The President and Chief Executive
Offi cer of Jackson also shares in the
JNL bonus pool while the Chief
Executive of M&G retains separate
arrangements.
Key
Fixed pay
Short-term variable pay
Long-term variable pay
Share ownership guidelines
118
Directors’ remuneration report Prudential plc Annual Report 2012
Remuneration policy report continued
Summary of key changes
Element of
compensation
Annual bonus
Long-term
incentives
The percentage of salary
used to calculate maximum
bonus opportunity is
unchanged.
No changes are proposed to
the performance measures.
The three-year deferral
period remains.
The President and Chief
Executive Offi cer of Jackson
continues to share in the
JNL bonus pool in addition
to receiving awards under
the AIP.
Long-term incentive awards
(as a percentage of salary)
are unchanged.
The use of a combination
of Group and business unit
metrics for business unit
Chief Executives continues.
Outstanding awards made
under the GPSP and BUPP
will not be aff ected by the
introduction of the
Prudential Long Term
Incentive Plan.
The Chief Executive of M&G
will continue to participate
in the M&G Executive LTIP.
What is unchanged?
What is changing?
Why?
Executives will continue to
receive awards under the
Annual Incentive Plan (AIP).
The proportion of bonus deferred
will be 40 per cent for all executive
directors.
Clawback provisions have been
enhanced for the deferred portion
of 2013 and subsequent bonuses.
A cap will be introduced to the
Chief Executive of M&G's maximum
annual bonus opportunity of the lower
of 0.75 per cent of M&G’s IFRS profi t
or six times salary.
Creates alignment among the
executive directors.
Allows the deferred element
of the bonus to be forfeited
in specifi c circumstances,
including a material, adverse
restatement of the fi nancial
results or regulatory breach.
The calculation of the Chief
Executive of M&G's annual
bonus opportunity is
transparent and linked to the
success of the M&G business.
A new long-term incentive plan (the
Prudential Long Term Incentive Plan)
will be proposed for shareholder
approval at the 2013 AGM.
The Prudential Long Term Incentive
Plan provides reward for achievement
of IFRS operating profi t as well as
superior relative TSR.
TSR will be measured against a revised
peer group and assessed against peers
on a ranked (rather than an index) basis.
Subject to shareholder approval, 2013
awards will be made under this plan.
The awards made to the Chief Executive
of M&G will be calculated as a
percentage of salary. He will receive
awards with a face value of 150 per cent
of salary under the Prudential Long
Term Incentive Plan and 300 per cent of
salary under the M&G Executive LTIP.
The expanded TSR peer
group ensures the continued
relevance of comparators.
Assessing performance
against peers’ ranked
performance (rather
than an index) is more
straightforward.
IFRS operating profi t is
central to the management of
the business and a key driver
of shareholder value.
The calculation of the
Chief Executive of M&G's
LTIP award is transparent
and aligned with the other
executive directors.
Share ownership
guidelines
The guidelines continue to
be expressed as a percentage
of salary.
The requirement for the Group
Chief Executive has increased from
200 per cent to 350 per cent of salary.
This change increases
alignment with shareholder
interests.
The fi ve-year period to build
holding is maintained.
The requirement for all other
executive directors will be increased
to 200 per cent of salary. Most executive
directors were previously required to
hold Prudential plc shares with a value
of 100 per cent of salary.
Executives will have fi ve years from
the implementation of this policy (or
the date of their appointment, if later)
to build the additional level of
required ownership.
Remuneration policy report
Prudential plc Annual Report 2012
119
Performance measures
Annual bonus
Executive directors receive bonus awards under the Annual Incentive Plan (the AIP). The 2012 AIP:
AAAAAAAAAAAAA Strongly aligns annual reward with the KPIs that underpin the Group’s business strategy;
AAAAAAAAAAAAA Incentivises the executive team to outperform stretching annual targets; and
AAAAAAAAAAAAA Remains consistent with the Group’s risk framework and appetite.
No changes were proposed to the structure or the performance conditions, of the annual bonus for 2013.
Long-term incentives
The Prudential Long Term Incentive Plan has been designed to reward the creation of IFRS profi t as well as the sustained delivery
of superior returns to shareholders. Performance will be assessed over a three-year period on the following basis:
Performance
condition
IFRS operating
profi t
(50 per cent of
award)
Measurement approach
Assessment
Participants will be incentivised to deliver and
outperform the long-term business plan. The
awards will vest based on achievement of IFRS
operating profi t compared to performance ranges.
IFRS targets will be set at a Group or business unit
level, dependent on role.
Cumulative performance will be measured over
three years.
Threshold, plan and maximum achievement levels
will be set at the beginning of the performance
periods in line with the three-year business plan.
25 per cent of the award will vest for threshold
performance, increasing to 100 per cent for stretch
performance.
The target for Group IFRS operating profi t will be
disclosed when the performance period ends.
Total Shareholder
Return
(50 per cent of
award)
The long-term incentive plan will continue to
reward executives for superior shareholder
returns.
TSR will continue to be measured on a local
currency basis.
Relative three-year TSR will be measured on a
ranked basis.
25 per cent of the award will vest for median
performance increasing on a straight-line basis to
full vesting for TSR at or above the upper quartile.
TSR will be measured relative to a revised peer
group to ensure the continued relevance of this
measure. In order to refl ect the international
scope of the Group’s business operations, the peer
group has been extended to encompass the global
insurance peers with which we compete for
customers and capital. Our revised peer group
is outlined below.
Revised TSR peer group for awards made from 2013 onwards:
Aegon, Afl ac*, AIA*, AIG*, Allianz, Aviva, AXA, Generali, Legal & General, Manulife, MetLife*, Munich Re*, Old Mutual, Prudential Financial*, Standard Life,
Sun Life Financial*, Swiss Re*, Zurich Insurance Group*
Those peers marked with an asterisk have been added to the peer group for 2013 onwards.
The Remuneration Committee believes that adequate controls
exist to ensure that these performance measures will not create
an implicit incentive to take undue operational or fi nancial risks
or to adopt an unduly risky capital structure.
For any Prudential Long Term Incentive Plan award to vest, the
Committee must be satisfi ed that the quality of the Company’s
underlying fi nancial performance justifi es 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 which ultimately vest. If
performance measures are not achieved in full, the unvested
portion of any award lapses and performance cannot be retested.
As with the Group Performance Share Plan (GPSP), the
performance achieved against target, and the resulting vesting
of the award, will be assessed by an independent third party.
The Committee believes that the proposed performance
measures are more relevant to the Group and at least as
stretching as those used in the Group Performance Share
Plan and the Business Unit Performance Plan.
We have undertaken an extensive process of consultation about
these proposals with shareholders and their representatives
who together comprise more than half of our shareholder base.
The Committee took account of shareholder feedback when
developing these proposals.
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Directors’ remuneration report Prudential plc Annual Report 2012
Remuneration policy report continued
Summary of main elements of remuneration
Element
Purpose
Policy in 2012
Base salary
To provide executives with a
guaranteed level of remuneration.
The Committee reviews salaries annually. Changes in base salaries are generally eff ective
from 1 January.
Annual bonus
Paying salaries at an appropriate
level ensures that Prudential
continues to be competitive
when recruiting and retaining
key executives.
Salary is intended to reward
executives for the performance
of their role.
To incentivise and reward the
achievement of stretching annual
business plans which are:
Determined in line with the
Group’s long-term commitments
to shareholders; and
Consistent with the Group’s risk
In determining base salaries for each executive the Committee considers:
The performance and experience of the executive;
Internal relativities;
Company fi nancial performance;
Salary increases for all employees; and
Benchmark information from appropriate markets.
Executive directors participate in annual bonus plans based on the achievement of Group
and business unit fi nancial performance measures including profi tability, cash fl ow and
capital adequacy, and personal objectives. Targets are determined in line with the business
plan.
Executive directors are required to defer between 30 per cent and 50 per cent of annual
bonus (for the Chief Executive of M&G, 50 per cent of bonus over £500,000 is deferred)
into Prudential shares for three years.
appetite.
Bonuses are not pensionable.
Long-term incentives
To incentivise and reward the
achievement of:
All executive directors participate in the Group Performance Share Plan (GPSP). GPSP
awards vest based on relative TSR.
Longer-term commitments to
shareholders;
Sustainable long-term returns
for shareholders; and
Adherence to the Group’s risk
appetite.
Business unit Chief Executives also participate in business unit performance plans (BUPPs
or the M&G Executive LTIP) which focus on those fi nancial measures which contribute to
the long-term success of the business unit and, therefore, the Group.
Share ownership
guidelines
To create a community of interest
between the executives and
shareholders.
The Group Chief Executive and Chief Executive of M&G are required to build up and hold
shares equal to 200 per cent of base salary.
Other executive directors are required to build up and hold shares equal to 100 per cent
of base salary.
Executives have fi ve years to build up their shareholding. Full details of the current
shareholdings of the directors are provided on page 133.
Benefi ts
To provide executives with items
and allowances that assist them in
carrying out their duties effi ciently.
Pension
To provide executives with an
opportunity to save for an income in
retirement.
All executive directors received core health and security benefi ts (for example medical
insurance and life assurance).
Other benefi ts may be off ered to executives, dependent on:
Local market practice;
The benefi ts off ered to other employees within the business unit; and
Applicable expatriate and relocation benefi ts and allowances.
No benefi ts are pensionable. Details of the costs of providing the benefi ts to each executive
director are outlined in the remuneration table on page 134.
The pension provision for executive directors depends on the arrangements in place for
other employees in their business unit when they joined the Group.
Executives who joined aft er June 2003 have the option to:
Receive payments into a defi ned contribution scheme; or
Take a cash supplement in lieu of contributions.
Executives who joined the Group before June 2003 were entitled to join the defi ned benefi t
plans available at that time. At the end of 2012, no executive director was an active member
of a Group defi ned benefi t scheme.
Remuneration policy report
Prudential plc Annual Report 2012
121
2012 opportunity
2012 performance metrics
Changes to policy for 2013
2012 base salaries are set out on page 124.
The maximum annual bonus opportunity
available to the majority of executive directors is
between 160 per cent and 200 per cent of salary.
Based on relevant market practice, the Chief
Executive of M&G and the President & CEO,
Jackson have bonus opportunities which are
not capped as a percentage of their salaries.
The Chief Executive of M&G has an overriding
cap on total remuneration of 3 per cent of M&G’s
IFRS profi t.
Details of executive directors’ 2012 bonus
opportunities are provided on page 125.
Awards for the majority of executive directors
are subject to the achievement of:
Net free surplus generated;
IFRS operating profi t;
EEV operating profi t;
Holding company cash fl ow;
Insurance Groups Directive (IGD)
Capital Surplus; and
Personal objectives.
The maximum combined award under the GPSP
and BUPP is 550 per cent of salary, although the
actual awards made in 2012 were below this level.
The Chief Executive of M&G's long-term incentive
opportunity was not capped as a percentage of
salary in 2012. There is an overriding cap on total
remuneration for this role of 3 per cent of M&G’s
IFRS profi t.
GPSP awards vest based on relative TSR (Total
Shareholder Return, a combination of share price
growth and dividends paid) performance relative
to an index of international insurers.
The performance measures for the BUPPs and
the M&G Executive LTIP vary according to the
business plan and strategy of the business unit.
These are outlined on pages 127 to 128.
A breakdown of the long-term incentive
opportunities available to executive directors
is set out on page 123.
As part of the review of remuneration
architecture which took place during 2012, the
clawback provisions applied to the deferred
portion of bonuses for 2013 onwards have
been strengthened.
The percentage of annual bonus awards which
executives are required to defer has been made
consistent across our senior executive team at
40 per cent.
The annual bonus opportunity for the
Chief Executive of M&G will be capped at the
lower of 0.75 per cent of M&G’s IFRS profi t or
six times salary.
Please see page 118 for further details.
As part of the review of remuneration
architecture, the Remuneration Committee
has proposed a new long-term incentive (the
Prudential Long Term Incentive Plan) for approval
at the 2013 AGM.
Subject to shareholder approval, the fi rst awards
will be made under this plan in May 2013.
Full details of the proposal are outlined on
pages 118 to 119.
As part of the review of remuneration
architecture, the executive director shareholding
guidelines have been enhanced.
The revised guidelines are:
350 per cent of salary for the Group Chief
Executive; and
200 per cent of salary for all other executive
directors.
Full details of the revised guidelines are outlined
on page 118.
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Executive directors based in the UK and Asia are
entitled to receive pension contributions or a cash
supplement (or combination of the two) of
25 per cent of base salary.
The President & CEO, Jackson, participates in
Jackson’s Defi ned Contribution Retirement Plan
on the same basis as other JNL employees.
Full details of the amounts paid by the Company
with regards to pension provision are outlined in
the remuneration table on page 134 and the
pensions table on page 130.
Jackson’s Defi ned Contribution Retirement Plan
has a guaranteed element and additional
contributions based on the profi tability of JNL.
No other Group pension schemes have
performance conditions.
122
Directors’ remuneration report Prudential plc Annual Report 2012
2012 implementation of remuneration policy
The operation of the Remuneration Committee in 2012
The members of the Committee during 2012 are listed below.
All are independent non-executive directors:
AAAAAAAAAAAAA Lord Turnbull KCB CVO (Chairman)
AAAAAAAAAAAAA Keki Dadiseth
AAAAAAAAAAAAA Michael Garrett
AAAAAAAAAAAAA Paul Manduca (until 2 July 2012)
AAAAAAAAAAAAA Kai Nargolwala
Philip Remnant joined the Committee on 1 January 2013.
In 2012, the Committee met fi ve times. Key activities at each meeting are shown in the table below:
Meeting
Key activities
February 2012
Approve the 2011 directors’ remuneration report;
Consider 2011 bonus awards for executive directors (and total compensation fi gure for Michael McLintock);
Consider vesting of the long-term incentive awards with a performance period ending on 31 December
2011; and
Approve the annual bonus measures and targets to be used in 2012.
March 2012
Approve 2012 long-term incentive awards and performance measures; and
Confi rm 2011 annual bonuses and the vesting of long-term incentive awards with a performance
period ending on 31 December 2011 in light of audited fi nancial results.
June 2012
Review the remuneration of the Group Leadership Team, senior risk staff and of employees
with a remuneration opportunity over £1 million per annum;
Note the dilution levels resulting from the Company’s share plans; and
Consider proposed changes to the remuneration architecture.
September 2012
Monitor performance against long-term incentive targets, based on the half year results;
Review the Committee’s terms of reference;
Approve proposed changes to the remuneration architecture for shareholder consultation; and
Review total remuneration of executive directors.
December 2012
Note the level of participation in the Company’s all-employee share plans;
Approve executive directors’ 2013 salaries and incentive opportunities;
Consider the annual bonus measures and targets to be used in 2013;
Review an initial draft of the 2012 directors’ remuneration report;
Confi rm changes to the remuneration architecture in light of shareholder feedback; and
Approve the Committee’s 2013 work plan.
2012 implementation of remuneration policy
Prudential plc Annual Report 2012
123
In January 2012, the Remuneration Committee met to conclude
issues arising from the December 2011 Committee meeting.
In addition, the Committee met for a working session in
September 2012 to discuss changes to the remuneration
architecture to be implemented in 2013.
The Chairman and the Group Chief Executive attend meetings by
invitation. The Committee also had the benefi t of advice from the
Chief Financial Offi cer, Group Human Resources Director and
Director of Group Reward and Employee Relations. The Group
Chief Risk Offi cer advised the Committee on adherence to the
Group’s risk appetite and framework. Individuals are never
present when their own remuneration is discussed.
During 2012, Deloitte LLP were the independent
advisor to the Committee. Advice was also provided by
PricewaterhouseCoopers LLP. Market data was sourced from
Deloitte LLP, Towers Watson, McLagan Partners and LOMA.
Norton Rose, Slaughter & May, Linklaters and Allen & Overy
provided legal counsel, including advice on employment law and
the operation of the Company’s share plans. Some of these fi rms
also provided other services to the Company: Deloitte LLP and
PricewaterhouseCoopers LLP provided advice on Solvency II,
taxation and other fi nancial matters, Towers Watson provided
actuarial advice and Slaughter & May and Norton Rose provided
commercial, corporate and general legal advice.
The operation of the reward policy in 2012
In 2012, executive directors were rewarded on the basis set out below:
Director
Role
Rob Devey
John Foley
Michael McLintock
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells
Chief Executive, UK & Europe
Group Chief Risk Offi cer
Chief Executive, M&G
Chief Financial Offi cer
Chief Executive, PCA
Group Chief Executive
President & CEO, JNL
Long-term incentives (2012 award
as a percentage of salary)
Base salary at
1 January 2012
£600,000
£610,000
£360,000
£630,000
HK$8,000,000
£1,000,000
US$1,050,000
Annual bonus –
maximum
percentage
of salary
Group
Performance
Share Plan
(GPSP)
Business Unit
Performance
Plan (BUPP)
160%
160%
note 1
175%
160%
200%
note 2
112.5%
250.0%
100.0%
225.0%
112.5%
400.0%
230.0%
112.5%
–
344.1%
–
112.5%
–
230.0%
Total
225.0%
250.0%
444.1%
225.0%
225.0%
400.0%
460.0%
Notes
1 Michael McLintock’s annual bonus and long-term incentive opportunity under the M&G Executive LTIP (rather than the BUPP) are based on M&G’s
performance both in absolute terms and relative to its peers. In line with practice in the asset management sector, there is no specifi ed maximum incentive
award. Michael’s total remuneration is subject to an overriding cap such that his total remuneration should not be greater than 3 per cent of M&G’s annual IFRS
profi ts. The fi gure shown for his 2012 M&G Executive LTIP award is the expected value of this grant.
2 Mike Wells’ maximum annual bonus fi gure is comprised of 160 per cent of salary and a 10 per cent share of the Jackson senior management bonus pool based
on the target performance of Jackson.
3 All long-term incentives have a three-year performance period. For the awards detailed above the performance period will end on 31 December 2014.
4 Where awards are made in shares, the fi nal number of shares awarded is calculated in line with the respective plan rules. Details on the shares granted under
these plans are outlined in the Directors’ outstanding long-term incentive awards tables in the Supplementary information section.
The package for 2012 offered the following proportions of fi xed and variable short- and long-term reward to executive directors
(average of executive directors):
Good performance
Superior performance
2
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1
2
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26% Base salary
30% Cash bonus for 2012, paid in 2013
18% Deferred bonus for 2012, vesting in 2016
26% 2012 LTIP Award, vesting in 2015
15% Base salary
21% Cash bonus for 2012, paid in 2013
14% Deferred bonus for 2012, vesting in 2016
50% 2012 LTIP Award, vesting in 2015
As illustrated above, ‘Good’ performance results in the payment of 2012 annual bonus at the target level and 2012 long-term incentive
awards vesting at the threshold level. ‘Superior’ performance generates maximum payment of 2012 annual bonuses and 2012
long-term incentive awards vest in full.
124
Directors’ remuneration report Prudential plc Annual Report 2012
2012 implementation of remuneration policy continued
The single fi gure
Although the UK Government’s proposed reporting requirements have not been fi nalised, we have anticipated the requirement
to present a single fi gure for executives’ total remuneration. This is included in the main remuneration table for 2012 on page 134.
The single fi gure has been calculated including the following elements:
AAAAAAAAAAAAA The salary and the cost of providing benefi ts in 2012;
AAAAAAAAAAAAA The bonus awarded for performance in 2012 (including the value at award of the deferred element which will be released in 2016);
AAAAAAAAAAAAA The value of long-term incentive awards with a performance period ending in 2012 which will be released in 2013, using the
average share price over the period 1 October 2012 to 31 December 2012; and
AAAAAAAAAAAAA The value of any salary supplement for pension, employer contributions to a defi ned contribution pension plan or the increase
in transfer value of fi nal salary pension benefi ts in 2012 (less contributions made by the director during 2012).
Base salary
Executive directors’ salaries were reviewed in 2012 with changes effective from 1 January 2013. In determining 2013 salaries, the
Committee considered the performance, experience and internal relativities of each director, as well as the performance of the Group
and the salary increases awarded to other employees. To provide context for this review, information was drawn from the following
market reference points:
Director
Role
Benchmark(s) used to assess remuneration
Rob Devey
Chief Executive, UK & Europe
FTSE 40
International Insurance Companies
John Foley
Group Chief Risk Offi cer
FTSE 40
Michael McLintock
Chief Executive, M&G
McLagan UK Investment Management Survey
Nic Nicandrou
Chief Financial Offi cer
FTSE 40
International Insurance Companies
Barry Stowe
Chief Executive, PCA
Towers Watson Asian Insurance Survey
Tidjane Thiam
Group Chief Executive
FTSE 40
International Insurance Companies
Mike Wells
President & CEO, JNL
Towers Watson US Financial Services Survey
LOMA US Insurance Survey
After careful consideration the Committee decided to increase
salaries by 3 per cent as set out in the table on the right. Salary
increases for the wider workforce vary across our business units,
based on local market conditions. It is anticipated that 2013 salary
budgets will increase between 3 per cent and 5 per cent, for the
wider workforce.
Executive
2012 salary
2013 salary (+3%)
Rob Devey
John Foley
Michael McLintock
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells
£600,000
£610,000
£360,000
£630,000
HK$8,000,000
£1,000,000
US$1,050,000
£618,000
£628,300
£370,800
£648,900
HK$8,240,000
£1,030,000
US$1,081,500
2012 implementation of remuneration policy
Prudential plc Annual Report 2012
125
Annual bonus
Performance measures
The fi nancial measures used to assess performance for the
2012 AIP are set out below. These remain unchanged for 2013.
Executive directors who have business unit responsibilities are
assessed on both Group and business unit performance.
requirements). 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.
Specifi cally, all business units must act within the Group’s risk
appetite and framework, and all individuals must act within the
Group’s Code of Business Conduct.
A portion of the annual bonus for each executive director
is based on the achievement of personal objectives. These
objectives include the executive’s contribution to Group
strategy as a member of the Board and specifi c goals related
to their functional and/or business unit role (for instance,
project measures relating to the implementation of Solvency II
A proportion of each executive director’s annual bonus is not
paid in cash and must be deferred. This portion is deferred for
three years in the form of the Company’s shares. This deferral
aligns the interests of our executive directors with our
shareholders and helps to ensure a focus on the sustainable
success of the Company.
Annual bonus opportunities
Executive directors’ bonus opportunities, the weighting of performance measures for 2012 and the proportion of annual bonuses
deferred are set out below.
Rob Devey
John Foley
Michael McLintock
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells note 2
Maximum bonus
opportunity
(Percentage of salary)
Deferral requirement
Group
Business unit
Personal
objectives
Weighting of measures
160%
160%
Note 1
175%
160%
200%
c.400%
40% of total bonus
40% of total bonus
50% of bonus above £500,000
40% of total bonus
40% of total bonus
50% of total bonus
30% of total bonus
20%
50%
10%
80%
20%
80%
30%
60%
–
60%
–
60%
–
60%
20%
50%
30%
20%
20%
20%
10%
Notes
1 Michael McLintock’s annual bonus and long-term incentive opportunities in 2012 were based on M&G’s performance both in absolute terms and relative to its
peers. In line with practice in the asset management sector, there is no specifi ed maximum incentive award. Michael’s total remuneration (including long-term
incentives) 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 profi t.
2 Mike Wells’ annual bonus fi gure comprises an AIP opportunity of 160 per cent of salary and a 10 per cent share of the Jackson senior management bonus pool.
The fi gure above is based on the target performance of Jackson.
Rewarding performance in 2012
As set out in the Remuneration Committee Chairman’s letter, during 2012 the Group delivered further increases in its key fi nancial
measures, specifi cally new business profi tability, IFRS profi tability and cash generation. The outstanding performance delivered in
2012 against these measures exceeded both the Group’s 2011 performance and the stretching targets set by the Committee at the
start of the year. The Group Chief Risk Offi cer was invited to attend the Remuneration Committee meeting held in March 2013
and advised the Committee on the Group’s adherence to its risk appetite and framework during 2012.
2012 fi nancial performance, relative to the targets set by the Committee, is summarised below:
Measure
Group
PCA
UK
M&G
Cash fl ow
Above stretch target
Net free surplus generated Above stretch target
Above stretch target
IFRS profi t
Above stretch target
Between Plan and stretch target
Above stretch target
At Plan level
–
Above stretch target
IGD surplus
NBP EEV profi t
In-force EEV profi t
Above stretch target
Above stretch target
Above stretch target
Between Plan and stretch target
Above stretch target
Between Plan and stretch target
Above stretch target
Above stretch target
Between Plan and
stretch target
–
–
Between Plan and
stretch target
–
–
–
2
0
1
2
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2012 implementation of remuneration policy continued
On the basis of this outstanding performance, the Committee approved the following 2012 AIP payments:
Executive
Rob Devey
John Foley
Michael McLintock
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells note 1
2012 salary
Maximum
2012 AIP
2012 outcome
(as a percentage
of max)
2011 outcome
(as a percentage
of max)
Total 2012
AIP payment
£600,000
£610,000
£360,000
£630,000
HK$8,000,000
£1,000,000
US$1,050,000
160%
160%
n/a
175%
160%
200%
160%
73.9%
100.0%
n/a
99.0%
98.1%
100.0%
99.0%
£709,200
90.7%
£976,000
98.1%
£1,307,275
n/a
95.9%
£1,091,475
94.1% HK$12,560,000
£2,000,000
96.9%
US$1,663,200
95.4%
Note
1 In addition to the AIP, Mike Wells also received 10 per cent of the JNL senior management bonus pool. His total 2012 bonus, including his AIP and JNL senior
management award, is US$4,599,500.
Long-term incentives
Details of the awards made under these plans in 2012 can be
found on pages 137 to 139.
Group Performance Share Plan (GPSP)
All executive directors receive GPSP awards. GPSP awards
vest on the basis of the Group’s Total Shareholder Return (TSR)
performance over a three-year period. TSR is the combination of
the share price growth and the dividends paid. Prudential’s TSR
achievement over the performance period is compared with the
TSR 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 benefi t of simplicity
and directness of comparison.
The vesting schedule for outstanding GPSP awards is set out
below:
% of award vesting
100
75
50
25
0
80%
x index
90%
x index
100%
x index
110%
x index
120%
x index
Performance to be achieved by Prudential
Peer companies used within the Index for all outstanding GPSP awards
Aegon, Allianz, Aviva, Axa, Generali, ING, Legal & General, Manulife, Old
Mutual and Standard Life
For any GPSP award to vest, the Committee must be satisfi ed
that the quality of the Company’s underlying fi nancial
performance justifi es 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 which ultimately vest. If performance measures are not
achieved in full, the unvested portion of any award lapses and
performance cannot be retested.
On 31 December 2012, the performance period for 2010 GPSP
awards (which began on 1 January 2010) came to an end. Over
the performance period the Group has delivered superior returns
for shareholders through share price growth and dividends paid.
This resulted in Prudential achieving excellent TSR performance
of 156.4 per cent.
The peer group’s TSR index was 100 at the start of the 2010 to
2012 performance period and was 111.8 at the end of the period
(as illustrated opposite). In order for the 2010 GPSP awards to
vest in full, Prudential’s TSR index over the period had to
outperform the peer index by 20 per cent, ie increase from 100
to at least 134.2 (111.8 x 120 per cent). The TSR performance
achieved by Prudential of 156.4 per cent equals an
outperformance of the peer index of 139.9 per cent.
The Committee, having satisfi ed itself about the quality of the
Company’s underlying fi nancial performance, confi rmed vesting
of 100 per cent of the 2010 to 2012 GPSP award (for reference,
100 per cent of the 2009 to 2011 GPSP award vested).
The Committee believes that the GPSP performance condition is
a stretching requirement that requires exceptional performance,
relative to other international insurance companies, for awards to
be released in full.
2012 implementation of remuneration policy
Prudential plc Annual Report 2012
127
The line chart below compares Prudential’s TSR during the three years from 1 January 2010 to 31 December 2012 with that of the
peer group against which TSR is measured for the purposes of the GPSP.
Prudential TSR v peer group index – total returns index % over three years to December 2012
160
140
120
100
80
156.4
111.8
Dec 2009
Dec 2010
Dec 2011
Dec 2012
Prudential
Peer group index
Business Unit Performance Plans (BUPP)
Asia BUPP
The Chief Executive, PCA receives awards under the Asia BUPP.
These awards are dependent on the achievement of PCA’s new
business profi t, IFRS profi t and cash remittance targets over the
three-year performance period. Each of these measures will
determine vesting of one third of each award. Threshold
performance results in 30 per cent of the award vesting,
increasing to 100 per cent for stretch performance.
On 31 December 2012, the performance period for the 2010 Asia
BUPP award (which began on 1 January 2010) came to an end.
Over the period, the new business profi t, IFRS profi t and cash
remittance achieved by the PCA business unit meant that the
Committee, having satisfi ed itself as to the quality of the business
units’ underlying fi nancial performance, confi rmed vesting of
95.2 per cent of Barry Stowe’s 2010 to 2012 Asia BUPP award
(for reference, 86.5 per cent of Barry Stowe’s 2009 to 2011 Asia
BUPP award vested).
Jackson BUPP
The President and CEO, JNL receives an award under the Jackson
BUPP. Vesting of awards made under this plan is dependent on
Shareholder Capital Value (SCV) growth over the performance
period. The SCV growth required is outlined in the table below.
Vesting occurs between these performance levels on a
straight-line basis.
Percentage of BUPP award which vests
0%
30%
75%
100%
Compound annual
growth in SCV
over three years
<8%
8%
10%
12%
On 31 December 2012, the performance period for the 2010
Jackson BUPP came to an end. Although no current executive
director had a 2010 award under this plan the vesting level for
other participants was 100 per cent (for reference 93.75 per cent
of the 2009 to 2011 awards vested).
UK BUPP
The Chief Executive, UK & Europe receives awards under
the UK BUPP. Given the cash-generative priorities of the
UK Business Unit, UK BUPP awards are assessed using the
same relative TSR measure applied to GPSP awards.
On 31 December 2012, the performance period for the
2010 UK BUPP (which began on 1 January 2010) came to an end.
As detailed above, Prudential’s TSR over this period was equal to
139.9 per cent of the peer index. The Committee, having satisfi ed
itself as to the quality of the business unit’s underlying fi nancial
performance, confi rmed vesting of 100 per cent of Rob Devey’s
2010 to 2012 UK BUPP award (for reference 100 per cent of
Rob Devey’s 2009 to 2011 UK BUPP award vested).
For any BUPP award to vest, the Committee must be satisfi ed that
the quality of underlying fi nancial performance of the relevant
business unit justifi es 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 which ultimately vest. If the performance conditions are
not achieved in full, the unvested portion of any award lapses
and cannot be retested.
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Directors’ remuneration report Prudential plc Annual Report 2012
2012 implementation of remuneration policy continued
Limits on award sizes
The rules of the GPSP and BUPP set a limit on the value of shares
which may be awarded to an executive in a fi nancial year. The
combined value of shares awarded under the two plans may not
exceed a maximum of 550 per cent of salary although the awards
made in a particular year are often signifi cantly below this limit.
On a change in control of Prudential, vesting of awards made
under these arrangements would be prorated for performance
and to refl ect the elapsed portion of the performance period.
M&G Executive Long-Term Incentive Plan
The Chief Executive, M&G receives awards under the M&G
Executive Long-Term Incentive Plan. Under this 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 profi tability over the
three-year performance period with profi t and investment
performance adjustments also applied:
Profi t growth
The value of phantom shares vesting will be adjusted by a profi t
measure as follows:
AAAAAAAAAAAAA No adjustment will be made if profi ts in the third year of the
performance period are at least equal to the average annual
profi t generated over the performance period;
AAAAAAAAAAAAA A loss or zero profi t will result in the value of the award being
reduced to zero, irrespective of investment performance; and
AAAAAAAAAAAAA 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:
AAAAAAAAAAAAA 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;
AAAAAAAAAAAAA Investment performance in the third quartile will not change
the value of phantom shares vesting; and
AAAAAAAAAAAAA Investment performance in the bottom quartile will result in
awards being forfeited, irrespective of any profi t growth.
The value of the vested phantom shares will be paid in cash after
the end of the three-year performance period.
On 31 December 2012, the performance period for the 2010
award under the M&G Executive Long-Term Incentive Plan
(which began on 1 January 2010) came to an end. M&G’s profi t
at the end of the performance period was 204 per cent of that at
the start and M&G’s investment performance was in the second
quartile. The Committee, having satisfi ed itself about the quality
of M&G’s underlying fi nancial performance, confi rmed vesting of
Michael McLintock’s 2010 award with a value of £2.65 per share.
This will result in a payment of £2,616,024 to Michael McLintock
in 2013 (for reference, the 2009 to 2011 award vested with a
value of £2.96 per share which resulted in a payment of
£5,417,359 to Michael McLintock during 2012). Based on 2011
performance, an award of 952,960 phantom shares with an
expected value of £1,238,849 was made to Michael McLintock
in 2012.
As described in the remuneration architecture review section
of this report, the method used to determine the number of
phantom shares awarded to Michael McLintock under the
M&G Executive Long-Term Incentive Plan has been revised.
With effect from 2013, Michael McLintock will receive an annual
award with a face value of three times his salary. The ultimate
value of the 2013 award will be determined with reference to the
profi tability and investment performance of M&G over the three
years from 1 January 2013 to 31 December 2015 using the
measures set out above.
Jackson Long-Term Incentive Plans
Prior to his appointment as an executive director, Mike Wells
participated in the two long-term incentive plans offered to
senior staff within Jackson. Mike Wells was awarded ADRs
under the JNL US Performance Share Plan and cash-based
awards under the JNL Long-Term Incentive Plan. Awards made
under both plans have a performance period of four years and
vesting is dependent on the achievement of shareholder value
targets. Up to 150 per cent of the original number of ADRs
awarded under the JNL Performance Share Plan may be
released if stretch performance targets are achieved.
Outstanding awards made to Mike Wells before his
appointment as an executive director remain subject to the
original performance conditions and vesting schedule. No
further awards will be made to Mike Wells under these plans.
On 31 December 2012, the performance periods for the 2009
awards under the JNL long-term incentive plans (which began on
1 January 2009) came to an end. Over the period the shareholder
value of the US business grew by 22.68 per cent per annum (on a
compound basis) and by 126.51 per cent over the performance
period. This resulted in vesting of 150 per cent of Mike Wells’
2009 JNL US Performance Share Plan award and of
126.51 per cent of his 2009 cash-settled JNL Long-Term Incentive
Plan award (for reference 150 per cent of Mike Wells’ 2008 to
2011 JNL US Performance Share Plan award and 95 per cent
of his 2008 to 2011 cash-settled JNL Long-Term Incentive Plan
award vested).
2012 implementation of remuneration policy
Prudential plc Annual Report 2012
129
Share ownership guidelines
As a condition of serving, all directors are required to have
benefi cial 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 fi ve years
following their appointment.
The level of the requirements which applied to executive
directors in 2012 and the current holdings of directors are shown
below. The shareholding guidelines have been increased as part
of the review of remuneration architecture and full details of the
revised guidelines are outlined on page 118. Shares earned and
deferred under the Annual Incentive Plan are included in
calculating the executive director’s shareholding for these
purposes.
2012
Shareholding
guideline as a
percentage of
base salary
Shareholding
at 31 December
2012 as a
percentage
of base salary
note
2013
Shareholding
guideline as a
percentage of
base salary
100%
100%
200%
100%
100%
200%
100%
397%
459%
1,641%
482%
680%
800%
773%
200%
200%
200%
200%
200%
350%
200%
Rob Devey
John Foley
Michael McLintock
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells
Note
Benefi cial interest, based on the share price as at 31 December 2012 (£8.655).
Calculated using base salaries on 31 December 2012.
Benefi ts
All executive directors receive core health and security benefi ts,
for example medical insurance and life assurance.
Other benefi ts may be offered to executives, dependent on:
AAAAAAAAAAAAA Local market practice;
AAAAAAAAAAAAA The benefi ts offered to other employees within the business
unit; and
AAAAAAAAAAAAA Applicable expatriate and relocation benefi ts and allowances.
The 2012 remuneration table on page 134 sets out the cost of
providing benefi ts in 2012.
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 in their location.
Save As You Earn (SAYE) schemes
UK-based executive directors are eligible to participate in
the HM Revenue and Customs (HMRC) approved Prudential
Savings-Related Share Option Scheme and Barry Stowe is invited
to participate in the similar International Share Ownership
Scheme. These schemes allow all eligible 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 fi ve 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 fi ve years, matching shares
are forfeited.
No directors or other employees are provided with loans to
enable them to buy shares.
Pension benefi ts
Michael McLintock elected to become a deferred member
of a contributory defi ned benefi t scheme (described overleaf)
on 5 April 2012. Michael McLintock now receives a salary
supplement of 25 per cent of salary. John Foley elects to receive
a combination of contributions into the money purchase scheme
and a cash supplement with a total value of 25 per cent of salary.
All other executive directors based in the UK have chosen to
receive their pension benefi ts in the form of a cash supplement
of 25 per cent of salary throughout 2012. These executives are
provided with life assurance cover of up to four times salary
plus a dependants’ pension.
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Barry Stowe receives a cash supplement of 25 per cent of salary
and a payment to the Hong Kong Mandatory Provident Fund.
He is provided with life assurance cover of up to four times salary.
Mike Wells participates 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 (Mike Wells’
salary for pension purposes is limited to US$250,000). He also
participates 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 6 per cent of pensionable salary was made in
2012 (in 2011, the profit share contribution was 5 per cent of
pensionable salary). Mike Wells is provided with life assurance
cover of two times salary.
Those executives who joined the Group before June 2003 were
entitled to maintain their membership of the defined benefit
plans available at that time. However, at the end of 2012, no
executive director was an active member of a Group defined
benefit scheme. Until 5 April 2012, Michael McLintock
participated 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, his contribution was 4 per cent of
base salary. Michael McLintock participated 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 £129,600 for the 2011/2012 tax year) which replicates
the HMRC earnings cap in force before A-Day (6 April 2006).
Michael McLintock was also entitled to supplements based on
his salary above the notional earnings cap.
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:
Additional pension earned during
year ended 31 December 2012
Transfer value of
accrued benefit
at 31 December
note (3)
Age at
31 December
2012
Years of
pensionable
service at
31 December
2012
Accrued
benefit at
31 December
2012
(£ per annum)
£000
Ignoring
inflation
on pension
earned to
31 December
2011
note (1)
£000
Allowing
for inflation
on pension
earned to
31 December
2011
note (2)
£000
Increase
in transfer
value less
contributions
made by
directors
during 2012
Contributions
to defined
contribution
pension
schemes
note (4)
2012
2011
£000
£000
£0000
£0000
Rob Devey
John Foley
Michael McLintock (note 5)
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells
44
56
51
47
55
50
52
20
56
1
(1) 1,323 1,102
218
–
50
–
–
2
–
19
Notes
1 As required by the Companies Act remuneration regulations.
2 As required by Stock Exchange Listing rules.
3 The transfer value equivalent has been calculated in accordance with the M&G Group Pension Scheme’s transfer basis.
4 This table includes employer contributions to defined contribution plans totalling £71,124 (2011: £56,224). Supplements in the form of cash are included in the
table on page 134.
5 Michael McLintock became a deferred member of the M&G defined benefit scheme on 5 April 2012. The amounts shown above as at 31 December 2012 are
calculated as at this date.
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.
Directors’ remuneration report Prudential plc Annual Report 20122012 implementation of remuneration policy continued
2012 implementation of remuneration policy
Prudential plc Annual Report 2012
131
Executive directors’ service contracts
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 benefi ts 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 specifi c
circumstances of each case, including the director’s obligation
to mitigate his loss. Payments are phased over the notice period.
Executive directors’ service contracts provide details of the broad
types of remuneration to which they are entitled, and about the
kinds of plans in which they may be invited to participate. The
service contracts offer no certainty as to the value of
performance-related reward and confi rms that any variable
payment will be at the discretion of the Company.
Details of the service contracts of the executive directors are outlined below:
Executive director
Rob Devey
John Foley
Michael McLintock
Nic Nicandrou
Barry Stowe
Tidjane Thiam
Mike Wells note
Date of contract
Notice period
to the Company
Notice period
from the Company
1 July 2009
8 December 2010
21 November 2001
26 April 2009
18 October 2006
20 September 2007
15 October 2010
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
Note
The contract for Mike Wells is a renewable one-year fi xed term contract. 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.
Policy on external appointments
Subject to the Group Chief Executive’s or the 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
2012, Michael McLintock received £47,500 as a trustee of
another organisation (for reference, Michael McLintock received
£45,000 for this role in 2011). Other directors served on the
boards of educational, development, charitable and cultural
organisations without receiving a fee for such services.
Chairman and non-executive directors’ letters
of appointment and fees
Non-executive directors’ letters of appointment
Non-executive directors do not have service contracts but are
appointed pursuant to letters of appointment with notice periods
of six months without liability for compensation.
Under the terms of their letters of appointment, continuation
of the non-executive directors’ appointment is contingent on
satisfactory performance and re-election by shareholders.
Non-executive directors are typically expected to serve two
three-year terms from the date of their election by shareholders.
Thereafter, the Board may invite the Director to serve for an
additional period.
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Directors’ remuneration report Prudential plc Annual Report 2012
2012 implementation of remuneration policy continued
Details of the letters of appointment for the non-executive directors are outlined below:
Non-executive director
Appointment by the Board
Initial election by
shareholders at AGM
Notice period
Expiration of current
term of appointment
Keki Dadiseth (note 1)
Howard Davies
Michael Garrett (note 1)
Ann Godbehere
Alistair Johnston
Paul Manduca (note 2)
Kaikhushru Nargolwala
Kathleen O’Donovan (note 3)
Philip Remnant (note 4)
Lord Turnbull
1 April 2005
15 October 2010
1 September 2004
2 August 2007
1 January 2012
15 October 2010
1 January 2012
8 May 2003
1 January 2013
18 May 2006
AGM 2005
AGM 2011
AGM 2005
AGM 2008
AGM 2012
AGM 2011
AGM 2012
AGM 2004
AGM 2013
AGM 2006
6 months
6 months
6 months
6 months
6 months
6 months
6 months
6 months
6 months
6 months
AGM 2013
AGM 2014
AGM 2013
AGM 2014
AGM 2015
AGM 2014
AGM 2015
n/a
AGM 2016
AGM 2015
Notes
1 Keki Dadiseth and Michael Garrett were reappointed in 2012 for one year. The Board will consider a further renewal term in May 2013.
2 Paul Manduca was appointed as Chairman of the Board on 2 July 2012.
3 Kathleen O’Donovan retired from the Board on 31 March 2012.
4 For Philip Remnant the table assumes initial election by shareholders at the 2013 AGM.
Chairman’s letter of appointment, fees and benefi ts
Paul Manduca was appointed as a non-executive director on
15 October 2010 and became Senior Independent Director
on 1 January 2011. On 2 July 2012, he was appointed Chairman.
He is paid an annual fee of £600,000. A contractual notice period
of 12 months by either party applies. Paul Manduca is provided
with life assurance cover of four times his annual fees plus an
additional sum to buy a dependants’ annuity, private medical
insurance and the use of a car and driver. No pension allowance
is paid and he is not a member of any Group pension scheme.
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 refl ect their
individual responsibilities, including chairmanship and
membership of committees where appropriate. The Board
reviews fees annually.
An increase of just under 3 per cent was made to the basic
non-executive fee with effect from 1 July 2012. No increases
were made to the additional fees paid to committee chairmen
or members. The revised fees are:
Annual fees
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 fee
Risk Committee member – additional fee
Senior Independent Director – additional fee
From
1 July 2012
£
87,500
70,000
25,000
50,000
25,000
60,000
25,000
50,000
Notes
1 No fee is payable for chairmanship or membership of the Nomination
Committee.
2 The Company may determine that additional fees should be paid if, in a
particular year, the number of meetings is materially greater than usual.
Please see the table on page 134 for details of the fees received
by individual non-executive directors during 2012.
2012 implementation of remuneration policy
Prudential plc Annual Report 2012
133
Non-executive directors’ share ownership requirements
In July 2011, a share ownership requirement for non-executive
directors was introduced. Non-executive directors are required
to hold shares with a value equivalent to one times the annual
basic fee (excluding additional fees for chairmanship and
membership of any committees). Non-executive directors will be
expected to attain this level of share ownership within three years
of the implementation of this requirement (or within three years
of their date of appointment, if later). The Chairman is required
to hold shares with a value equivalent to one times his annual fee
and is expected to attain this level of share ownership within fi ve
years of the date of his appointment.
Directors’ shareholdings
The interests of directors in ordinary shares of the Company
are set out below. ‘Shares subject to deferral’ includes shares
acquired under the Share Incentive Plan (detailed in the table
on page 142), deferred annual incentive awards and interests in
shares awarded on appointment (detailed in the ‘Other Share
Awards’ table on pages 140 and 141).
1 January 2012
31 December 2012
12 March 2013
Benefi cial
interest
(Number
of shares)
32,196
3,083
126,006
364,378
39,233
15,914
–
2,500
300,636
595,363
–
167,655
24,425
–
274,575
650,116
16,624
438,718
Number of
shares owned
outright
Number of
shares subject
to deferral
32,196
3,192
154,746
277,178
39,233
15,914
5,000
2,500
–
487,203
16,000
227,791
–
–
359,997
524,123
16,624
369,142
–
–
120,697
46,057
–
–
–
–
–
195,530
–
123,067
–
–
151,234
399,716
–
222,666
Total
benefi cial
interest
(Number
of shares)
32,196
3,192
275,443
323,235
39,233
15,914
5,000
2,500
–
682,733
16,000
350,858
–
–
511,231
923,839
16,624
591,808
Number of
shares subject
to performance
conditions
–
–
537,208
351,917
–
–
–
–
–
161,834
–
546,037
–
–
625,976
1,408,368
–
1,152,908
Benefi cial
interest
(Number
of shares)
32,196
3,192
275,443
323,235
39,233
15,914
5,000
2,500
–
682,733
16,000
350,907
–
–
511,231
923,839
16,624
591,808
Keki Dadiseth
Howard Davies
Rob Devey
John Foley
Michael Garrett
Ann Godbehere
Alistair Johnston note (1)
Paul Manduca
Harvey McGrath note (2)
Michael McLintock
Kaikhushru Nargolwala note (3)
Nic Nicandrou note (4)
Kathleen O'Donovan note (5)
Philip Remnant note 6)
Barry Stowe note (7)
Tidjane Thiam
Lord Turnbull
Mike Wells note (8)
Notes
1 Alistair Johnston was appointed to the Board on 1 January 2012.
2 Harvey McGrath retired from the Board on 2 July 2012.
3 Kaikhushru Nargolwala was appointed to the Board on 1 January 2012.
4 Nic Nicandrou’s interest in shares on 12 March 2013 includes his monthly purchases made under the SIP plan in January, February and March 2013.
5 Kathleen O’Donovan retired from the Board on 31 March 2012.
6 Philip Remnant was appointed to the Board on 1 January 2013.
7 Part of Barry Stowe’s benefi cial interest in shares is made up of 207,963 ADRs (representing 415,926 ordinary shares) and 95,305 ordinary shares. 8,513.73 of
these ADRs are held within an investment account which secures premium fi nancing for a life assurance policy).
8 Mike Wells’ benefi cial interest in shares is made up of 295,904 ADRs (representing 591,808 ordinary shares). In the table above, the fi gure for shares subject to
performance conditions refl ects the maximum number of shares (150 per cent of the original number awarded) which may be released to Mike Wells under
the JNL Performance Share Plan. This maximum number of shares may be released if stretch performance targets are achieved.
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134
Directors’ remuneration report Prudential plc Annual Report 2012
2012 implementation of remuneration policy continued
Directors’ remuneration for 2012 (audited information)
Salary/
fees
2012
cash
bonus
2012
deferred
bonus
Total
2012
bonus
Benefi ts*
Cash
supple-
ments for
pension
purposes
Total
emolu-
ments
2012†
2012
employers’
pension
contribu-
tions‡
Value of
anticipated
releases
from LTIPs
in respect of
performance
periods
ending
31 December
2012§
Total 2012
remuner-
ation –
‘The Single
Figure’¶
£000
Chairman
Paul Manduca note (1)
Harvey McGrath note ( 2)
Executive directors
Rob Devey
John Foley
Michael McLintock note (3)
Nic Nicandrou
Barry Stowe note (4)
Tidjane Thiam
Mike Wells note (5)
393
252
600
610
360
630
651
1,000
663
–
–
–
–
–
–
426
586
904
655
613
1,000
2,031
284
390
404
437
409
1,000
871
710
976
1,308
1,092
1,022
2,000
2,902
71
50
114
156
124
99
608
123
55
–
–
464
302
150
103
93
158
163
250
–
1,574
1,845
1,885
1,979
2,444
3,373
3,620
Total executive directors
4,514
6,215
3,795 10,010
1,279
917 16,720
Non-executive directors
Keki Dadiseth note (6)
Howard Davies
Michael Garrett
Ann Godbehere
Alistair Johnston
Kaikhushru Nargolwala
Kathleen O’Donovan note (7)
Lord Turnbull
120
171
111
181
111
136
28
161
Total non-executive directors
1,019
120
171
111
181
111
136
28
161
1,019
–
–
–
50
218
–
2
–
19
289
–
–
1,804
–
3,190
1,804
2,183
4,428
3,008
464
302
3,378
1,895
5,293
3,783
4,629
7,801
6,647
16,417
33,426
120
171
111
181
111
136
28
161
1,019
Overall total
6,178
6,215
3,795 10,010
1,400
917 18,505
289
16,417
35,211
* The value of benefi ts is the cost to the Company of providing core and additional benefi ts.
† Each remuneration element is rounded to the nearest £1,000 and totals are the sum of these rounded fi gures.
‡ Pension benefi ts are described in the section on ‘Pensions benefi ts’ on page 129.
§ 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 average
closing share price over the period 1 October 2012 to 31 December 2012. All executive directors participate in long-term incentive plans and the details of share
releases from awards with a performance period ending 31 December 2012 are provided in the footnote to the tables on share awards on pages 137 to 139. This
fi gure does not include releases from other share plans (detailed on pages 140 to 141) or all-employee share plans, (set out on page 142). Dividend equivalents will
be released on these vested shares.
¶ ‘The Single Figure’ is based on the methodology outlined on page 124.
Notes
1 Paul Manduca was appointed as Chairman on 2 July 2012. The fi gures above include the fees he received as senior independent non-executive director
prior to his appointment as Chairman.
2 Harvey McGrath retired from the Board on 2 July 2012.
3 ‘The Single Figure’ for Michael McLintock includes the increase in transfer value of his defi ned benefi t pension. This is outlined on page 130.
4 Barry Stowe’s benefi ts relate primarily to his expatriate status, including costs of £217,567 for housing, £32,104 for children’s education, £69,289 for home leave
and a £248,894 Executive Director Location Allowance.
5 Mike Wells’ bonus fi gure excludes a contribution of US$15,000 from a profi t sharing plan which has been made into a 401(k) retirement plan. This is included
under employers’ pension contribution.
6 Keki Dadiseth was paid allowances totalling £8,997 in respect of his accommodation expenses in London whilst on the Company’s business.
7 Kathleen O’Donovan retired from the Board on 31 March 2012.
2012 implementation of remuneration policy
Prudential plc Annual Report 2012
135
Directors’ remuneration for 2011 (audited information)
Salary/
fees
2011
cash
bonus
2011
deferred
bonus
500
550
550
350
550
641
900
624
–
479
518
779
507
579
785
1,660
5,307
–
319
345
279
338
386
785
711
3,163
£000
Chairman
Harvey McGrath
Executive directors
Rob Devey
John Foley (note 1)
Michael McLintock
Nic Nicandrou
Barry Stowe (note 2)
Tidjane Thiam
Mike Wells (notes 1 and 3)
Total executive directors
4,165
Non-executive directors
Keki Dadiseth (note 4)
Howard Davies
Michael Garrett
Ann Godbehere
Bridget Macaskill (note 5)
Paul Manduca
Kathleen O’Donovan
James Ross (note 6)
Lord Turnbull
Total non-executive directors
102
153
93
158
65
156
98
33
129
987
Value of
anticipated
releases
from LTIPs
in respect of
performance
periods
ending
31 December
2011‡
Cash
supplements
for pension
purposes†
Total
emoluments
2011
Benefi ts*
82
111
139
93
84
544
116
64
1,151
–
582
–
138
100
96
138
160
225
–
857
1,597
1,652
1,597
1,617
2,310
2,811
3,059
1,544
–
6,005
2,020
2,341
1,910
1,369
14,643
15,189
Total
2011
bonus
–
798
863
1,058
845
965
1,570
2,371
8,470
102
153
93
158
65
156
98
33
129
987
Overall total
5,652
5,307
3,163
8,470
1,233
857
16,212
15,189
* Benefi ts include (where provided) the cost of providing the use of a car and driver, medical insurance, security arrangements and expatriate benefi ts.
† Pension benefi ts are described in the section on ‘Pensions and long-term savings’ in the 2011 Directors’ remuneration report.
‡ 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 2011. This fi gure does not include releases from other share plans or all-employee share plans. Dividend equivalents will be released on these
vested shares.
Notes
1 John Foley and Mike Wells were appointed to the Board on 1 January 2011.
2 Barry Stowe’s benefi ts relate primarily to his expatriate status, including costs of £184,489 for housing, £32,077 for children’s education, £35,093 for home leave
and a £245,114 Executive Director Location Allowance.
3 Mike Wells’ bonus fi gure excludes a contribution of US$12,250 from a profi t sharing plan which has been made into a 401(k) retirement plan. This is included in
the table on pension contributions.
4 Keki Dadiseth was paid allowances totalling £8,997 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.
5 Bridget Macaskill retired from the Board on 30 September 2011.
6 James Ross retired from the Board on 19 May 2011.
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The performance condition attached to the 2010 GPSP award
was met in full and 100 per cent of the award will be released
during 2013. Achievement of the SCV performance measure
attached to the 2010 Jackson BUPP award was 22.68 per cent per
annum (on a compound basis), so 100 per cent of the outstanding
portion of this award will be released during 2013.
Outstanding 2010 awards made to Clark Manning 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
refl ect the portion of the performance periods which had elapsed
on 31 December 2011 (ie 24/36ths).
No awards were made to Clark Manning under any long-term
incentive plan during 2011 or 2012 and none will be made in any
subsequent year.
Payments and share releases in 2012 to newly
appointed executive directors
Share awards made to Nic Nicandrou and Rob Devey in
connection with their appointment were released, as scheduled,
during 2012. Details of these awards were originally set out in the
Directors’ remuneration report for 2009. Please see the Other
share awards table for details.
No other amounts were paid during the fi nancial year or were
receivable by directors (or past directors) in connection with
leaving the organisation.
136
Directors’ remuneration report Prudential plc Annual Report 2012
Supplementary information
Payments and share releases in 2012
to past executive directors
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.
The performance periods of Nick Prettejohn’s GPSP and UK
BUPP awards for 2009 ended on 31 December 2011. Vesting
was prorated based on service (ie 9/36ths). Vesting remained
dependent on performance achieved over the performance
period and shares were released at the same time as for other
participants in these plans.
The performance condition attached to the 2009 GPSP award
was met in full and 100 per cent of the proportion of the award
which was outstanding was released during 2012. Achievement
against the shareholder capital value performance measure
attached to the 2009 UK BUPP award was 12.5 per cent per
annum (on a compound basis), so 87.5 per cent of the
outstanding portion of this award was released during 2012.
This award was the last that Nick Prettejohn had outstanding
under a Prudential long-term incentive plan.
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 remained Chairman of
Jackson until 30 April 2011 and acted in an advisory role until
31 December 2011. The 2010 Directors’ remuneration report
provided details of the remuneration arrangements that would
apply to Clark Manning after his resignation. These arrangements
were implemented as intended by the Committee.
During 2012, Clark Manning received the following payments:
AAAAAAAAAAAAA Clark Manning had a prorated 2011 annual bonus opportunity
(4/12ths) based on his length of service as Chairman of
Jackson during 2011. On this basis, a cash payment of
£725,389 was made to him in 2012;
AAAAAAAAAAAAA The deferred portion of the bonuses awarded to Clark
Manning in respect of performance in 2009 and 2010 were
released to Clark Manning in July 2012;
AAAAAAAAAAAAA The performance condition attached to the 2009 GPSP award
was met in full and 100 per cent of the award was released
in 2012; and
AAAAAAAAAAAAA Achievement against the shareholder capital value
performance measure attached to the 2009 JNL BUPP
award was 11.5 per cent per annum (on a compound basis)
so 93.75 per cent of the outstanding portion of this award
was released in 2012.
Supplementary information
Prudential plc Annual Report 2012
137
Directors’ outstanding long-term incentive awards
Share-based long-term incentive awards
The section below sets out the outstanding share awards under the Group Performance Share Plan and the awards made under additional
long-term plans (Business Unit Performance Plan and JNL Performance Share Plan) for the executive directors with regional responsibilities.
Plan name
Rob Devey
GPSP
BUPP
GPSP
BUPP
GPSP
BUPP
GPSP
BUPP
John Foley
GPSP
GPSP
Michael McLintock
GPSP
GPSP
GPSP
GPSP
Nic Nicandrou
GPSP
GPSP
GPSP
GPSP
Barry Stowenote (1)
GPSP
BUPP
GPSP
BUPP
GPSP
BUPP
GPSP
BUPP
Conditional
share awards
outstanding
at 1 January
2012
(Number of
shares)
Conditional
awards
in 2012
(Number of
shares)
Market price
at date of
award
(pence)
Dividend
equivalents
on vested
shares
(Number of
shares
released)
note (2)
Conditional
share awards
outstanding
at 31 December
2012
(Number
of shares)
Date of
end of
performance
period
Rights
exercised
in 2012
Rights
lapsed
in 2012
15,361 136,259
15,361 136,258
120,898
120,897
104,089
104,089
76,242
76,242
639
639
568.5
568.5
733.5
733.5
678
678
88,273
88,273
– 31 Dec 11
– 31 Dec 11
104,089 31 Dec 12
104,089 31 Dec 12
76,242 31 Dec 13
76,242 31 Dec 13
88,273 31 Dec 14
88,273 31 Dec 14
602,457
176,546
30,722 272,517
537,208
Year of
award
2009
2009
2010
2010
2011
2011
2012
2012
2011
2012
152,484
199,433
733.5
678
152,484
199,433
152,484 31 Dec 13
199,433 31 Dec 14
351,917
– 31 Dec 11
66,238 31 Dec 12
48,517 31 Dec 13
47,079 31 Dec 14
2009
2010
2011
2012
2009
2010
2011
2012
2009
2009
2010
2010
2011
2011
2012
2012
92,022
66,238
48,517
455.5
568.5
733.5
678
47,079
11,691 103,713
206,777
47,079
11,691 103,713
161,834
316,328
208,179
152,484
185,374
639
568.5
733.5
678
40,197 356,525
– 31 Dec 11
208,179 31 Dec 12
152,484 31 Dec 13
185,374 31 Dec 14
676,991
185,374
40,197 356,525
546,037
22,868 219,464
19,780 189,834
26,542
196,596
196,596
129,076
129,076
88,270
88,270
455.5
455.5
568.5
568.5
733.5
733.5
678
678
95,642
95,642
– 31 Dec 11
– 31 Dec 11
129,076 31 Dec 12
129,076 31 Dec 12
88,270 31 Dec 13
88,270 31 Dec 13
95,642 31 Dec 14
95,642 31 Dec 14
827,884
191,284
42,648 409,298
26,542
625,976
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138
Directors’ remuneration report Prudential plc Annual Report 2012
Supplementary information continued
Plan name
Tidjane Thiam
GPSP
GPSP
GPSP
GPSP
Mike Wellsnotes (1 & 5)
JNL PSP
JNL PSP
JNL PSP
GPSP
BUPP
GPSP
BUPP
Year of
award
2009
2010
2011
2012
2008
2009
2010
2011
2011
2012
2012
Conditional
share awards
outstanding
at 1 January
2012
(Number of
shares)
299,074
510,986
374,279
Conditional
awards
in 2012
(Number of
shares)
Market price
at date of
award
(pence)
455.5
568.5
733.5
678
523,103
Dividend
equivalents
on vested
shares
(Number of
shares
released)
note (2)
Conditional
share awards
outstanding
at 31 December
2012
(Number
of shares)
Date of
end of
performance
period
Rights
exercised
in 2012
Rights
lapsed
in 2012
38,004 337,078
– 31 Dec 11
510,986 31 Dec 12
374,279 31 Dec 13
523,103 31 Dec 14
1,184,339
523,103
38,004 337,078
1,408,368
84,900
84,900
218,100
141,000
197,648
197,648
546
455.5
568.5
733.5
733.5
678
678
199,256
199,256
– 31 Dec 11
218,100 31 Dec 12
141,000 31 Dec 13
197,648 31 Dec 13
197,648 31 Dec 13
199,256 31 Dec 14
199,256 31 Dec 14
839,296
398,512
84,900
1,152,908
Notes
1 The awards for Barry Stowe and Mike Wells were made in ADRs (1 ADR = 2 Prudential plc shares). The fi gures in the table are represented in terms of
Prudential shares.
2 In 2009 and 2010, a scrip dividend equivalent and in 2011 and 2012 a DRIP dividend equivalent were accumulated on these awards.
3 On 31 December 2012, the performance period of the 2010 GPSP awards came to an end. Prudential’s TSR performance was 139.9 per cent of the TSR
performance of the peer index. On this basis, it is anticipated that awards granted under this plan in 2010 will vest in full. This will result in 104,089 shares
vesting for Rob Devey, 66,238 shares for Michael McLintock, 208,179 shares for Nic Nicandrou, 129,076 shares for Barry Stowe and 510,986 shares for
Tidjane Thiam under this plan. Dividend equivalents will be released on these vested shares.
4 At 31 December 2012, the performance period of the 2010 BUPP awards came to an end. Over the performance period the new business profi t, IFRS profi t and
cash remittance achieved by the Asia business meant that it is anticipated that 95.2 per cent of the award will vest. This will result in 122,880 shares being
released to Barry Stowe under this plan. Since the UK BUPP uses the same TSR performance measure as the GPSP, it is anticipated that 104,089 shares will be
released to Rob Devey under this plan. No current executive director participated in the 2010 JNL BUPP. Dividend equivalents will be released on these vested
shares.
5 The table above refl ects the maximum number of shares (150 per cent of the original number awarded) which may be released to Mike Wells under the
JNL Performance Share Plan. This maximum number of shares may be released if stretch performance targets are achieved. On 31 December 2012, the
performance period of the 2009 JNL Performance Share Plan award came to an end. On the basis of the shareholder value being achieved by the Jackson
business over the performance period, it is anticipated that 150 per cent of awards will vest, resulting in 218,100 shares being released to Mike Wells under
this plan in 2013.
Supplementary information
Prudential plc Annual Report 2012
139
Business-specifi c cash-based long-term incentive plans
Details of all outstanding awards under cash-based long-term incentive plans are set out in the table below. The performance period
for all M&G Executive LTIP awards is three years while the performance period for all JNL LTIP awards is four years:
Michael McLintock
M&G Executive LTIP
M&G Executive LTIP
M&G Executive LTIP
M&G Executive LTIP
Total cash payments made in 2012
Mike Wells
JNL LTIP
JNL LTIP
JNL LTIP
Total cash payments made in 2012
Year of initial
award
Face value of
conditional
share awards
outstanding at
1 January 2012
£000
Conditionally
awarded
in 2012
£000
Payments
made
in 2012
£000
Face value of
conditional
share awards
outstanding at
31 December
2012
£000
Date of end of
performance
period
2009
2010
2011
2012
2008
2009
2010
1,830
987
1,318
756
894
906
953
5,417
5,417
827
827
–
987
1,318
953
31 Dec 11
31 Dec 12
31 Dec 13
31 Dec 14
–
894
906
31 Dec 11
31 Dec 12
31 Dec 13
Note
Under the M&G Executive LTIP, the value of each unit at award is £1. The value of units changes based on M&G’s profi t growth and investment performance over
the performance period. For the 2009 award of 1,830,189 units, the unit price at the end of the performance period was £2.96 which resulted in a payment of
£5,417,359 to Michael McLintock during 2012. For the 2010 award of 987,179 units, the unit price at the end of the performance period was £2.65. This will result in
payment of £2,616,024 to Michael McLintock in 2013.
See page 128 for a description of the JNL LTIP. Performance over the period from 2008 to 2011 resulted in a payment of £826,975 to Mike Wells during 2012.
Performance over the period from 2009 to 2012 will result in a payment of £1,117,509 being paid to Mike Wells in 2013. The awards above were made before
Mike Wells became an executive director and it is anticipated that no further awards will be made to him under this Plan.
The sterling face value of Mike Wells’ JNL LTIP awards have been calculated using the average exchange rate for the year in which the grant was made.
The dollar face value of conditional share awards outstanding on 1 January 2012 and 31 December 2012 was US$4,200,000 and US$2,800,000 respectively.
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140
Directors’ remuneration report Prudential plc Annual Report 2012
Supplementary information continued
Other share awards
The table below sets out the share awards that have been made to executive directors under their appointment terms and those
deferred from annual incentive plan payments. 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 fi nancial results for the relevant year. For the
awards from the 2011 annual incentives, made in 2012, the average share price was 776 pence. Please see the table on page 142
for details of shares acquired under the Share Incentive Plan.
Con-
ditionally
awarded
in 2012
(Number
of shares)
Dividends
accumu-
lated
in 2012
(Number
of shares)
note (2)
Shares
released
in 2012
(Number
of shares)
Con-
ditional
share
awards out-
standing
at 31
December
2012
(Number
of shares)
Date of
end of
restricted
period
Date of
release
Market
price at
date of
award
(pence)
Market
price at
date of
vesting
or release
(pence)
50,575
– 31 Mar 12 29 Mar 12
639
750
Con-
ditional
share
awards out-
standing at
1 January
2012
(Number
of shares)
Year of
grant
2009
50,575
2010
28,737
2011
46,694
1,018
1,655
29,755 31 Dec 12
48,349 31 Dec 13
2012
41,136
1,457
42,593 31 Dec 14
126,006
41,136
4,130 50,575 120,697
2010 172,993
6,133 179,126
– 14 Dec 12 14 Dec 12
612
881
2012
44,481
1,576
46,057 31 Dec 14
750
172,993
44,481
7,709 179,126
46,057
2010 137,700
137,700
– 31 Dec 11 15 Mar 12
519.5
780
2010
74,840
2011
77,988
2,653
2,765
77,493 31 Dec 12
80,753 31 Dec 13
2012
36,008
1,276
37,284 31 Dec 14
290,528
36,008
6,694 137,700 195,530
552.5
721.5
750
68,191
– 31 Mar 12 29 Mar 12
639
750
2009
68,191
2010
26,342
2011
48,155
934
1,707
27,276 31 Dec 12
49,862 31 Dec 13
2012
43,518
1,542
45,060 31 Dec 14
142,688
43,518
4,183 68,191 122,198
552.5
721.5
750
552.5
721.5
750
Rob Devey
Awards under
appointment terms
Deferred 2009 annual
incentive award
Deferred 2010 annual
incentive award
Deferred 2011 annual
incentive award
John Foley
Deferred 2009 deferred
PruCap award
Deferred 2011 annual
incentive award
Michael McLintock
Deferred 2008 annual
incentive award
Deferred 2009 annual
incentive award
Deferred 2010 annual
incentive award
Deferred 2011 annual
incentive award
Nic Nicandrou
Awards under
appointment terms
Deferred 2009 annual
incentive award
Deferred 2010 annual
incentive award
Deferred 2011 annual
incentive award
Supplementary information
Prudential plc Annual Report 2012
141
Con-
ditionally
awarded
in 2012
(Number
of shares)
Dividends
accumu-
lated
in 2012
(Number
of shares)
note (2)
Shares
released
in 2012
(Number
of shares)
Con-
ditional
share
awards out-
standing
at 31
December
2012
(Number
of shares)
Date of
end of
restricted
period
Date of
release
Market
price at
date of
award
(pence)
Market
price at
date of
vesting
or release
(pence)
22,643
– 31 Dec 11 15 Mar 12
349.5
780
69,924
– 31 Dec 11 15 Mar 12
552.5
780
Con-
ditional
share
awards out-
standing at
1 January
2012
(Number
of shares)
Year of
grant
2009
22,643
2010
39,088
2011
56,316
2010
69,924
2010
63,240
2011 221,657
1,386
1,998
40,474 31 Dec 12
58,314 31 Dec 13
2012
50,648
1,798
52,446 31 Dec 14
118,047
50,648
5,182 22,643 151,234
2,242
7,858
65,482 31 Dec 12
229,515 31 Dec 13
2012
101,134
3,585
104,719 31 Dec 14
354,821 101,134
13,685 69,924 399,716
2010
32,250
32,250 15 Mar 13
2011
90,854
3,226
94,080 31 Dec 13
2012
93,034
3,302
96,336 31 Dec 14
123,104
93,034
6,528
222,666
Barry Stowenote (1)
Deferred 2008 annual
incentive award
Deferred 2009 annual
incentive award
Deferred 2010 annual
incentive award
Deferred 2011 annual
incentive award
Tidjane Thiam
Deferred 2008 annual
incentive award
Deferred 2009 annual
incentive award
Deferred 2010 annual
incentive award
Deferred 2011 annual
incentive award
Mike Wells note (1)
2009 After Tax Deferral
Program awardnote (3)
Deferred 2010 Group
Deferred Bonus Plan
award
Deferred 2011 annual
incentive award
552.5
721.5
750
552.5
721.5
750
520
721.5
750
S
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y
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f
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m
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D
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Notes
1 The Deferred Share Awards in 2010, 2011 and 2012 for Barry Stowe and Mike Wells were made in ADRs (1 ADR = 2 Prudential plc shares). The fi gures in the table
are represented in terms of Prudential shares.
2 In 2009 and 2010 a scrip dividend equivalent and in 2011 and 2012 a DRIP dividend equivalent were accumulated on these awards.
3 This award attracts dividends in the form of cash rather than shares.
142
Directors’ remuneration report Prudential plc Annual Report 2012
Supplementary information continued
Shares acquired under the Share Incentive Plan
Year of
initial grant
Share
incentive
plan awards
held in Trust
at 1 January
2012
(Number
of shares)
Partnership
shares
accumulated
in 2012
(Number
of shares)
Matching
shares
accumulated
in 2012
(Number
of shares)
Dividend
shares
accumulated
in 2012
(Number
of shares)
Share
Incentive Plan
awards held in
Trust at
31 December
2012
(Number
of shares)
Nic Nicandrou
Shares held in Trust
2010
596
199
50
24
869
Note
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 fi ve years.
Outstanding share options
The following table sets out the share options held by the directors in the UK Savings-Related Share Option Scheme (SAYE) as at the
end of the period. No other directors held shares in any other option scheme.
Exercise period
Number of options
Date of
grant
Exercise
price
Market
price
at 31
December
2012
Beginning
End
of period Granted Exercised Cancelled Forfeited Lapsed
Beginning
End of
period
551
John Foley 25 Apr 08
Tidjane
Thiam
Nic
Nicandrou 16 Sep 11 465.8666
Rob Devey 16 Sep 11 465.8666
16 Sep 11 465.8666
865.5 01 Jun 13
29 Nov 13
2,953
865.5 01 Dec 14 29 May 15
965
865.5 01 Dec 16 31 May 17
865.5 01 Dec 16 31 May 17
3,268
3,268
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– 2,953
–
965
– 3,268
– 3,268
Notes
1 No gains were made by directors in 2012 on the exercise of SAYE options (2011: £665).
2 No price was paid for the award of any option.
3 The highest and lowest closing share prices during 2012 were 911.5 pence and 633.5 pence respectively.
Dilution
Releases from Prudential’s GPSP and BUPP are satisfi ed 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 satisfi ed by new issue shares. The combined dilution from
all outstanding shares and options at 31 December 2012 was 0.1 per cent of the total share capital at the time. Deferred shares will
continue to be satisfi ed by the purchase of shares in the open market.
Supplementary information
Prudential plc Annual Report 2012
143
Company TSR performance (unaudited information)
As required by the Companies Act, the line chart below compares Prudential’s Total Shareholder Return (TSR) during the fi ve years
from 1 January 2008 to 31 December 2012, 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. This chart is prepared using the methodology stipulated in the current remuneration regulations:
Prudential TSR v FTSE 100 and peer group index – total returns % over five years to December 2012
160
140
120
100
80
60
40
146.4
109.6
67.3
Dec 2007
Dec 2008
Dec 2009
Dec 2010
Dec 2011
Dec 2012
Prudential
FTSE 100
Peer group index
Their emoluments were within the following bands:
£5,000,001 – £5,100,000
£5,300,001 – £5,400,000
£5,700,001 – £5,800,000
£6,000,001 – £6,100,000
£8,200,001 – £8,300,000
£8,300,001 – £8,400,000
£8,400,001 – £8,500,000
£10,000,001 – £10,100,000
2010
2011
2012
1
1
1
1
1
2
1
1
S
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m
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y
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f
o
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m
a
t
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n
D
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e
c
t
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s
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Five highest paid individuals (unaudited information)
Of the fi ve individuals with the highest emoluments in 2012,
three were directors whose emoluments are disclosed in this
report (2011: two; 2010: one). The aggregate of the emoluments
of the other two individuals for 2012 (2011: three; 2010: four)
were as follows:
£000,000
2010
2011
2012
Base salaries, allowances and
benefi ts in kind (note 1)
Pension contributions (note 2)
Bonuses paid or receivable
Share-based payments and other
cash payments
Total
1
–
18
6
25
1
–
23
2
26
–
–
15
1
16
Notes
1 Base salaries, allowances and benefi ts in kind in 2012 were less than
£400,000.
2 Pension contributions payable were less than £150,000 in each period.
Signed on behalf of the Board of directors
Lord Turnbull
Chairman of the Remuneration Committee
12 March 2013
Paul Manduca
Chairman
12 March 2013
144
Prudential plc Annual Report 2012
Prudential plc Annual Report 2012
145
Section 5
Financial
statements
Financial statements and European Embedded Value (EEV)
basis supplementary information
146
147
148
149
151
153
154
315
316
324
Index to Group fi nancial statements
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated statement of changes in equity
Consolidated statement of fi nancial position
Consolidated statement of cash fl ows
Notes on the Group fi nancial statements
Balance sheet of the parent company
Notes on the parent company fi nancial statements
Statement of directors’ responsibilities in respect of the
annual report and the fi nancial statements
Independent auditor’s report to the members of Prudential plc
EEV basis results
Notes on the EEV basis results
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 unaudited fi nancial information
325
326
331
363
364
366
F
i
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a
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c
i
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l
s
t
a
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e
m
e
n
t
s
146
Financial statements Prudential plc Annual Report 2012
Index to Group fi nancial statements
Primary statements
147
148
149
151
153
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated statement of changes in equity
Consolidated statement of fi nancial position
Consolidated statement of cash fl ows
Notes on the Group fi nancial statements
Section A: Background and accounting policies
Nature of operations
154
A1:
A2:
154
Basis of preparation
A3: Accounting policies
154
A4:
166
A5: New accounting pronouncements
170
Critical accounting estimates and judgements
Section B: Summary of results
176
179
180
181
182
Segment disclosure – profi t before tax
Earnings per share
Dividends
Exchange translation
Group statement of fi nancial position
B1:
B2:
B3:
B4:
B5:
Section C: Group risk management
191
Group risk management
C:
Section D: Life assurance business
192
197
213
231
238
D1:
D2:
D3:
D4: Asia insurance operations
D5:
Group overview
UK insurance operations
US insurance operations
Capital position statement for life assurance businesses
Section E: Asset management (including US broker-dealer)
and other operations
247
249
E1:
E2:
Income statement for asset management operations
Statement of fi nancial position for asset management
operations
Regulatory and other surplus for asset
management operations
Sensitivity of profi t and shareholders’ equity to
market and other fi nancial risk
Other operations
250
E3:
251
E4:
251
E5:
F1:
F2:
F3:
F4:
Section F: Income statement notes
252
254
256
257
Segmental information
Revenue
Acquisition costs and other expenditure
Finance costs – Interest on core structural borrowings
of shareholder-fi nanced operations
Tax
257
F5:
Financial instruments – Designation and fair values
Section G: Financial assets and liabilities
262
269
273
274
274
G1:
G2: Market risk
G3:
G4:
G5:
Derivatives and Hedging
Derecognition and collateral
Impairment of fi nancial assets
Intangible assets attributable to shareholders
Intangible assets attributable to with-profi ts funds
Reinsurers’ share of insurance contract liabilities
Tax assets and liabilities
Section H: Other information on statement of fi nancial position items
H1:
275
279 H2:
280 H3:
281
H4:
283 H5: Accrued investment income and other debtors
Property, plant and equipment
283 H6:
Investment properties
284 H7:
Investments in associates and joint ventures
285 H8:
287 H9:
Properties held for sale
287 H10: Cash and cash equivalents
287 H11:
Shareholders’ equity: share capital, share premium
and reserves
Insurance contract liabilities and unallocated surplus
of with-profi ts funds
289 H12:
289 H13: Borrowings
291
294 H15: Other liabilities
H14: Provisions and contingencies
Section I: Other notes
295
297
298
308
311
312
312
313
313
314
314
Acquisition of subsidiaries
Changes to Group’s holdings
Staff and pension plans
Share-based payments
Key management remuneration
Fees payable to auditor
Related party transactions
Subsidiary undertakings
Commitments
Cash fl ows
Post balance sheet events
I1:
I2:
I3:
I4:
I5:
I6:
I7:
I8:
I9:
I10:
I11:
Parent company fi nancial statements
315
316
Balance sheet of the parent company
Notes on the parent company fi nancial statements
Statement of directors’ responsibilities and
independent auditor’s report
324
Statement of directors’ responsibilities in respect of the annual
report and the fi nancial statements
Independent auditor’s report to the members of Prudential plc
325
European Embedded Value (EEV) basis results
326 Operating profi t based on longer-term investment returns
Summarised consolidated income statement – EEV basis
328
Earnings per share – EEV basis
328
328
Dividends per share
329 Movement in shareholders’ equity (excluding non-controlling
interests) – EEV basis
330 Net asset value per share – EEV basis
330
331
363
Summary statement of fi nancial position – EEV basis
Notes on the EEV basis results
Statement of directors’ responsibilities in respect of the European
Embedded Value (EEV) basis supplementary information
Independent auditor’s report to Prudential plc on the European
Embedded Value (EEV) basis supplementary information
364
Additional unaudited fi nancial information
366 Additional unaudited fi nancial information
Primary statements Prudential plc Annual Report 2012
147
Consolidated income statement
Year ended 31 December
Gross premiums earned
Outward reinsurance premiums
Earned premiums, net of reinsurance
Investment return
Other income
Total revenue, net of reinsurance
Benefi ts and claims
Outward reinsurers’ share of benefi t and claims
Movement in unallocated surplus of with-profi ts funds
Benefi ts and claims and movement in unallocated surplus of with-profi ts funds,
net of reinsurance
Acquisition costs and other expenditure
Finance costs: interest on core structural borrowings of shareholder-fi nanced operations
Total charges, net of reinsurance
Profi t before tax (being tax attributable to shareholders’ and policyholders’ returns)†
(Less) add tax (charge) credit attributable to policyholders’ returns
Profi t before tax attributable to shareholders
Total tax (charge) attributable to policyholders and shareholders
Adjustment to remove tax credit (charge) attributable to policyholders’ returns
Tax charge attributable to shareholders’ returns
Profi t for the year
Attributable to:
Equity holders of the Company
Non-controlling interests
Profi t for the year
Note
2012 £m
2011* £m
F2
F2
F2
F1,F2
F1
H12
F3
F4
F1
B1
F5
F5
29,910
(506)
29,404
24,051
2,021
55,476
(44,831)
259
(1,381)
(45,953)
(6,055)
(280)
25,706
(429)
25,277
9,360
1,869
36,506
(31,060)
746
1,025
(29,289)
(5,120)
(286)
(52,288)
(34,695)
3,188
(378)
2,810
(991)
378
(613)
2,197
2,197
–
2,197
1,811
17
1,828
(392)
(17)
(409)
1,419
1,415
4
1,419
Earnings per share (in pence)
Based on profi t attributable to the equity holders of the Company:
Basic
Diluted
B2
B2
86.5p
86.4p
55.8p
55.7p
* The Group has adopted updated US GAAP requirements for deferred acquisition costs as an improvement to its accounting policy under IFRS 4 for those
operations of the Group which measure insurance assets and liabilities substantially by reference to US GAAP principles. Accordingly, the 2011 comparative
results and related notes have been adjusted from those previously published for the retrospective application of the change as if the new accounting policy had
always applied, as described in note A5.
† This measure is the formal profi t before tax measure under IFRS but it is not the result attributable to shareholders. This is principally because the corporate taxes
of the Group include those on the income of consolidated with-profi ts and unit-linked funds that, through adjustments to benefi ts, are borne by policyholders.
These amounts are required to be included in the tax charge of the Company under IAS 12. Consequently, the profi t before all taxes measure (which is determined
aft er deducting the cost of policyholder benefi ts and movements in the liability for unallocated surplus of the PAC with-profi ts fund aft er adjusting for taxes borne
by policyholders) is not representative of pre-tax profi ts attributable to shareholders.
P
r
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a
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t
a
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m
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148
Financial statements Prudential plc Annual Report 2012
Consolidated statement of comprehensive income
Year ended 31 December
Profi t for the year
Note
2012 £m
2011* £m
2,197
1,419
Other comprehensive income:
Exchange movements on foreign operations and net investment hedges:
Exchange movements arising during the year
Related tax
Unrealised valuation movements on securities of US insurance operations classifi ed
as available-for-sale:
Unrealised holding gains arising during the year
Deduct net gains included in the income statement on disposal and impairment
Total
Related change in amortisation of deferred acquisition costs
Related tax
Other comprehensive income for the year, net of related tax
Total comprehensive income for the year
Attributable to:
Equity holders of the Company
Non-controlling interests
Total comprehensive income for the year
B4
D3(a)
H1(b)
(214)
(2)
(216)
930
(68)
862
(270)
(205)
387
(37)
(68)
(105)
912
(101)
811
(275)
(187)
349
171
244
2,368
1,663
2,368
–
2,368
1,659
4
1,663
* The Group has adopted updated US GAAP requirements for deferred acquisition costs as an improvement to its accounting policy under IFRS 4 for those
operations of the Group which measure insurance assets and liabilities substantially by reference to US GAAP principles. Accordingly, the 2011 comparative
results and related notes have been adjusted from those previously published for the retrospective application of the change as if the new accounting policy
had always applied, as described in note A5.
Consolidated statement of changes in equity
Primary statements Prudential plc Annual Report 2012
149
Year ended 31 December 2012
Reserves
Profi t 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 acquisition costs and
related tax
Total other comprehensive income
Total comprehensive income for the year
B3
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-profi ts fund and other consolidated
investment funds
Share capital and share premium
New share capital subscribed
H11
Treasury shares
Movement in own shares 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:
As previously reported
Effect of change in accounting policy
for deferred acquisition costs
A5
After effect of change
At end of year
Note
Share
capital
Share
premium
Retained
earnings
2012 £m
Trans-
lation
reserve
Available-
for-sale
securities
reserve
Share-
holders’
equity
Non-
controlling
interests
Total
equity
–
2,197
–
–
2,197
–
2,197
–
–
–
–
–
–
–
–
1
–
–
1
–
–
–
–
–
–
–
16
–
–
–
(216)
–
(216)
–
(216)
–
–
–
(216)
387
387
387
171
2,197
(216)
387
2,368
–
–
–
–
–
387
171
2,368
(655)
42
(655)
42
(655)
42
–
–
(13)
36
–
–
–
–
–
–
–
–
–
–
–
–
–
(38)
(38)
17
–
17
(13)
36
–
–
(13)
36
16
1,607
(216)
387
1,795
(38)
1,757
127
1,873
5,839
354
924
9,117
43
9,160
–
127
–
1,873
(595)
5,244
(72)
282
114
1,038
(553)
8,564
–
43
(553)
8,607
H11
128
1,889
6,851
66
1,425 10,359
5 10,364
P
r
i
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a
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s
t
a
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e
m
e
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s
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a
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s
150
Financial statements Prudential plc Annual Report 2012
Consolidated statement of changes in equity continued
Note
Share
capital
Share
premium
Retained
earnings
2011* £m
Trans-
lation
reserve
Available-
for-sale
securities
reserve
Share-
holders’
equity
Non-
controlling
interests
Total
equity
–
1,415
–
–
1,415
4
1,419
–
(105)
–
(105)
–
(105)
–
–
1,415
(642)
44
–
–
–
(30)
–
–
–
–
–
–
–
17
–
17
349
244
1,659
(642)
44
–
–
4
–
–
349
244
1,663
(642)
44
–
(5)
(5)
17
–
17
(30)
–
(30)
–
(105)
(105)
349
349
349
–
–
–
–
–
–
–
–
–
–
–
–
(5)
(5)
782
(105)
349
1,043
–
(1)
(5)
1,042
Year ended 31 December 2011
Reserves
Profi t 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 acquisition costs and
related tax
Total other comprehensive income
Total comprehensive income for the year
B3
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-profi ts fund and other consolidated
investment funds
Share capital and share premium
New share capital subscribed
H11
Treasury shares
Movement in own shares 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:
As previously reported
Effect of change in accounting policy
for deferred acquisition costs
After effect of change
At end of year
–
–
–
–
–
–
–
–
–
–
–
–
127
1,856
4,982
454
612
8,031
44
8,075
–
127
127
H11
–
1,856
(520)
4,462
(67)
387
77
689
(510)
7,521
1,873
5,244
282
1,038
8,564
–
44
43
(510)
7,565
8,607
* The Group has adopted updated US GAAP requirements for deferred acquisition costs as an improvement to its accounting policy under IFRS 4 for those
operations of the Group which measure insurance assets and liabilities substantially by reference to US GAAP principles. Accordingly, the 2011 comparative
results and related notes have been adjusted from those previously published for the retrospective application of the change as if the new accounting policy
had always applied, as described in note A5.
Consolidated statement of fi nancial position
Assets
Primary statements Prudential plc Annual Report 2012
151
31 December
Note
2012 £m
2011* £m
2010*† £m
Intangible assets attributable to shareholders:
Goodwill
Deferred acquisition costs and other intangible assets
Total
Intangible assets attributable to with-profi ts funds:
In respect of acquired subsidiaries for venture fund and other
investment purposes
Deferred acquisition costs and other intangible assets
Total
Total intangible assets
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
Associate 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
1,469
4,267
5,736
1,465
4,234
5,699
1,466
3,901
5,367
178
78
256
178
89
267
166
110
276
5,992
5,966
5,643
765
6,859
2,314
254
2,798
1,361
14,351
748
1,647
2,276
546
2,710
987
8,914
554
1,344
2,188
555
2,668
903
8,212
10,880
113
10,757
70
11,247
71
11,821
99,958
140,103
7,900
12,653
9,714
87,349
124,498
7,509
10,708
9,261
86,635
116,352
5,779
9,952
283,428
250,605
239,297
H9
G1,H10
98
6,384
3
7,257
257
6,631
B5
310,253
272,745
260,040
* The Group has adopted updated US GAAP requirements for deferred acquisition costs as an improvement to its accounting policy under IFRS 4 for those
operations of the Group which measure insurance assets and liabilities substantially by reference to US GAAP principles. Accordingly, the 2011 and 2010
comparative results and related notes have been adjusted from those previously published for the retrospective application of the change as if the new
accounting policy had always applied, as described in note A5.
† As a result of the adoption of the altered US GAAP requirements as noted above, the 2010 balance sheet has been presented in accordance with IAS 1.
The 2010 comparatives for the relevant balance sheet notes which have been aff ected by this change have been retrospectively adjusted accordingly.
‡ The increase in reinsurers’ share of insurance contract liabilities and other liabilities from 2011 to 2012 is attributed to amounts due to the reinsurance
arrangements attaching to the purchase by Jackson of REALIC in September 2012, as discussed in note I1.
§ Included within fi nancial investments are £3,015 million (2011: £7,843 million) of lent securities and £2,012 million of loans and debt securities covering liabilities
for funds withheld under reinsurance arrangement of the Group’s US operations from the purchase of REALIC, as discussed in note I1.
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152
Financial statements Prudential plc Annual Report 2012
Consolidated statement of fi nancial position
Equity and liabilities
31 December
Equity
Shareholders’ equity
Non-controlling interests
Total equity
Note
2012 £m
2011* £m
2010† £m
H11
10,359
5
10,364
8,564
43
8,607
7,521
44
7,565
Liabilities
Policyholder liabilities and unallocated surplus of with-profi ts funds:
Insurance contract liabilities
Investment contract liabilities with discretionary participation features
Investment contract liabilities without discretionary participation features
Unallocated surplus of with-profi ts funds
H12
G1
G1
H12
208,584
33,812
18,378
10,589
180,363
29,745
16,967
9,215
171,291
25,732
17,704
10,253
Total
271,363
236,290
224,980
Core structural borrowings of shareholder-fi nanced operations:
Subordinated debt
Other
Total
Other borrowings:
H13
H13
G1,H13
2,577
977
3,554
2,652
959
3,611
2,718
958
3,676
Operational borrowings attributable to shareholder-fi nanced operations
Borrowings attributable to with-profi ts operations
G1,H13
G1,H13
2,245
1,033
3,340
972
3,004
1,522
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
G1
G1
H4
H4
G1
H14
G1,G3
G1,H15
2,436
3,114
4,199
4,345
3,970
445
833
2,781
601
2,829
3,454
3,840
3,929
930
736
2,544
529
3,054
1,249
3,372
3,968
831
707
2,321
729
2,037
1,129
21,694
19,925
19,293
B5
299,889
264,138
252,475
310,253
272,745
260,040
* The Group has adopted updated US GAAP requirements for deferred acquisition costs as an improvement to its accounting policy under IFRS 4 for those
operations of the Group which measure insurance assets and liabilities substantially by reference to US GAAP principles. Accordingly, the 2011 comparative
results and related notes have been adjusted from those previously published for the retrospective application of the change as if the new accounting policy
had always applied, as described in note A5.
† As a result of the adoption of the altered US GAAP requirements as noted above, the 2010 balance sheet has been presented in accordance with IAS 1. The 2010
comparatives for the relevant balance sheet notes which have been impacted by this change have been retrospectively adjusted accordingly.
‡ The increase in reinsurers’ share of insurance contract liabilities and other liabilities from 2011 to 2012 is attributed to amounts due to the reinsurance
arrangements attaching to the purchase by Jackson of REALIC in September 2012, as discussed in note I1.
The consolidated fi nancial statements on pages 147 to 314 were approved by the Board of directors on 12 March 2013 and signed
on its behalf.
Paul Manduca
Chairman
Tidjane Thiam
Group Chief Executive
Nic Nicandrou
Chief Financial Offi cer
Consolidated statement of cash fl ows
Primary statements Prudential plc Annual Report 2012
153
Year ended 31 December
Note
2012 £m
2011* £m
Cash fl ows from operating activities
Profi t before tax (being tax attributable to shareholders' and policyholders' returns)note (i)
Non-cash movements in operating assets and liabilities refl ected in profi t before tax:
3,188
1,811
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 note (ii)
Operating cash items:
Interest receipts
Dividend receipts
Tax paid
Net cash fl ows from operating activities
Cash fl ows from investing activities
Purchases of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Acquisition of subsidiaries, net of cash balance note (iii)
Change to Group's holdings, net of cash balance
Net cash fl ows from investing activities
Cash fl ows from fi nancing activities
Structural borrowings of the Group:
Shareholder-fi nanced operations:note (iv)
Issue of subordinated debt, net of costs
Redemption of senior debt
Bank loan
Interest paid
With-profi ts operations:note (v)
Interest paid
Equity capital:
Issues of ordinary share capital
Dividends paid
Net cash fl ows from fi nancing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at end of year
(27,126)
(801)
26,710
(969)
(7,772)
128
6,483
1,530
(925)
446
(139)
14
(224)
23
(326)
–
–
25
(270)
(9)
17
(655)
(892)
(772)
7,257
(101)
6,384
(8,854)
(999)
10,874
(859)
(7,449)
108
6,365
1,302
(561)
1,738
(124)
10
(53)
–
(167)
340
(333)
–
(286)
(9)
17
(642)
(913)
658
6,631
(32)
7,257
H6
I1
I2
I10
H11
B3
H10
* The Group has adopted updated US GAAP requirements for deferred acquisition costs as an improvement to its accounting policy under IFRS4, for those
operations of the Group which measure insurance assets and liabilities substantially by reference to US GAAP principles. Accordingly, the 2011 comparative
results and related notes have been adjusted from those previously published for the retrospective application of the change as if the new accounting policy
had always applied, as described in note A5.
Notes
(i)
(ii) Other non-cash items consist of the adjustment of non-cash items to profi t before tax together with other net items, net purchases of treasury shares and
This measure is the formal profi t before tax measure under IFRS but it is not the result attributable to shareholders.
other net movements in equity.
(iii) The acquisition of REALIC in 2012, as explained further in note I1, resulted in a net cash outfl ow of £224 million. The acquisition of subsidiaries in 2011 related
to the PAC with-profi ts fund’s purchase of Earth & Wind and Alticom venture investments with an outfl ow of £53 million.
(iv) Structural borrowings of shareholder-fi nanced operations comprise the core debt of the parent company, a PruCap bank loan and Jackson surplus notes.
Core debt excludes borrowings to support short-term fi xed income securities programmes, non-recourse borrowings of investment subsidiaries of
shareholder-fi nanced operations and other borrowings of shareholder-fi nanced operations. Cash fl ows in respect of these borrowings are included within
cash fl ows from operating activities.
Interest paid on structural borrowings of with-profi ts 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-profi ts fund. Cash fl ows in
respect of other borrowings of with-profi ts funds, which principally relate to consolidated investment funds, are included within cash fl ows from operating
activities.
(v)
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154
Financial statements Prudential plc Annual Report 2012
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 fi nancial services
group with its principal operations in Asia, the US and the UK. Prudential offers a wide range of retail fi nancial products and services
and asset management services throughout these territories. The retail fi nancial products and services principally include life
insurance, pensions and annuities as well as collective investment schemes.
In Asia, the Group has operations in Hong Kong, Malaysia, Singapore, Indonesia and other Asian countries. The life insurance
products offered by the Group’s operations in Asia include with-profi ts (participating) and non-participating term, whole life and
endowment and unit-linked policies. In Asia, unit-linked policies are usually sold with insurance riders such as health covers.
In the US, the Group’s principal subsidiary is Jackson National Life Insurance Company (Jackson). The principal products written
by Jackson are fi xed annuities (interest-sensitive, fi xed indexed and immediate annuities), variable annuities (VA), life insurance and
institutional products.
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. Long-term
business products written in the UK are principally with-profi ts deposit administration, other conventional and unitised with-profi ts
policies and non-participating pension annuities in the course of payment. Long-term business written in the UK also includes
unit-linked products.
Prudential plc is a public limited company incorporated and registered in England and Wales. The registered offi ce is:
Laurence Pountney Hill
London
EC4R 0HH
UK Companies House registered number: 1397169
A2: Basis of preparation
The consolidated fi nancial statements consolidate the Group and the Group’s interest in associates and jointly-controlled entities.
The parent company fi nancial statements present information about the Company as a separate entity and not about the Group.
The consolidated fi nancial 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
fi nancial statements in accordance with UK Generally Accepted Accounting Practice (GAAP). These are presented on pages 315 to 323.
A reconciliation to IFRS has also been provided for shareholders’ equity and profi t for the year of the parent company.
The Group has applied all IFRS standards and interpretations adopted by the EU that are effective for fi nancial years commencing
on or before 1 January 2012. The Group has applied the same accounting policies in preparing the 2012 results as for 2011 except for
the adoption of altered US GAAP reporting requirements for Group IFRS reporting, which is described in note A5.
A3: Accounting policies
1 Critical accounting policies
Prudential’s discussion and analysis of its fi nancial condition and results of operations are based upon Prudential’s consolidated
fi nancial 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 2012, there were no unendorsed standards effective for the two years ended 31 December 2012 affecting the
consolidated fi nancial 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 fi nancial information for the two years ended
31 December 2012 is prepared in accordance with IFRS as issued by the IASB. Prudential adopts mandatory requirements of new
or altered EU-adopted IFRS standards when required, and may consider earlier adoption where permitted and appropriate in the
circumstances.
The preparation of these fi nancial statements requires Prudential to make estimates and judgements that affect the reported
amounts of assets, liabilities, 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 and the fair value of assets.
Critical accounting policies are defi ned as those that are refl ective of signifi cant 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 those that relate to the Group’s
shareholder-fi nanced 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-profi ts business. This distinction refl ects the basis of recognition of profi t and
accounting treatment of unallocated surplus of with-profi ts funds as a liability, as described elsewhere in these fi nancial statements.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
155
Insurance contract accounting
With the exception of certain contracts described in note D1, the contracts issued by the Group’s life assurance business are classifi ed
as insurance contracts and investment contracts with discretionary participating features. As permitted by IFRS 4, ‘Insurance
Contracts’, assets and liabilities of these contracts are accounted for under previously applied GAAP. Accordingly, except as
described below, the modifi ed statutory basis (MSB) of reporting as set out in the revised Statement of Recommended Practice
(SORP) issued by the Association of British Insurers (ABI) in 2003 has been applied.
AAAAAAAAAAAAAAAAAAA With-profi ts funds
With-profi ts funds are those in which the policyholder has a contractual right to receive at the discretion of the insurer, additional
benefi ts based on factors such as the performance of a pool of assets held within the fund as a supplement to any guaranteed
benefi ts.
AAAAAAAAAAAAAAAAAAA UK regulated with-profi ts funds
For Group IFRS reporting, UK regulated with-profi ts funds are accounted for by the voluntary application of the UK accounting
standard FRS 27, ‘Life Assurance’. Under this standard, for such funds, policyholder liabilities are measured on a ‘realistic basis’
as discussed in section 2(a) of this note.
AAAAAAAAAAAAAAAAAAA Unallocated surplus of with-profi ts funds
Unallocated surplus represents the excess of assets over policyholder liabilities for the Group’s with-profi ts funds that have yet to
be appropriated between policyholders and shareholders. The Group has elected to account for unallocated surplus wholly as a
liability with no allocation to equity. This treatment refl ects the fact that shareholders’ participation in the cost of bonuses arises
only on distribution. The unallocated surplus is shown separately in the statement of fi nancial position.
Overseas operations:
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 India, Japan, Taiwan and, until 2012, Vietnam (as discussed in note A5), the local
GAAP is not appropriate in the context of the previously applied MSB. For these countries the insurance assets and liabilities are
measured principally by reference to US GAAP. For participating business the liabilities include provisions for the policyholders’
interest in investment gains and other surpluses that 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-profi ts funds, options and guarantees are valued on a market consistent basis. The basis is described in
section 2(a) below. For other operations a market consistent basis is not applied under the accounting basis described in section 2(a)
below. Details of the guarantees, basis of setting assumptions and sensitivity to altered assumptions are described in notes D3 and D4.
Additional details on the Group’s accounting policies for insurance assets and liabilities are shown in section 2 below.
Valuation and accounting presentation of fair value movements of derivatives and debt securities of Jackson
These policies are critical because of their signifi cance to the volatility of the income statement result and shareholders’ equity. Under
IAS 39, ‘Financial Instruments: Recognition and Measurement’, 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.
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:
AAAAAAAAAAAAAAAAAAA IAS 39 hedging criteria have been designed primarily in the context of hedging and hedging instruments that are assessable as
fi nancial instruments that are either stand-alone or separable from host contracts, rather than, for example, duration characteristics
of insurance contracts;
AAAAAAAAAAAAAAAAAAA The high hurdle levels under IAS 39 of ensuring hedge effectiveness at the level of individual hedge transactions;
AAAAAAAAAAAAAAAAAAA The diffi culties in applying the macro hedge provisions under IAS 39 (which are more suited to banking arrangements) to Jackson’s
derivative book;
AAAAAAAAAAAAAAAAAAA The complexity of asset and liability matching of US life insurers such as those with Jackson’s product range; and fi nally
AAAAAAAAAAAAAAAAAAA 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 occasional circumstances, 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 refl ected within it. This volatility is refl ected in the level of short-term fl uctuations
in investment returns, as shown in note B1.
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 fi nancial 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.
A
:
B
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Financial statements Prudential plc Annual Report 2012
A: Background and accounting policies continued
A3: Accounting policies continued
Presentation of results before tax
The total tax charge for the Group refl ects tax that in addition to relating to shareholders’ profi ts is also attributable to policyholders
and unallocated surplus of with-profi ts funds and unit-linked policies. This is explained in more detail in note F5. Reported profi t
before the total tax charge is not representative of pre-tax profi ts attributable to shareholders. Accordingly, in order to provide
a measure of pre-tax profi ts 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 profi t based on longer-term investment returns as the segmental measure of its results. The basis of
calculation is disclosed in section 2(d) below.
For shareholder-backed business, with the exception of debt securities held by Jackson and assets classifi ed as loans and
receivables at amortised cost, all fi nancial investments and investment property are designated as assets at fair value through profi t
and loss. The short-term fl uctuations affect the result for the year and the Group provides additional analysis of results before and
after short-term fl uctuations in investment returns, together with other items that are of a short-term volatile or one-off nature.
Short-term fl uctuations in investment returns on such assets held by with-profi ts funds, do not affect directly reported shareholder
results. This is because (i) the unallocated surplus of with-profi ts funds is accounted for as a liability and (ii) excess or defi cits of income
and expenditure of the funds over the required surplus for distribution are transferred to or from unallocated surplus.
2 Other signifi cant accounting policies
a Long-term business contracts
Income statement treatment
Insurance contracts and investment contracts with discretionary participation features (DPF)
Premium and annuity considerations for conventional with-profi ts policies and other protection type insurance policies are recognised
as revenue when due. Premiums and annuity considerations for linked policies, unitised with-profi ts 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-profi ts 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 notifi ed.
Acquisition costs are deferred and amortised as described in note A4.
Investment contracts other than those with DPF
For investment contracts which do not contain discretionary participating features, the accounting is carried out in accordance with
IAS 39 to refl ect the deposit nature of the arrangement, with premiums and claims refl ected as deposits and withdrawals and taken
directly to the statement of fi nancial position as movements in the fi nancial liability balance.
Under IFRS, investment contracts (excluding those with discretionary participation features) accounted for as fi nancial liabilities
in accordance with IAS 39 which also offer investment management services, require the application of IAS 18, ‘Revenue’, for the
revenue attached to these services. Incremental, directly attributable acquisition costs relating to the investment management
element of these contracts are capitalised and amortised in line with the related revenue. If the contracts involve up-front charges,
this income is also deferred and amortised through the income statement in line with contractual service provision.
UK regulated with-profi ts 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-profi ts policies. Prudential maintains with-profi ts funds within the Group’s long-term business funds, which segregate
the assets and liabilities and accumulate the returns related to that with-profi ts business. The amounts accumulated in these with-profi ts
funds are available to provide for future policyholder benefi t provisions and for bonuses to be distributed to with-profi ts policyholders.
The bonuses, both annual and fi nal, refl ect the right of the with-profi ts policyholders to participate in the fi nancial performance of the
with-profi ts funds. Shareholders’ profi ts with respect to bonuses declared on with-profi ts 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
to the with-profi ts fund of bonuses declared for with-profi ts policies.
Annual bonuses are declared and credited each year to with-profi ts policies. The annual bonuses increase policy benefi ts and,
once credited, become guaranteed. Annual bonuses are charged to the profi t and loss account in the year declared. Final bonuses
are declared each year and accrued for all policies scheduled to mature and for death benefi ts expected to be paid during the next
fi nancial 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 benefi t
provisions are recorded for future annual or fi nal bonus declarations.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
157
The policyholders’ liabilities of the regulated with-profi ts funds are accounted for under FRS 27, under which 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:
AAAAAAAAAAAAAAAAAAA A with-profi ts benefi ts reserve (WPBR); plus
AAAAAAAAAAAAAAAAAAA Future policy-related liabilities (FPRL); plus
AAAAAAAAAAAAAAAAAAA The realistic current liabilities of the fund.
The WPBR is primarily based on the retrospective calculation of accumulated asset shares but is adjusted to refl ect future policyholder
benefi ts and other outgoings. Asset shares broadly refl ect the policyholders’ share of the with-profi ts fund assets attributable to
their policies.
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 fl exibility has been included in the modelled management actions in order to refl ect
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-profi ts 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-profi ts business included in 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 fi nancial 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-profi ts funds. As allowed
under IFRS 4, the Group has opted to continue to record unallocated surplus of with-profi ts funds wholly as a liability. The annual
excess (shortfall) of income over expenditure of the with-profi ts 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-profi ts 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 (ie contracts which contain signifi cant insurance risk as defi ned under IFRS 4)
For these contracts ‘grandfathered’ UK GAAP has been applied, which refl ects the MSB. Under this basis the following
approach applies:
i Other UK insurance contracts
Other UK insurance contracts that contain signifi cant insurance risk include unit-linked, annuity and other non-profi t business. For
the purposes of local regulations, segregated accounts are established for linked business for which policyholder benefi ts are wholly
or partly determined by reference to specifi c investments or to an investment-related index. The interest rates used in establishing
policyholder benefi t provisions for pension annuities in the course of payment are adjusted each year. Mortality rates used in
establishing policyholder benefi ts are based on published mortality tables adjusted to refl ect actual experience.
ii 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 benefi t provisions for Jackson’s conventional protection-type policies are determined under US GAAP
principles with the locked in assumptions as to mortality, interest, policy lapses and expenses plus provisions for adverse deviations.
For non-conventional protection-type policies, the policyholder benefi t provision included within policyholder liabilities in the
consolidated statement of fi nancial position is the policyholder account balance. Acquisition costs are accounted for as explained
in note A4.
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 deferred acquisition costs (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 refl ect the change in DAC that would have arisen if the assets held in the statement of
fi nancial position had been sold, crystallising unrealised gains or losses, and the proceeds reinvested at the yields currently available
in the market.
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158
Financial statements Prudential plc Annual Report 2012
A: Background and accounting policies continued
A3: Accounting policies continued
Asia operations
Except for the operations in India, Japan, Taiwan and, until 2012, Vietnam, the future policyholder benefi t provisions for Asian
businesses are determined in accordance with methods prescribed by local GAAP adjusted to comply, where necessary, with
UK GAAP. Refi nements to the local reserving methodology are generally treated as change in estimates, dependent on the nature
of the change.
For the Asia operations referred to above 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 operations the business written is primarily non-participating
linked and participating business. The future policyholder benefi t 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 benefi t 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
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 benefi t 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, where relevant, present value of acquired in-force business is suffi cient to cover current estimates of future cash
fl ows. Any defi ciency is immediately charged to the income statement.
Reinsurance
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 signifi cant insurance risk as defi ned under IFRS 4)
For investment contracts with discretionary participation features, the accounting basis is consistent with the accounting for similar
with-profi ts insurance contracts. Other investment contracts are accounted for on a basis that refl ects the hybrid nature of the
arrangements whereby part is accounted for as a fi nancial instrument under IAS 39 and the investment management service
component is accounted for under IAS 18, ‘Revenue’.
For those investment contracts in the US with fi xed and guaranteed terms, the Group uses the amortised cost model to measure
the liability.
Those investment contracts without fi xed and guaranteed terms are designated at fair value through profi t and loss because the
resulting liabilities are managed and their performance is evaluated on a fair value basis. Where the contract includes a surrender
option its carrying value is subject to a minimum carrying value equal to its surrender value.
b Financial instruments other than fi nancial instruments classifi ed as long-term business contracts
Investment classifi cation
Under IAS 39, subject to specifi c criteria, fi nancial instruments are required to be accounted for under one of the following categories:
fi nancial investments at fair value through profi t and loss, fi nancial investments held on an available-for-sale basis, fi nancial
investments held-to-maturity or loans and receivables. These IAS 39 classifi cations have been changed by IFRS 9 ‘Financial
Investments: Classifi cation and Measurement’ which is not required to be adopted until 2015 and is still subject to EU endorsement.
In addition, the International Accounting Standards Board (IASB) continues to consult on future possible changes to IFRS 9. This
standard has not been adopted by the Group in 2012. The Group holds fi nancial investments on the following bases:
i
ii
Financial assets and liabilities at fair value through profi t and loss – this comprises assets and liabilities designated by management
as fair value through profi t 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 return in the income statement;
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 fi nancial 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. The effective interest rate is the rate that exactly discounts estimated future cash receipts through
the expected life of the fi nancial instrument or, when appropriate, a shorter period to the net carrying amount of the fi nancial asset.
Available-for-sale fi nancial 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. Upon disposal
or impairment, accumulated unrealised gains and losses are transferred from other comprehensive income to the income statement
as realised gains or losses; and
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
159
iii Loans and receivables – except for those designated as at fair value through profi t and loss or available-for-sale, these instruments
comprise non-quoted investments that have fi xed or determinable payments. 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 fi nancial assets as fair value through profi t 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 fi nancial assets other
than those loans and receivables, carried at amortised cost, and debt securities accounted for on an available-for-sale basis by
Jackson. 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 fi nancial 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 fl ow technique. Additional details are provided in note G1.
Impairments
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 fi nancial instruments are used to reduce or manage investment, interest rate and currency exposures, to facilitate effi cient
portfolio management and for investment purposes.
The Group may designate certain derivatives as hedges.
For hedges of net investments in foreign operations, the effective portion of any change in fair value of derivatives or other fi nancial
instruments designated as net investment hedges is recognised in other comprehensive income. 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 is recognised
directly in other comprehensive income while the foreign operation is held.
For fair value hedges, movements in the fair value of the hedged item attributable to the hedged risk are recognised in the income
statement.
The Group does not regularly seek to apply fair value or cash fl ow hedging treatment under IAS 39. The exceptions, where hedge
accounting has been applied in 2012 and 2011, are summarised in note G3.
All derivatives that are not designated as hedging instruments 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-profi ts funds and
annuity business, and Jackson.
For UK with-profi ts funds the derivative programme derivatives are used for the purposes of effi cient portfolio management
or reduction in investment risk.
For shareholder-backed 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 fi nancial assets including derivatives held.
For Jackson an extensive derivative programme is maintained. Value movements on the derivatives held can be very signifi cant in
their effect on shareholder results. Further details on this aspect of the Group’s fi nancial reporting are described in notes B1 and D3.
Embedded derivatives
Embedded derivatives are present in host contracts issued by various Group companies, in particular Jackson. They are embedded
within other non-derivative host fi nancial instruments and insurance contracts to create hybrid instruments. Embedded derivatives
meeting the defi nition 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 option of IFRS 4 to not separate and fair value surrender options embedded in host contracts
and with-profi ts investment contracts whose strike price is either a fi xed amount or a fi xed amount plus interest. Further details on the
valuation basis for embedded derivatives attaching to Jackson’s life assurance contracts are provided in note D3(e).
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160
Financial statements Prudential plc Annual Report 2012
A: Background and accounting policies continued
A3: Accounting policies continued
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 classifi cation.
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 fi nancial position.
Derecognition of fi nancial assets and liabilities
The Group’s policy is to derecognise fi nancial assets when it is deemed that substantially all the risks and rewards of ownership have
been transferred.
The Group derecognises fi nancial liabilities only when the obligation specifi ed 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.
Financial liabilities designated at fair value through profi t 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 classifi cation certain fi nancial liabilities at fair value through profi t 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.
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 fi nancial and operating policies of an entity in order to obtain benefi ts. The results of subsidiaries are included in the fi nancial
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.
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 (i) 50 per cent or greater, and (ii) where the Group’s
ownership of internally managed funds declines marginally below 50 per cent and the decline in ownership is expected to be
temporary.
Where the Group exercises signifi cant infl uence or has the power to exercise signifi cant infl uence 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’ profi t 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, ‘Investments in Associates’, are carried at fair value through profi t 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 fi nancial statements. Other interests in entities, where
signifi cant infl uence is not exercised, are carried as investments at fair value through profi t and loss.
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 qualifi ed surveyors or by taking into consideration the advice of professional external valuers
using the Royal Institution of Chartered Surveyors guidelines. Each property is externally valued at least once every three years.
Fair value is based on active market prices. If this information is not available, the Group uses alternative valuation methods such as
discounted cash fl ow 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 classifi ed as fi nance
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.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
161
Pension schemes
For the Group’s defi ned benefi t schemes, if the present value of the defi ned benefi t obligation exceeds the fair value of the scheme
assets, then a liability is recorded in the Group’s statement of fi nancial position. By contrast, if the fair value of the assets exceeds the
present value of the defi ned benefi t 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 defi cit
funding, this is also recognised such that the fi nancial position recorded for the scheme refl ects the higher of any underlying IAS 19,
‘Employee Benefi ts’, defi cit and the obligation for defi cit funding.
The Group utilises the projected unit credit method to calculate the defi ned benefi t obligation. This method sees each period of
service as giving rise to an additional unit of benefi t entitlement and measures each unit separately to build up the fi nal obligation.
Estimated future cash fl ows 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 fi nancial
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 defi ned contribution schemes are expensed when due.
Share-based payments
The Group offers share award and option plans for certain key employees and a Save As You Earn plan for all UK and certain overseas
employees. 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. The Company has established trusts to facilitate the delivery of Prudential plc shares under
employee incentive plans and savings-related share option schemes. The cost to the Company of acquiring these treasury shares held
in trusts is shown as a deduction from shareholders’ equity.
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 indefi nitely to be offset against profi ts arising from the same company.
Deferred taxes are provided under the liability method for all relevant temporary differences. 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. Deferred tax assets are only recognised when it is more likely than not, that future
taxable profi ts will be available against which these losses can be utilised.
The tax charge for long-term business includes tax expense 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.
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.
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. Income and expenses of acquired entities are included in the income statement from the date of acquisition.
Goodwill
Goodwill arising on acquisitions of subsidiaries and businesses is capitalised and carried on the Group statement of fi nancial 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.
Intangible assets
Intangible assets acquired on the purchase of a subsidiary or portfolio of contracts are fair valued at acquisition. Other intangible
assets, such as software, are valued at the price paid to acquire them. Intangible assets are 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.
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Financial statements Prudential plc Annual Report 2012
A: Background and accounting policies continued
A3: Accounting policies continued
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.
Segments
Under IFRS 8, ‘Operating Segments’, the Group determines and presents operating segments based on the information that is
internally provided to the Group Executive Committee which is the Group’s chief operating decision maker.
The operating segments identifi ed by the Group refl ect 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 signifi cant and insignifi cant 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 to support 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 determined in accordance with IFRS 8, ‘Operating Segments’, are as follows:
Insurance operations
AAAAAAAAAAAAAAAA Asia
AAAAAAAAAAAAAAAA US (Jackson)
AAAAAAAAAAAAAAAA UK
Asset management operations
AAAAAAAAAAAAAAAA M&G (including Prudential Capital)
AAAAAAAAAAAAAAAA Eastspring Investments
AAAAAAAAAAAAAAAA US broker-dealer and asset management (including Curian)
The Group’s operating segments are also its reportable segments with the exception of Prudential Capital (PruCap) which has been
incorporated into the M&G operating segment for the purposes of segment reporting.
The performance measure of operating segments utilised by the Company is IFRS operating profi t attributable to shareholders
based on longer-term investment returns, as described below. This measure excludes the recurrent items of short-term fl uctuations in
investment returns and the shareholders’ share of actuarial and other gains and losses on defi ned benefi t pension schemes. In addition
for 2012 this measure excluded a gain arising upon the dilution of the Group’s holding in PPM South Africa and the amortisation of the
acquisition accounting adjustments arising on the purchase of REALIC as described further in note I1. Operating earnings per share
is based on operating profi t based on longer-term investment returns, after tax and non-controlling interests. Further details on the
determination of the performance measure of operating profi t based on longer-term investment returns is provided below.
Segment results that are reported to the Group Executive Committee 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 Offi ce and the
Asia Regional Head Offi ce.
d Operating profi t based on longer-term investment returns
The Group provides supplementary analysis of profi t before tax attributable to shareholders that distinguishes operating profi t based
on longer-term investment returns from other constituent elements of the total profi t.
Except in the case of the assets backing the UK annuity business, unit-linked and US variable annuity separate account liabilities,
operating profi t based on longer-term investment returns for shareholder-fi nanced business is determined on the basis of expected
longer-term investment returns. In the case of assets backing the UK annuity business, unit-linked and US variable annuity separate
account liabilities, the basis of determining operating profi t based on longer-term investment returns is as follows:
AAAAAAAAAAAAAAAA Assets backing UK annuity business liabilities. 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 fl uctuations in investment returns; and
AAAAAAAAAAAAAAAA Assets backing unit-linked and US variable annuity business separate account liabilities. For such business, the policyholder unit
liabilities are directly refl ective of the asset value movements. Accordingly, the operating results based on longer-term investment
returns refl ect the current period value movements in unit liabilities and the backing assets.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
163
In the case of other shareholder-fi nanced business, the measurement of operating profi t based on longer-term investment returns
refl ects 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 of life businesses exclusive of the effects of short-term fl uctuations in market conditions. In determining the profi t on this
basis, the following key elements are applied to the results of the Group’s shareholder-fi nanced operations as refl ected in the segment
results shown in note B1.
i Debt, equity-type securities and loans
Longer-term investment returns for both debt, equity-type securities and loans comprise longer-term actual income receivable for the
period (interest/dividend income) and longer-term capital returns.
In principle, for debt securities and loans, the longer-term capital returns comprise two elements. The fi rst element is a risk margin
reserve (RMR) based charge for the expected level of defaults for the period, which is determined by reference to the credit quality
of the portfolio. The difference between impairment losses in the reporting period and the RMR charge to the operating result is
refl ected in short-term fl uctuations in investment returns. The second element is for the 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.
Jackson is the shareholder-backed operation for which the distinction between impairment losses and interest-related realised
gains and losses is in practice relevant to a signifi cant extent. Jackson has used the ratings by Nationally Recognised Statistical Ratings
Organisations (NRSRO) or ratings resulting from the regulatory ratings detail issued by the National Association of Insurance
Commissioners (NAIC) developed by external third parties such as PIMCO or BlackRock Solutions to determine the average annual
RMR to apply to debt securities held to back general account business. Debt securities held to back separate account and reinsurance
funds withheld are not subject to RMR charge. Further details of the RMR charge, as well as the amortisation of interest-related
realised gains and losses, for Jackson are shown in note B1(iv) to the consolidated fi nancial statements.
For debt securities backing non-linked shareholder-fi nanced business of the UK insurance operations (other than the annuity
business) and of the Asia insurance operations, the realised gains and losses are principally interest related. Accordingly, all realised
gains and losses to date for these operations are being amortised over the period to the date those securities would otherwise have
matured, with no explicit RMR charge.
At 31 December 2012, the level of unamortised interest-related realised gains and losses related to previously sold bonds for the
Group was a net gain of £498 million (31 December 2011: £462 million).
For equity-type securities, the longer-term rates of return are estimates of the long-term trend investment return for
income and capital having regard to past performance, current trends and future expectations. Equity-type securities held for
shareholder-fi nanced operations other than the UK annuity business, unit-linked and US variable annuity are of signifi cance
for the US and Asia insurance operations. Different rates apply to different categories of equity-type securities.
As at 31 December 2012, the equity-type securities for US insurance non-separate account operations amounted to £1,004 million
(31 December 2011: £902 million). For these operations, the longer-term rates of return for income and capital applied in 2012 refl ects
the combination of risk free rates and appropriate risk premium are as follows:
Equity-type securities such as common and preferred stock and portfolio holdings in mutual funds
Other equity-type securities such as investments in limited partnerships and private equity funds
5.5% to 6.2%
7.5% to 8.2%
5.9% to 7.5%
7.9% to 9.5%
2012
2011
For Asia insurance operations, investments in equity securities held for non-linked shareholder-fi nanced operations amounted to
£659 million as at 31 December 2012 (31 December 2011: £590 million). The rates of return applied in the years 2012 and 2011 ranged
from 1.0 per cent to 13.8 per cent, with the rates applied varying by territory. The investment amounts for 2011 of £590 million
included the Group’s investment in China Life Insurance Company of Taiwan (China Life (Taiwan)) of £88 million which was sold
in 2012, as described in note B1.
The longer-term rates of return discussed above for equity-type securities are determined after consideration by the Group’s
in-house economists of long-term expected real government bond returns, equity risk premium and long-term infl ation. These rates
are broadly stable from period to period but may be different between countries refl ecting, for example, differing expectations of
infl ation in each territory. The assumptions are for returns expected to apply in equilibrium conditions. The assumed rates of return
do not refl ect any cyclical variability in economic performance and are not set by reference to prevailing asset valuations.
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Financial statements Prudential plc Annual Report 2012
A: Background and accounting policies continued
A3: Accounting policies continued
ii US variable and fi xed index annuity business
The following value movements for Jackson’s variable and fi xed index annuity business are excluded from operating profi t based on
longer-term investment returns:
AAAAAAAAAAAAAAAA Fair value movements for equity-based derivatives;
AAAAAAAAAAAAAAAA Fair value movements for embedded derivatives for Guaranteed Minimum Withdrawal Benefi t (GMWB) ‘not for life’ and fi xed
index annuity business, and Guaranteed Minimum Income Benefi t (GMIB) reinsurance (see note);
AAAAAAAAAAAAAAAA Movements in accounts carrying value of Guaranteed Minimum Death Benefi t (GMDB) and GMWB ‘for life’ liabilities, for which,
under the ‘grandfathered’ US GAAP applied under IFRS for Jackson’s insurance assets and liabilities, the measurement basis gives
rise to a muted impact of current period market movements;
AAAAAAAAAAAAAAAA Fee assessments and claim payments, in respect of guarantee liabilities; and
AAAAAAAAAAAAAAAA Related changes to amortisation of deferred acquisition costs for each of the above items.
Note: US operations – embedded derivatives for variable annuity guarantee features
The 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 benefi t is economically reinsured the mark to market element of the reinsurance
asset is included as a component of short-term fl uctuations in investment returns.
iii Other derivative value movements
Generally, derivative value movements are excluded from operating results based on longer-term investment returns (unless those
derivative value movements broadly offset changes in the accounting value of other assets and liabilities included in operating profi t).
The principal example of non-equity based derivatives (for example interest rate swaps and swaptions) whose value movements
are excluded from operating profi t arises in Jackson. Non-equity based derivatives are primarily held by Jackson as part of a
broadly based hedging programme for features of Jackson’s bond portfolio (for which value movements are booked in the statement
of comprehensive income rather than the income statement), product liabilities (for which US GAAP accounting as ‘grandfathered’
under IFRS 4 does not fully refl ect the economic features being hedged), and the interest rate exposure attaching to equity-based
embedded derivatives.
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 profi t 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 (ie after allocated
investment return and change for policyholder benefi ts) the operating result refl ects longer-term market returns.
Examples where such bifurcation is necessary are:
Asia
i Hong Kong
For certain non-participating business, the economic features are more akin to asset management products with policyholder
liabilities refl ecting asset shares over the contract term. For these products, the charge for policyholder benefi ts in the operating
results should refl ect the asset share feature rather than volatile movements that would otherwise be refl ected if the local regulatory
basis (which is applied for IFRS balance sheet purposes) was used.
For other Hong Kong non-participating business, longer-term interest rates are used to determine the movement in policyholder
liabilities for determining operating results. Similar principles apply for other Asia operations;
ii Japan Guaranteed Minimum Death Benefi t (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 refl ects changes in market conditions. Under the Company’s segmental basis of reporting the
operating profi t refl ects the change in liability based on longer-term market conditions with the difference between the charge to
the operating result and the movement refl ected in the total result included in short-term fl uctuations in investment returns;
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
165
UK shareholder-backed annuity business
The operating result based on longer-term investment returns refl ects the impact of value movements on policyholder liabilities
for annuity business in PRIL and the PAC non-profi t sub-fund after adjustments to allocate the following elements of the movement
to the category of ‘short-term fl uctuations in investment returns’ in the Group’s supplementary analysis of profi t:
AAAAAAAAAAAAAAAAAAA The impact on credit risk provisioning of actual upgrades and downgrades during the period;
AAAAAAAAAAAAAAAAAAA Credit experience compared to assumptions; and
AAAAAAAAAAAAAAAAAAA Short-term value movements on assets backing the capital of the business.
Credit experience refl ects the impact of defaults and other similar experience, such as asset exchanges arising from debt restructuring
by issuers that include effectively an element of permanent impairment of the security held. Negative experience compared to
assumptions is included within short-term fl uctuations in investment returns without further adjustment. This is to be contrasted with
positive experience where surpluses are retained in short-term allowances for credit risk for IFRS reporting purposes. 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.
v 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
fl uctuations in investment returns. For this purpose impairments are calculated as the credit loss determined by comparing the
projected cash fl ows 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 fi nancial instruments to operating results over a time
period that refl ects the underlying economic substance of the arrangements.
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.
Share capital
Where there is no obligation to transfer assets, shares are classifi ed 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 fi nancial statements are presented in pounds sterling, the Group’s presentation currency. Accordingly,
the results and fi nancial position of foreign subsidiaries must be translated into the presentation currency of the Group from their
functional currencies, ie 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.
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166
Financial statements Prudential plc Annual Report 2012
A: Background and accounting policies continued
A4: Critical accounting estimates and judgements
In determining the measurement of the Group’s assets and liabilities estimates and judgements are required. The critical aspects are
described below.
Investments
Determining the fair value of fi nancial investments when the markets are not active
The Group holds certain fi nancial investments for which the markets are not active. These can include fi nancial investments which
are not quoted on active markets and fi nancial investments for which markets are no longer active as a result of market conditions
eg market illiquidity. When the markets are not active, there is generally no or limited observable market data to account for fi nancial
investments at fair value. The determination of whether an active market exists for a fi nancial investment requires management’s
judgement.
If the market for a fi nancial investment of the Group is not active, the fair value is determined by using valuation techniques.
The Group establishes fair value for these fi nancial 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 refl ects 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 fl ow 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 fi nancial investments.
The fi nancial investments measured at fair value are classifi ed into the following three level hierarchy on the basis of the lowest
level of inputs that is signifi cant to the fair value measurement of the fi nancial 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
(ie derived from prices); and
Level 3: Signifi cant inputs for the asset or liability that are not based on observable market data (unobservable inputs).
At 31 December 2012, £6,660 million (2011: £4,565 million) of the fi nancial investments (net of derivative liabilities) valued at fair value
were classifi ed as level 3. Of these £861 million (2011: £800 million) are held to back shareholder non-linked business and so changes
to these valuations will directly impact shareholders’ equity. Further details of the level 3 investments and the classifi cation of fi nancial
instruments are given in note G1.
Determining impairments relating to fi nancial assets
i Available-for-sale securities
The majority of Jackson’s debt securities portfolio are accounted for on available-for-sale basis. The consideration of evidence
of impairment requires management’s judgement. In making this determination the factors considered include, for example:
AAAAAAAAAAAAAAAA Whether the decline of the fi nancial 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 fl ows;
AAAAAAAAAAAAAAAA The impact of the duration of the security on the calculation of the revised estimated cash fl ows; the duration of a security to
maturity helps to inform whether assessments of estimated future cash fl ows that are higher than market value are reasonable;
AAAAAAAAAAAAAAAA The duration and extent to which the amortised cost exceeds fair value; this factor provides an indication of how the contractual
cash fl ows and effective interest rate of a fi nancial asset compares with the implicit market estimate of cash fl ows 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; and
AAAAAAAAAAAAAAAA The fi nancial 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 fl ows is identifi ed 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 fl ows and any additional market-price-driven temporary reductions
in values.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
167
For Jackson’s residential mortgage-backed and other asset-backed securities, all of which are classifi ed as available-for-sale, the
model used to analyse cash fl ows 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 effects. After applying a cash fl ow simulation an indication is obtained
as to whether or not the security has suffered, or is anticipated to suffer, contractual principal or interest payment shortfalls. If a
shortfall applies an impairment charge is recorded. The difference between the fair value and book cost for unimpaired securities
designated as available-for-sale, is accounted for as unrealised gains or losses, with the movements in the accounting period being
included in other comprehensive income.
The Group’s review of fair value involves several criteria, including economic conditions, credit loss experience, other
issuer-specifi c developments and future cash fl ows. 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 fl ow assumptions can contribute to future
price volatility. If actual experience differs negatively from the assumptions and other considerations used in the consolidated
fi nancial statements, unrealised losses currently in equity may be recognised in the income statement in future periods.
Additional details on the impairments of the available-for-sale securities of Jackson are described in notes D3 and G5.
ii Assets held at amortised cost
Except for certain loans of the UK insurance operations and Jackson National Life, which are accounted for on a fair value through
profi t and loss basis, and as described below, fi nancial assets classifi ed as loans and receivables under IAS 39 are carried at amortised
cost using the effective interest rate method. The loans and receivables include loans collateralised by mortgages, deposits and loans
to policyholders. In estimating future cash fl ows, the Group looks at the expected cash fl ows 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 fl ows are discounted using the fi nancial 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.
Certain mortgage loans of the UK insurance operations and, consequent upon the purchase of REALIC in 2012, policy loans held
to back funds withheld under reinsurance arrangements have been designated at fair value through profi t and loss as these loan
portfolios are managed and evaluated on a fair value basis.
Insurance contracts
Product classifi cation
IFRS 4 requires contracts written by insurers to be classifi ed as either ‘insurance contracts’ or ‘investment contracts’ depending on the
level of insurance risk transferred. Insurance risk is a pre-existing risk, other than fi nancial risk, transferred from the contract holder to
the contract issuer. If signifi cant insurance risk is transferred by the contract then it is classifi ed as an insurance contract. Contracts that
transfer fi nancial risk but not signifi cant insurance risk are termed investment contracts. Furthermore, some contracts, both insurance
and investment, contain discretionary participating features representing the contractual right to receive additional benefi ts as a
supplement to guaranteed benefi ts:
a That are likely to be a signifi cant portion of the total contract benefi ts;
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.
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-profi ts funds, as described subsequently in section A3(2)(a), 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,’Revenue’, apply measurement principles to assets and liabilities attaching to the contract.
Valuation assumptions
i Contracts of with-profi ts funds
For UK regulated with-profi ts funds, the contract liabilities are valued by reference to the UK Financial Services Authority’s (FSA)
realistic basis as described in section A3(2)(a). This basis has the effect of placing a value on the liabilities of UK with-profi ts contracts,
which refl ects the amounts expected to be paid based on the current value of investments held by the with-profi ts funds and current
circumstances. An explanation of the basis of liability measurement is contained in section A3(2)(a).
The Group’s other with-profi ts contracts are written in with-profi ts funds that operate in some of the Group’s Asian subsidiaries.
The liabilities for these contracts and those of Prudential Annuities Limited, which is a subsidiary company of the PAC with-profi ts
fund, are determined differently. For these contracts the liabilities are estimated using actuarial methods based on assumptions
relating to premiums, interest rates, investment returns, expenses, mortality and surrenders. The assumptions to which the estimation
of these reserves is particularly sensitive are the interest rate used to discount the provision and the assumed future mortality
experience of policyholders.
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Financial statements Prudential plc Annual Report 2012
A: Background and accounting policies continued
A4: Critical accounting estimates and judgements continued
ii Other contracts
Contracts, other than those of with-profi ts funds, are written by shareholder-backed operations of the Group. The signifi cant
shareholder-backed product groupings and the factors that may signifi cantly affect IFRS results due to experience against
assumptions or changes of assumptions vary signifi cantly between business units. For some types of business the effect of changes
in assumptions may be signifi cant, whilst for others, due to the nature of the product, assumption setting may be of less signifi cance.
The nature of the products and the signifi cance of assumptions are discussed in notes D2, D3 and D4.
UK insurance operations
From the perspective of shareholder results the key sensitivity for UK insurance operations are the assumptions for allowance for
credit risk and mortality for UK annuity business.
Jackson
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 fi xed 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 fi rst
instance a retrospective deposit method to determine the liability for policyholder benefi ts. 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 defi ciency, ie 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 fi xed 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 benefi t features.
In general terms, liabilities for these benefi ts are accounted for under US GAAP by using estimates of future benefi ts and fees under
best estimate assumptions.
For traditional life insurance contracts, provisions for future policy benefi ts are determined using 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 profi ts through variations in claim payments and the
guaranteed minimum death benefi t reserves, the profi ts of Jackson are relatively insensitive to changes in insurance risk. This refl ects
the principally spread and fee-based nature of Jackson’s business.
Asia operations
The insurance products written in the Group’s Asia operations principally cover with-profi ts business, unit-linked business and other
non-participating business. The results of with-profi ts 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 Asia unit-linked business are also relatively insensitive to changes in estimates or
assumptions due to the matching of asset value and liability movements. For other Asia non-participating business the degree of
sensitivity of results to changes in interest rates depends upon the degree to which the liabilities under the ‘grandfathered’ IFRS 4
measurement basis refl ects market interest rates from period to period for example, for those countries, such as those applying
US GAAP, the results can be more sensitive as the effect of interest rate movements on the backing investments may not be offset
by liability movements due to the US GAAP basis of measurement of insurance contracts.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
169
Deferred acquisition costs for insurance contracts
Except for acquisition costs of with-profi ts contracts of the UK regulated with-profi ts funds, which are accounted for under the
realistic FSA regime, costs of acquiring new insurance business are accounted for in a way that is consistent with the principles of the
ABI SORP with deferral and amortisation against margins in future revenues on the related insurance policies. Costs of acquiring new
insurance business, principally commissions, marketing and advertising and certain other costs associated with policy insurance and
underwriting that are not reimbursed by policy charges, are specifi cally identifi ed and capitalised as part of deferred acquisition costs
(DAC). In general, this deferral is presentationally shown by an explicit carrying value for DAC in the balance sheet. However, in some
Asia operations the deferral is implicit through the reserving methodology. The recoverability of the explicitly and implicitly deferred
acquisition costs is measured and are deemed impaired if the projected margins are less than the carrying value. To the extent that the
future margins differ from those anticipated, then an adjustment to the carrying value will be necessary.
For UK regulated with-profi ts funds where the realistic FSA regime is applied, the basis of setting liabilities is such that it would
be inappropriate for acquisition costs to be deferred, therefore these costs are expensed as incurred. The majority of the UK
shareholder-backed business is individual and group annuity business where the incidence of acquisition costs is negligible.
The deferral and amortisation of acquisition costs is of most relevance to the Group’s results for Jackson and Asia operations.
The DAC for Jackson and some Asia operations is determined with reference to US GAAP principles.
Jackson
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 profi ts. For interest-sensitive 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. In addition, expected gross profi ts 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 mortality, lapse and expenses experience is performed using
internally developed experience studies.
For US variable annuity business the key assumption is the investment return from the separate accounts, which for 2012 and 2011
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 fi ve years are fl exed (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 fi ve years. Further details are explained in note D3(e). These returns
affect the level of future expected profi ts through their effects on the fee income with consequential impact on the amortisation
of DAC.
The level of acquisition costs carried in the statement of fi nancial 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(e) and H1.
As explained in note A5, the Group has adopted the US Financial Accounting Standards Board measurement and recognition
requirements in Accounting Standards update No 2010-26 on ‘Accounting for Costs Associated with Acquiring or Renewing
Insurance Contracts’ (the ‘Update’) from 1 January 2012 into its IFRS reporting for the results of Jackson and those Asia operations
whose IFRS insurance assets and liabilities are measured principally by reference to US GAAP principles. Under the Update insurers
are required to capitalise only those incremental costs directly relating to acquiring a contract from 1 January 2012. For Group IFRS
reporting Prudential has chosen to apply this new basis retrospectively for the results of these operations.
On adoption of the new DAC policy for Jackson the deferred costs balance for business in force at 31 December 2011 was
retrospectively reduced from £3,880 million to £3,095 million (31 December 2010: DAC balance reduced from £3,543 million
to £2,829 million).
Asia operations
For those territories applying US GAAP to insurance assets and liabilities, as permitted by the ABI SORP, principles similar to those set
out in the Jackson paragraph above are applied to the deferral and amortisation of acquisition costs. For other territories in Asia, the
general principles of the ABI SORP are applied with, as described above, deferral of acquisition costs being either explicit or implicit
through the reserving basis.
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Financial statements Prudential plc Annual Report 2012
A: Background and accounting policies continued
A5: New accounting pronouncements
The following standards, interpretations and amendments have either been adopted for the fi rst time in 2012 or have been issued but
are not yet effective in 2012, including those which have not yet been adopted in the EU. This is not intended to be a complete list as
only those standards, interpretations and amendments that could have an impact upon the Group’s fi nancial statements have been
discussed.
a Accounting pronouncements adopted in 2012
Amendments to IFRS 7, ‘Financial instruments: Disclosures – Transfers of fi nancial assets’
The amendments introduce new disclosure requirements about transfers of fi nancial assets which include disclosures for fi nancial
assets that are not derecognised in their entirety and fi nancial assets that are derecognised in their entirety but for which the entity
retains continuing involvement. The adoption of these amendments did not have a signifi cant impact on the Group’s disclosures.
Amendments to IAS 12, ‘Income taxes’
These 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. The adoption of these amendments did not have a material effect on the Group’s fi nancial statements.
b Adoption of updated US GAAP reporting requirements for Group IFRS reporting in 2012
Background
In October 2010, the Emerging Issues Task Force of the US Financial Accounting Standards Board issued update No 2010-26 on
‘Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts’ (the ‘Update’). The Update was issued to address
perceived diversity in practices by companies preparing fi nancial statements in accordance with US GAAP as regards the types of
acquisition costs being deferred. Under US GAAP, costs that can be deferred and amortised are those that ‘vary with and are primarily
related to the acquisition of insurance contracts’. The Update requires insurers to capitalise only those incremental costs directly
relating to acquiring a contract for fi nancial statements for reporting periods beginning after 15 December 2011. All other indirect
acquisition expenses are required to be charged to the income statements as incurred expenses. Accordingly, the main impact of the
Update is to disallow insurers from deferring costs that are not directly related to successful sales.
The Group’s IFRS accounting policies include that under IFRS 4, ‘Insurance Contracts’, insurance assets and liabilities other than
those for UK regulated with-profi ts funds, are measured using the GAAP basis applied prior to IFRS adoption in 2005. On this basis
insurance assets and liabilities are measured under the UK Modifi ed Statutory Basis (MSB) which was codifi ed by the Statement
of Recommended Practice (SORP) on accounting for insurance business issued by the Association of British Insurers (ABI) in 2003.
The SORP also permits the use of local GAAP subject to the requirement for adjustments to be made to ensure suffi cient consistency
of measurement under the UK GAAP framework under which the SORP was developed.
In applying this overarching basis, the Group has chosen to apply US GAAP for measuring the insurance assets and liabilities of
Jackson. In addition, for the Group’s operations in India, Japan, Taiwan and, until 2012, Vietnam*, where the local GAAP basis would
not be appropriate as the start point for deriving MSB insurance asset and liabilities, the measurement has been determined
substantially by reference to US GAAP requirements.
For 2012, the Group had the option to either continue with its current basis of measurement or improve its accounting policy
under IFRS 4 to acknowledge the issuance of the Update. Prudential has chosen to improve its accounting policy in 2012 to apply the
US GAAP update, on a retrospective basis, to the results of Jackson and the affected Asia operations.
The 2011 comparatives in these consolidated fi nancial statements have been adjusted accordingly for the retrospective application
of this Update.
* Separately from the DAC change noted above, in Vietnam, the Company has improved its estimation basis for liabilities in 2012 from one determined substantially
by reference to US GAAP requirements. Aft er making this change, the estimation basis for Vietnam is aligned substantially with that used in Singapore, Malaysia
and some other Asia operations.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
171
Eff ect of the change in accounting policy
(a) The effect of the change in accounting policy for deferred acquisition costs (DAC) on the income statement, earnings per share,
comprehensive income, changes in equity and statement of fi nancial position is shown in the tables below:
Consolidated income statement
Year ended 31 December
Total revenue, net of reinsurance
Acquisition costs and other expenditure
Total other charges, net of reinsurance
Profi t before tax (being tax attributable to
shareholders’ and policyholders’ returns)
(Less) Add tax (charge) credit attributable to
policyholders’ returns
Profi t before tax attributable to shareholders
Total tax charge attributable to policyholders
and shareholders
Adjustment to remove tax charge (credit)
attributable to policyholders’ returns
Tax charge attributable to shareholders’ returns
Profi t for the year
Profi t for the year attributable to
equity holders of the Company
Earnings per share (in pence)
Based on profi t attributable to the equity
holders of the Company:
Basic
Diluted
2012 £m
2011 £m
Under
previous
policy
55,476
(5,908)
(46,233)
Eff ect of
change
–
(147)
–
Under
new
policy
55,476
(6,055)
(46,233)
As reported
under
previous
policy
36,506
(5,005)
(29,575)
Eff ect of
change
–
(115)
–
Under
new
policy
36,506
(5,120)
(29,575)
3,335
(147)
3,188
1,926
(115)
1,811
(378)
2,957
(1,039)
378
(661)
2,296
–
(378)
17
–
17
(147)
2,810
1,943
(115)
1,828
48
–
48
(991)
378
(613)
(432)
(17)
(449)
40
–
40
(392)
(17)
(409)
(99)
2,197
1,494
(75)
1,419
2,296
(99)
2,197
1,490
(75)
1,415
90.4p
90.3p
(3.9)p
(3.9)p
86.5p
86.4p
58.8p
58.7p
(3.0)p
(3.0)p
55.8p
55.7p
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Financial statements Prudential plc Annual Report 2012
A: Background and accounting policies continued
A5: New accounting pronouncements continued
Consolidated statement of comprehensive income and statement of changes in equity
Year ended 31 December
Profi t for the year
Exchange movements on foreign operations and
net investment hedges, net of related tax
Unrealised valuation movements on securities
of US insurance operations classifi ed as
available-for-sale
Related change in amortisation of deferred
income and acquisition costs
Related tax
Net unrealised gains
Total comprehensive income for the year
Total comprehensive income for the year
attributable to equity holders of the
Company
Shareholders’ equity:
Net increase in shareholders’ equity
At beginning of year
At end of year
Consolidated statement of fi nancial position
Year ended 31 December
Assets
Deferred acquisition costs and other intangible
assets attributable to shareholders
Total other assets
Total assets
Liabilities
Deferred tax liabilities
Total other liabilities
Total liabilities
Equity
Shareholders’ equity
Non-controlling interests
Total equity
2012 £m
2011 £m
Under
previous
policy
2,296
(236)
862
(314)
(190)
358
2,418
Eff ect of
change
(99)
20
–
44
(15)
29
(50)
Under
new
policy
2,197
As reported
under
previous
policy
1,494
(216)
(100)
862
(270)
(205)
387
811
(331)
(168)
312
2,368
1,706
Eff ect of
change
(75)
(5)
–
56
(19)
37
(43)
Under
new
policy
1,419
(105)
811
(275)
(187)
349
1,663
2,418
(50)
2,368
1,702
(43)
1,659
1,845
9,117
10,962
(50)
(553)
(603)
1,795
8,564
10,359
1,086
8,031
9,117
(43)
(510)
(553)
1,043
7,521
8,564
2012 £m
2011 £m
Under
previous
policy
Eff ect of
change
Under
new
policy
As reported
under
previous
policy
Eff ect of
change
Under
new
policy
5,173
305,986
311,159
4,273
295,919
300,192
(906)
–
4,267
305,986
5,069
268,511
(906)
310,253
273,580
(303)
–
3,970
295,919
4,211
260,209
(303)
299,889
264,420
10,962
5
10,967
(603)
–
(603)
10,359
5
10,364
9,117
43
9,160
(835)
–
(835)
(282)
–
(282)
(553)
–
(553)
4,234
268,511
272,745
3,929
260,209
264,138
8,564
43
8,607
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
173
(b) The effect of the change in accounting policy for deferred acquisition costs on the Group’s supplementary analysis of profi t is
shown in the table below:
Segment disclosure – profi t before tax
Year ended 31 December
Operating profi t based on longer-term
investment returns
Asia insurance operationsnote (i)
US insurance operationsnote (ii)
Other operations
Total
Short-term fl uctuations in investment returns on
shareholder-backed business
Shareholders’ share of actuarial and other gains
and losses on defi ned benefi t pension
schemes
Gain on dilution of Group’s holdings
Amortisation of acquisition accounting
adjustments arising on the purchase of
REALIC
Profi t before tax attributable to shareholders
Basic EPS from operating profi t based on
longer-term investment returns after tax and
non-controlling interests
Basic EPS based on total profi t after tax and
non-controlling interests
2012 £m
2011 £m
Under
previous
policy
Eff ect of
change
Under
new
policy
As reported
under
previous
policy
Eff ect of
change
Under
new
policy
704
651
672
2,027
(220)
21
–
–
922
1,081
656
2,659
225
50
42
(19)
2,957
(9)
(117)
–
(126)
(21)
–
–
–
913
964
656
704
694
672
2,533
2,070
204
(148)
50
42
(19)
21
–
–
–
(43)
–
(43)
(72)
–
–
–
(147)
2,810
1,943
(115)
1,828
80.2p
(3.4)p
76.8p
63.9p
(1.1)p
62.8p
90.4p
(3.9)p
86.5p
58.8p
(3.0)p
55.8p
Notes on the eff ect of the change in the accounting policy on operating profi t based on longer-term investment returns
(i)
Asia insurance operations
New business
Acquisition costs on new contracts not deferred under the new policy
Business in force at beginning of period
Reduction in amortisation on reduced DAC balance under the new policy
Total
(ii) US insurance operations
New business
Acquisition costs on new contracts not deferred under the new policy
Business in force at beginning of period
Reduction in amortisation on reduced DAC balance under the new policy
Total
Eff ect of change
2012 £m
2011 £m
(14)
5
(9)
(16)
16
–
Eff ect of change
2012 £m
2011 £m
(174)
57
(117)
(156)
113
(43)
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Financial statements Prudential plc Annual Report 2012
A: Background and accounting policies continued
A5: New accounting pronouncements continued
c Accounting pronouncements endorsed by the EU but not yet eff ective
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 2012 year end.
Amendments to IAS 19, ‘Employee benefi ts’
In June 2011, the IASB published amendments to IAS 19 on accounting for pensions and other post-employment benefi ts effective
from annual periods beginning on or after 1 January 2013. The key revisions to the standard are:
AAAAAAAAAAAAAAAA The removal of the corridor option for actuarial gains and losses
The Group does not apply the corridor option, therefore, its removal has no impact to the Group;
AAAAAAAAAAAAAAAA Presentation of actuarial gains and losses
The Group currently presents actuarial gains and losses in the income statement. Under the revised standard actuarial gains and
losses will be presented in ‘other comprehensive income’. Details of the 2012 and 2011 actuarial gains and losses on the current
basis are shown in note I3;
AAAAAAAAAAAAAAAA The replacement of the expected return on plan assets with an amount based on the liability discount rate in the determination of
pension costs
This revision alters the pension costs included in the Group’s income statement with a corresponding equal and opposite effect
on the actuarial gains and losses included in other comprehensive income. The effect of this change for Prudential is not expected
to be signifi cant; and
AAAAAAAAAAAAAAAA Enhanced disclosures, specifi cally on risks arising from defi ned benefi t plans.
Adoption of the revised IAS 19 standard will have no impact on shareholders’ equity.
Standards on joint arrangements and disclosures: IFRS 11, ‘Joint arrangements’, IFRS 12, ‘Disclosures of interest in other entities’
and IAS 28, ‘Investments in associates and joint ventures’
In May 2011, the IASB issued IFRS 11, ‘Joint arrangements’ to replace IAS 31, ‘Interests in Joint Ventures’. The standard also
incorporates the guidance contained in related interpretation in SIC 13, Jointly Controlled Entities – Non-Monetary Contributions by
Venturers. The standard requires a joint venture to be recognised as an investment and be accounted for using the equity method in
accordance with IAS 28. The attaching changes to disclosure requirements for parties to joint arrangements are specifi ed in IFRS 12,
‘Disclosures of interest in other entities’, which replaces the disclosure requirements of IAS 28, ‘Investments in associates and joint
ventures’ and IAS 31, ‘Interests in Joint Ventures’.
The standards are effective from annual periods beginning on or after 1 January 2013 for IFRS as issued by the IASB and
1 January 2014 for IFRS as endorsed by the EU but with early adoption permitted. The Group’s investments in joint ventures are
currently accounted for using proportionate consolidation. At 31 December 2012, this approach gave rise to consolidated gross
assets and liabilities for the joint ventures of £3,946 million and £ 3,595 million respectively. With the application of IFRS 11, the
Group’s investments in joint ventures will be accounted for on a single line equity method thus giving rise at 31 December 2012 to
a net interest of £351 million included within gross assets.
Similarly, the 2012 gross revenue and charges of £1,040 million and £942 million respectively, which are currently included
on a line-by-line basis within the income statement will, after adoption of the standard, be presented as a single net contribution
of £98 million. As a consequence, the standard will also have a small impact on profi t before tax as the tax on the profi ts of the joint
ventures will no longer be presented in the tax line, instead the tax charges will be required to be netted against the Group’s share
of joint ventures’ income included in profi t before tax. The tax charges for 2012 for the Group’s share of joint ventures’ income was
£19 million. Adoption of the standard will have no impact on net of tax profi ts or shareholders’ equity.
Standards on consolidation and disclosures: IFRS 10, ‘Consolidated fi nancial statements’, IFRS 12, ‘Disclosures of interest in other
entities’ and IAS 27, ‘Separate fi nancial statements’
In May 2011, the IASB issued these three standards to replace IAS 27, ‘Consolidated and separate fi nancial statements’ and SIC 12,
‘Consolidation – Special Purpose Entities’.
The standards are effective from annual periods beginning on or after 1 January 2013. The standards are expected to have a minor
impact on the Group’s assessment of its interests in investment funds (including OEICs and unit trusts) and is likely to increase the
number of funds consolidated. The Group is currently determining those additional funds that will require consolidation under the
requirements of IFRS 10 and the effect of retrospective adjustment to comparative results. The principal effect will be to ‘gross up’ the
consolidated balance sheet for:
(i) The difference between the net value of the newly consolidated assets and liabilities and the previous carrying value for the
Group’s interest; and
(ii) The equal and opposite liability or minority interest for the external parties’ interests in the funds.
The grossing up effect on the 2012 statement of fi nancial position is not expected to exceed £1 billion. Adoption of the standard
is expected to have an insignifi cant effect on the retrospectively adjusted comparative 2012 profi t and shareholders’ equity in
the 2013 results.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
175
IFRS 13, ‘Fair value measurement’
In May 2011, the IASB issued IFRS 13, ‘Fair value measurement’ standard which creates a uniform framework to explain how to
measure fair value and aims to enhance fair value disclosures, but it does not change when to measure fair value or require additional
fair value measurements. The standard requires additional disclosure on the fair value of non-fi nancial assets and liabilities and
enhanced disclosures of recurring level 3 fair value measurements.
The standard is effective from annual periods beginning on or after 1 January 2013, with no adjustment to comparative results. The
Group is currently assessing the impact of the standard but it is not expected to have a material impact on the fair value measurement
of the Group’s assets and liabilities. Disclosures will be enhanced in providing detail of the methodology and underlying assumptions
used to determine fair value of the Group’s assets and liabilities, in line with the new requirements.
Amendments to IAS 1, ‘Presentation of fi nancial statements’
These amendments, effective on or after 1 January 2013, change the requirement for the disclosure of items presented in other
comprehensive income, requiring items to be presented separately based on whether or not they may be recycled to profi t or loss in
the future. The Group is expecting the amendments to be purely presentational with no signifi cant impact on the Group’s results and
fi nancial position.
Off setting Financial Assets and Financial Liabilities (Amendments to IAS 32, ‘Financial instruments: Presentation’ and IFRS 7,
‘Financial instruments: Disclosures’)
The two amendments, effective on or after 1 January 2013 and 2014, respectively clarifi es the offsetting criteria for fi nancial assets
and fi nancial liabilities in the statement of fi nancial position. The Group is currently assessing the impact of these amendments.
d Accounting pronouncements not yet endorsed by the EU
The following accounting pronouncement potentially relevant to the Group has been issued but not yet endorsed for use in the EU.
IFRS 9, ‘Financial instruments: Classifi cation and measurement’
The new standard, effective on or after 1 January 2015, will automatically replace IAS 39, ‘Financial Instruments – Recognition and
measurement’. Under the new requirements the classifi cation and hence measurement of fi nancial assets would be on two bases,
either amortised cost or fair value through profi t or loss, rather than the existing four bases of classifi cation. These requirements
maintain the existing amortised cost measurement for most liabilities but 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 profi t or loss for liabilities measured at fair value. On 28 November 2012, the IASB released an Exposure Draft
proposing amendments to IAS 9. The proposed changes would introduce a fair value through other comprehensive income (FVOCI)
category which would include certain fi nancial assets that contain contractual cash fl ows that are solely payments of principal and
interest and are held in a business model in which assets are managed both in order to collect contractual cash fl ows and for sale.
The Group is still assessing the full impact of this standard.
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Financial statements Prudential plc Annual Report 2012
B: Summary of results
B1: Segment disclosure – profi t before tax
The determination of the operating segments and performance measure of the operating segments of the Group are as detailed in
note A3(2)(d). Further segmentation of the income statement is provided in note F1 of these fi nancial statements.
Note
2012 £m
2011* £m
Asia operations
Insurance operations notes (i), (ii)
Operating result before gain on sale of stake in China Life of Taiwan
Gain on sale of stake in China Life of Taiwan
Total Asia insurance operations
Development expenses
Total Asia insurance operations after development expenses
Eastspring Investments
Total Asia operations
US operations
Jackson (US insurance operations) notes (i),(ii),(iii)
Broker-dealer and asset management
Total US operations
UK operations
UK insurance operations: notes (i),(ii)
Long-term business
General insurance commission note (v)
Total UK insurance operations
M&G
Total UK operations
Total segment profi t
Other income and expenditure
Investment return and other income
Interest payable on core structural borrowings
Corporate expenditure
Total
RPI to CPI infl ation measure change on defi ned benefi t pension schemes note (vi)
Solvency II implementation costs
Restructuring costs note (vii)
Operating profi t based on longer-term investment returns
Short-term fl uctuations in investment returns on shareholder-backed business note (viii)
Shareholders' share of actuarial and other gains and losses on defi ned benefi t pension
schemes note (ix)
Gain on dilution of Group's holdings
Amortisation of acquisition accounting adjustments arising on the purchase of REALIC
I2
I1
869
51
920
(7)
913
75
988
964
39
1,003
703
33
736
371
1,107
3,098
13
(280)
(231)
(498)
–
(48)
(19)
2,533
204
50
42
(19)
709
–
709
(5)
704
80
784
651
24
675
683
40
723
357
1,080
2,539
22
(286)
(219)
(483)
42
(55)
(16)
2,027
(220)
21
–
–
Profi t before tax attributable to shareholders
2,810
1,828
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy described
in note A5.
Notes
(i)
Operating profi t based on longer-term investment returns
The Group provides supplementary analysis of IFRS profi t before tax attributable to shareholders so as to distinguish operating profi t based on longer-term
investment returns from other elements of total profi t. Operating profi t based on longer-term investment returns is the basis on which management
regularly reviews the performance of Prudential’s segments as defi ned by IFRS 8. Further discussion on the determination of operating profi t based
on longer-term investment returns is provided in note A3(2)(d).
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
177
(ii)
(iii)
Eff ect of changes to assumptions, estimates and bases of determining life assurance liabilities
The results of the Group’s long-term business operations are aff ected by changes to assumptions, estimates and bases of preparation.
These are described in notes D2(g), D3(g) and D4(g).
Jackson operating results based on longer-term investment returns
IFRS basis operating profi ts 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 note (iv) below)
Equity type investments:
Longer-term returns
2012 £m
2011 £m
72
(66)
54
67
(56)
51
(iv) The risk margin reserve (RMR) charge for longer-term credit-related losses included in operating profi t based on longer-term investment returns of Jackson
for 2012 is based on an average annual RMR of 26 basis points (2011: 25 basis points) on average book values of US$47.6 billion (2011: US$44.4 billion) as
shown below:
Moody’s rating category
(or equivalent under NAIC ratings of MBS)
A3 or higher
Baa1, 2 or 3
Ba1, 2 or 3
B1, 2 or 3
Below B3
Total
2012
2011
Average
book
value
US$m
23,129
21,892
1,604
597
342
47,564
RMR
%
0.11
0.26
1.12
2.82
2.44
0.26
Annual expected loss
US$m
(26)
(56)
(18)
(17)
(8)
(125)
£m
(16)
(36)
(11)
(11)
(5)
(79)
Average
book
value
US$m
21,255
20,688
1,788
474
211
44,416
RMR
%
0.08
0.26
1.04
3.01
3.88
0.25
Annual expected loss
US$m
(17)
(54)
(19)
(14)
(8)
(112)
£m
(11)
(34)
(11)
(9)
(5)
(70)
Related change to amortisation of deferred acquisition
costs (see below)
Risk margin reserve charge to operating profi t for
longer-term credit-related losses
21
13
22
14
(104)
(66)
(90)
(56)
Consistent with the basis of measurement of insurance assets and liabilities for Jackson’s IFRS results, the charges and credits to operating profi ts based
on longer-term investment returns are partially off set by related changes to amortisation of deferred acquisition costs.
(v) General insurance commission
UK operations transferred its general insurance business to Churchill in 2002, with general insurance commission representing the commission received
net of expenses for Prudential-branded general insurance products as part of this arrangement.
(vi) RPI to CPI infl ation measure change
During 2011, the Group altered its infl ation measure basis for future statutory increases to pension payments for certain tranches of its UK defi ned benefi t
pension schemes. This refl ected the UK Government’s decision to replace the basis of indexation from Retail Prices Index with Consumer Prices Index.
This resulted in a credit to the operating profi t before tax in 2011 of £42 million.
(vii) Restructuring costs are incurred in the UK and represent one-off expenses incurred in securing expense savings.
(viii) Short-term fl uctuations in investment returns on shareholder-backed business.
Insurance operations:
Asia
US
UK
Other operations:
Economic hedge value movement
Other
Total
2012 £m
2011* £m
76
(90)
136
(32)
114
204
(92)
(167)
159
–
(120)
(220)
General overview of defaults
The Group did not experience any defaults on its shareholder-backed debt securities portfolio in 2012 or 2011.
Asia insurance operations
The positive short-term fl uctuations of £76 million in 2012 refl ects unrealised gains on bond assets following a fall in yields in the period. These gains more
than off set the impact of falling interest rates in Hong Kong and the transfer to operating profi t of previously booked unrealised gains on the sale of the
Group’s stake in China Life of Taiwan. The realised gain on the sale of the Group’s stake in China Life of Taiwan of £51 million is included in the Group’s
operating profi t based on longer-term investment returns as disclosed above.
The fl uctuations of £(92) million in 2011 in part refl ected equity market falls in Taiwan and negative unrealised value movement on the Group’s stake
in China Life of Taiwan.
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Financial statements Prudential plc Annual Report 2012
B: Summary of results continued
B1: Segment disclosure – profi t before tax continued
US insurance operations
The short-term fl uctuations in investment returns for US insurance operations comprise the following items:
Short-term fl uctuations relating to debt securities:
Charges in the year:
Defaults
Losses on sales of impaired and deteriorating bonds
Bond write downs
Recoveries/reversals
Total charges in the year note (a)
Less: Risk margin charge included in operating profi t based on longer-term investment returns note (iii)
Interest-related realised gains:
Arising in the year
Less: amortisation of gains and losses arising in current and prior years to operating profi t based on longer-term
investment returns
Related change to amortisation of deferred acquisition costs
Total short-term fl uctuations related to debt securities
Derivatives (other than equity-related): market value movements (net of related change to amortisation of deferred
acquisition costs) note (b)
Net equity hedge results (principally guarantees and derivatives, net of related change to amortisation of deferred
acquisition costs) note (c)
Equity-type investments: actual less longer-term return (net of related change to amortisation of deferred acquisition
costs) A3(d)(i)
Other items (net of related change to amortisation of deferred acquisition costs)
Total
2012 £m
2011* £m
–
(23)
(37)
13
(47)
79
32
94
(91)
3
(3)
32
135
(302)
23
22
(90)
–
(32)
(62)
42
(52)
70
18
158
(84)
74
(3)
89
554
(788)
–
(22)
(167)
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy
described in note A5.
Notes
(a) The charges on the debt securities of Jackson comprise the following:
Residential mortgage-backed securities:
Prime (including agency)
Alt-A
Sub-prime
Total residential mortgage-backed securities
Corporate debt securities
Other
Total
2012 £m
2011 £m
(4)
(1)
(3)
(8)
(14)
(25)
(47)
(25)
(1)
–
(26)
(14)
(12)
(52)
(b)
The gain of £135 million (2011: gain of £554 million) is principally for the value movement of non-equity free-standing derivatives held to manage interest
rate exposures, and for the GMIB reinsurance asset that is considered to be a derivative under IAS 39.
(c)
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 general account business, the Group has continued its approach of not seeking to apply hedge accounting under IAS 39.
This decision refl ects the inherent constraints of IAS 39 for hedge accounting investments and life assurance assets and liabilities under ‘grandfathered’
US GAAP under IFRS 4.
The amount of £(302) million (2011: £(788) million) relates to the net equity hedge accounting eff ect of the equity-based derivatives and associated
guarantee liabilities of Jackson’s variable and fi xed index annuity business. The details of the value movements excluded from operating profi t based on
longer-term investment returns are as described in note C. The principal movements are for (i) value for free-standing and GMWB ‘not for life’ embedded
derivatives, (ii) accounting values for GMDB and GMWB ‘for life’ guarantees, (iii) fee assessments and claim payments in respect of guarantee liabilities
and (iv) related changes to DAC amortisation. In 2012, the charge of (£302) million principally refl ects fair value movements on free-standing futures
contracts and short-dated options. The movements included within the net equity hedge result include the eff ect of lower interest rates for which the
movement was particularly signifi cant in 2011. The value movements on derivatives held to manage this and any other interest rate exposure are
included in the £135 million (2011: £554 million) described above in note (b).
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 classifi ed as available-for-sale of £862 million (2011: increase in net unrealised gains of £811 million). Temporary
market value movements do not refl ect defaults or impairments. Additional details on the movement in the value of the Jackson portfolio are included
in note D3.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
179
UK Insurance operations
The gain on short-term fl uctuations in investment returns for UK insurance operations of £136 million (2011: £159 million) principally refl ect net investment
gains arising in the year on fi xed income assets backing the capital of the shareholder-backed annuity business.
Economic hedge value movement
This item represents the costs on short-dated hedge contracts taken out in the fi rst half of 2012 to provide downside protection against severe equity market
falls through a period of particular uncertainty with respect to the Eurozone. The hedge contracts were terminated in the second half of 2012.
Other operations
Short-term fl uctuations in investment returns for Other operations in 2012 of £114 million primarily represent unrealised fair value movements on
Prudential Capital’s bond portfolio. Short-term fl uctuations in investment returns for Other operations in 2011 of £(120) million represent unrealised value
movements on investments, including centrally held swaps to manage foreign exchange and certain macroeconomic exposures of the Group.
(ix) Shareholders’ share of actuarial and other gains and losses on defi ned benefi t pension schemes
2012 £m
2011 £m
Actuarial gains and losses
Actual less expected return on scheme assets
Experience gains on scheme liabilities
(Losses) gains on changes of assumptions for scheme liabilities
Less: amount attributable to the PAC with-profi ts sub-fund
Other gains and losses
One-off uplift to recognise a portion of PSPS surplus
Movement in the provision for defi cit funding of PSPS
Less: amount attributable to the PAC with-profi ts sub-fund
Total
11
15
(40)
(14)
15
1
164
–
(115)
49
50
9
19
12
40
(18)
22
–
(4)
3
(1)
21
The actuarial gains and losses shown in the table above relate to the Prudential Staff Pension Scheme (PSPS), and the Scottish Amicable and M&G schemes.
The amounts did not include actuarial gains and losses for the Prudential Staff Pension Scheme, for which the Group has not recognised a substantial
portion of its interest in the scheme’s underlying surplus.
For the 2011 comparatives, the shareholders’ share of actuarial and other gains and losses on defi ned benefi t pension schemes comprises the aggregate
eff ect of actual less expected returns on scheme assets, experience gains and losses, the eff ect of changes in assumptions and altered provisions for defi cit
funding, where relevant. For 2012, these items also apply. However, the shareholders’ share of actuarial and other gains and losses on defi ned benefi t
pension schemes also includes £49 million for the eff ect of partial recognition of surplus of the main Prudential Staff Pension Scheme. This credit arose
from an altered funding arrangement following the 5 April 2011 triennial valuation. Further details on the Group’s defi ned benefi t pension schemes are
shown in note I3.
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 open
ended investment companies (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 potentially dilutive 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.
Based on operating profi t based on longer-term investment
returns
Short-term fl uctuations in investment returns on
shareholder-backed business
Shareholders’ share of actuarial and other gains and losses
on defi ned benefi t pension schemes
Gain on dilution of Group's holdings
Amortisation of acquisition accounting adjustments arising
on the purchase of REALIC
Based on profi t for the year
2012
Note
Before
tax
note B1
£m
Tax
note F5
£m
Non-
controlling
interests
Net of tax
and non-
controlling
interests
Basic
earnings
per share
Diluted
earnings
per share
£m
£m
pence
pence
B1
B1
I2
I1
2,533
(582)
204
50
42
(26)
(12)
–
(19)
7
2,810
(613)
–
–
–
–
–
–
1,951
76.8p
76.7p
178
7.0p
7.0p
38
42
1.5p
1.7p
1.5p
1.7p
(12)
(0.5)p
(0.5)p
2,197
86.5p
86.4p
B
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m
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180
Financial statements Prudential plc Annual Report 2012
B: Summary of results continued
B2: Earnings per share continued
2011* £m
Note
Before
tax
note B1
£m
Tax
note F5
£m
Non-
controlling
interests
Net of tax
and non-
controlling
interests
Basic
earnings
per share
Diluted
earnings
per share
£m
£m
pence
pence
Based on operating profi t based on longer-term investment
returns
Short-term fl uctuations in investment returns on
shareholder-backed business
Shareholders’ share of actuarial and other gains and losses
on defi ned benefi t pension schemes
2,027
(433)
(4)
1,590
62.8p
62.7p
B1
B1
(220)
21
29
(5)
–
–
(191)
(7.6)p
(7.6)p
16
0.6p
0.6p
Based on profi t for the year
1,828
(409)
(4)
1,415
55.8p
55.7p
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy described
in note A5.
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 year
Parent company:
Interim dividend (2012: 8.40p; 2011: 7.95p)
Final dividend for prior period (2012: 17.24p; 2011: 17.24p)
Total
2012
millions
2011
millions
2,541
9
(6)
2,544
2,533
13
(8)
2,538
2012 £m
2011 £m
215
440
655
203
439
642
Dividends paid in cash, as set in the consolidated statement of cash fl ows for 2012 were £655 million (2011: £642 million).
Parent company dividends relating to reporting year:
Interim dividend (2012: 8.40p; 2011: 7.95p)
Final dividend (2012: 20.79p; 2011: 17.24p)
Total
2012 £m
2011 £m
215
532
747
203
439
642
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
181
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 fi nal dividend for the year ended 31 December 2011 of 17.24 pence per ordinary share was paid to
eligible shareholders on 24 May 2012 and the 2012 interim dividend of 8.4 pence per ordinary share was paid to eligible shareholders
on 27 September 2012.
The Board has decided to rebase the full year dividend upwards by 4 pence, refl ecting the strong progress made in both the
earnings and free surplus generation of the business and in the delivery of our fi nancial objectives. In line with this, the directors
recommend a fi nal dividend of 20.79 pence per share (2011: 17.24 pence), which brings the total dividend for the year to 29.19 pence
(2011: 25.19 pence), representing an increase of 15.9 per cent over 2011.
The 2012 fi nal dividend of 20.79 pence per ordinary share will be paid on 23 May 2013 in sterling to shareholders on the principal
register and the Irish branch register at 6.00pm BST on Tuesday, 2 April 2013 (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 3 June 2013. The fi nal dividend will be
paid on or about 30 May 2013 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 the close of business
on 12 March 2013. 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 £532 million of shareholders’ funds.
Shareholders on the principal register and Irish branch register will be able to participate in a Dividend Reinvestment Plan.
B4: Exchange translation
Exchange movement recognised in other comprehensive income
Asia operations
US operations
Unallocated to a segment (central funds)
2012 £m
2011* £m
(87)
(187)
60
(214)
(28)
35
(44)
(37)
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy described
in note A5.
The movements for Asia and US operations refl ect 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 refl ects 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 2012
12.60
15,665.76
4.97
1.99
89.06
33,875.42
1.63
Average
for 2012
12.29
14,842.01
4.89
1.98
84.70
33,083.59
1.58
Closing
rate at
31 Dec 2011
12.07
14,091.80
4.93
2.02
82.53
33,688.16
1.55
Average
for 2011
12.48
14,049.41
4.90
2.02
74.80
33,139.22
1.60
B
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m
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182
Financial statements Prudential plc Annual Report 2012
B: Summary of results continued
B5: Group statement of fi nancial position
To explain more comprehensively the assets, liabilities and capital of the Group’s businesses, it is appropriate to provide analyses
of the Group’s statement of fi nancial 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 fi nancial position by operating segment
i
Position at 31 December 2012
2012 £m
Insurance operations
UK
D2
US
D3
Asia
D4
Total
insurance
operations
Asset
manage-
ment
operations
E2
Unallo-
cated to a
segment
(central
operations)
Intra-
group
elimina-
tions
31 Dec
Group
total
By operating segment
Assets
Intangible assets attributable to shareholders:
Goodwill
Deferred acquisition costs and other
intangible assets
Total
Intangible assets attributable to with-profi ts funds:
In respect of acquired subsidiaries for
venture fund and other investment
purposes
Deferred acquisition costs and other
intangible assets
Total H1
Deferred tax assets H4
Other non-investment and non-cash assets H3,H6
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 B5(c)
Other investments
Deposits
–
–
239
239
1,230
105
3,222
908
4,235
14
105
3,222
1,147
4,474
1,244
178
6
184
–
–
–
–
178
72
72
78
256
–
–
–
–
18
18
–
–
–
10,852
72
24
–
4 10,880
–
72
–
41
3,373
6,235
1,014 10,622
1,199
36,027 49,551 14,310 99,888
83,862 32,993 21,402 138,257
7,829
1,227 12,569
4,576
11,131
2,296
211
957
70
1,846
44
84
–
–
–
–
–
27
–
27
Total intangible assets
289
3,222
1,219
4,730
1,244
18
183
5,424
1,889
6,792
83
2,155
1,117 13,333
107
1,051
52
3,766
–
2,314
(6,113) 12,037
Total investments G1,H7,H8
149,893 91,310 38,914 280,117
3,284
Properties held for sale H9
Cash and cash equivalents H10
98
2,638
–
513
–
1,668
98
4,819
–
1,083
–
482
Total assets
158,525 103,726 43,001 305,252
6,769
4,345
(6,113) 310,253
Note
Further segmental analysis:
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 defi ned as fi nancial instruments or related to insurance contracts are
excluded. The Group’s total non-current assets at 31 December comprise:
UK including insurance operations, M&G and central operations
US
Asia*
Total
* No individual country in Asia held non-current assets at the end of the year which exceeds 10 per cent of the Group total.
2012 £m
2011 £m
1,927
152
640
2,719
1,906
144
681
2,731
–
–
–
–
–
–
–
1,469
4,267
5,736
178
78
256
5,992
– 10,880
–
113
– 11,821
– 99,958
– 140,103
–
7,900
– 12,653
– 283,428
–
–
98
6,384
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
183
2012 £m
Insurance operations
UK
D2
US
D3
Asia
D4
Total
insurance
operations
Asset
manage-
ment
operations
E2
Unallo-
cated to a
segment
(central
operations)
Intra-
group
elimina-
tions
31 Dec
Group
total
3,033
1
4,343
–
2,529
4
9,905
5
1,937
–
(1,483)
–
– 10,359
5
–
3,034
4,343
2,533
9,910
1,937
(1,483)
– 10,364
84,266 90,192 34,126 208,584
33,464
–
348 33,812
16,182
2,069
127 18,378
10,526
–
63 10,589
–
–
–
127
1,033
–
153
153
26
–
–
–
–
7
–
–
153
153
160
1,033
1,461
920
55
2,436
2,307
1,185
237
429
2,766
291
1,007
210
25
2,168
–
–
611
20
645
2,554
1,851
588
49
110
1,601
66
837
640
4,183
3,941
286
539
4,978
377
2,489
3,404
162
13
8
266
3,771
149
150
37
–
–
–
–
–
–
–
–
–
–
–
275
2,577
549
275
3,126
1
–
–
2,084
–
–
–
16
151
28
145
75
190
13
– 208,584
– 33,812
– 18,378
– 10,589
– 271,363
–
–
–
–
–
2,577
977
3,554
2,245
1,033
–
2,436
–
–
–
–
(6,113)
–
–
–
4,345
3,970
445
833
2,781
601
2,829
3,454
B
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m
a
r
y
o
f
r
e
s
u
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F
i
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a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
By operating segment
Equity and liabilities
Equity
Shareholders’ equity H11
Non-controlling interests
Total equity
Liabilities
Policyholder liabilities and unallocated surplus
of with-profi ts funds:
Insurance contract liabilities H12
Investment contract liabilities with
discretionary participation features G1
Investment contract liabilities without
discretionary participation features G1
Unallocated surplus of with-profi ts funds
(refl ecting application of ‘realistic’ basis
provisions for UK regulated with-profi ts
funds) D2, H12
Total policyholder liabilities and unallocated
Core structural borrowings of
shareholder-fi nanced operations: H13
Subordinated debt
Other
Total
Operational borrowings attributable to
shareholder-fi nanced operations
Borrowings attributable to with-profi ts
operations
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
9,893
6,943
5,797 22,633
4,556
618
(6,113) 21,694
155,491 99,383 40,468 295,342
4,832
5,828
(6,113) 299,889
Total equity and liabilities
158,525 103,726 43,001 305,252
6,769
4,345
(6,113) 310,253
surplus of with-profi ts funds
144,438 92,261 34,664 271,363
184
Financial statements Prudential plc Annual Report 2012
B: Summary of results continued
B5: Group statement of fi nancial position continued
i Position at 31 December 2011
By operating segment
Assets
Intangible assets attributable to shareholders:
Goodwill
Deferred acquisition costs and other
intangible assets
Total H1
Intangible assets attributable to with-profi ts funds:
In respect of acquired subsidiaries for
venture fund and other investment
purposes
Deferred acquisition costs and other
intangible assets
Total H2
Total intangible assets
Deferred tax assets
Other non-investment and non-cash assets H3,H6
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 B5(c)
Other investments
Deposits
2011* £m
Insurance operations
UK
D2
US
D3
Asia
D4
Total
insurance
operations
Asset
manage-
ment
operations
E2
Unallo-
cated to a
segment
(central
operations)
Intra-
group
elimina-
tions
–
–
235
235
1,230
3,115
977
4,205
16
3,115
1,212
4,440
1,246
–
–
–
–
83
83
178
89
267
–
–
–
113
113
178
6
184
297
3,115
1,295
4,707
1,246
13
231
4,771
1,392
1,542
115
1,024
1,738
7,337
129
1,000
409
4,532
–
(6,231)
10,712
70
35
–
10
10,757
–
70
–
–
3,115
4,110
1,233
8,458
1,256
36,722
77,953
4,568
9,287
38,036
27,022
2,376
167
11,997
86,755
17,681 122,656
7,414
10,619
470
1,165
594
1,842
78
89
31 Dec
Group
total
1,465
4,234
5,699
178
89
267
5,966
2,276
6,638
–
–
–
–
–
–
–
–
–
–
10,757
70
9,714
–
87,349
– 124,498
–
7,509
10,708
–
– 250,605
–
–
3
7,257
–
13
13
–
–
–
–
–
–
–
–
17
–
17
Total investments G1,H7,H8
142,427
71,746
32,556 246,729
3,859
Properties held for sale H9
Cash and cash equivalents H10
–
2,965
3
271
–
1,977
3
5,213
–
1,735
–
309
Total assets
150,691
78,069
36,967 265,727
7,969
5,280
(6,231) 272,745
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy
described in note A5.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
185
2011* £m
Insurance operations
UK
D2
US
D3
Asia
D4
Total
insurance
operations
Asset
manage-
ment
operations
E2
Unallo-
cated to a
segment
(central
operations)
Intra-
group
elimina-
tions
31 Dec
Group
total
2,581
33
3,761
–
2,306
5
8,648
38
1,783
5
(1,867)
–
2,614
3,761
2,311
8,686
1,788
(1,867)
–
–
–
8,564
43
8,607
By operating segment
Equity and liabilities
Equity
Shareholders’ equity H11
Non-controlling interests
Total equity
Liabilities
Policyholder liabilities and unallocated surplus
of with-profi ts funds:
Insurance contract liabilities H12
Investment contract liabilities with
discretionary participation features G1
Investment contract liabilities without
discretionary participation features G1
Unallocated surplus of with-profi ts funds
(refl ecting application of ‘realistic’ basis
provisions for UK regulated with-profi ts
funds) D2, H12
Total policyholder liabilities and unallocated
82,732
67,278
30,353 180,363
29,348
–
397
29,745
14,944
1,911
112
16,967
9,165
–
50
9,215
–
–
–
–
–
–
–
–
–
–
surplus of with-profi ts funds
136,189
69,189
30,912 236,290
Core structural borrowings of
shareholder-fi nanced operations: G1, H13
Subordinated debt
Other
Total
Operational borrowings attributable to
shareholder-fi nanced operations
Borrowings attributable to with-profi ts
operations
Other non-insurance liabilities:
Obligations under funding, securities lending
and sale and repurchase agreements H4, H14, H15
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
–
–
–
–
160
160
–
–
–
–
160
160
–
250
250
2,652
549
3,201
103
127
141
371
13
2,956
972
–
–
972
1,945
1,169
–
3,114
2,043
1,349
553
321
2,829
266
1,298
209
18
1,818
–
–
548
13
887
379
1,101
506
116
103
660
47
480
590
3,162
3,673
669
424
4,037
326
2,665
1,178
–
–
678
5
106
290
4,493
133
182
31
–
–
–
251
155
22
245
70
207
40
– 180,363
–
–
29,745
16,967
–
9,215
– 236,290
–
–
–
–
–
2,652
959
3,611
3,340
972
–
3,114
–
–
–
–
(6,231)
–
–
–
3,840
3,929
930
736
2,544
529
3,054
1,249
B
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m
a
r
y
o
f
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s
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t
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F
i
n
a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s
Total
Total liabilities
10,813
4,832
3,603
19,248
5,918
990
(6,231)
19,925
148,077
74,308
34,656 257,041
6,181
7,147
(6,231) 264,138
Total equity and liabilities
150,691
78,069
36,967 265,727
7,969
5,280
(6,231) 272,745
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy
described in note A5.
186
Financial statements Prudential plc Annual Report 2012
B: Summary of results continued
B5: Group statement of fi nancial position continued
ii Group statement of fi nancial position – additional analysis by business type
2012 £m
2011* £m
Shareholder-backed business
Unit-
linked
and
variable
annuity
Partici-
pating
funds
Non-
linked
business
Asset
manage-
ment
operations
E2
Unallo-
cated to a
segment
(central
operations)
Intra-
group
elimina-
tions
31 Dec
Group
total
31 Dec
Group
total
–
–
–
178
78
256
256
–
–
–
–
–
–
–
239
1,230
4,235
14
4,474
1,244
–
–
–
–
–
–
–
18
18
–
–
–
4,474
1,244
18
–
–
–
–
–
–
–
1,469
1,465
4,267
4,234
5,736
5,699
178
178
78
256
89
267
5,992
5,966
114
3,133
–
508
2,041
9,692
107
1,051
52
3,766
–
2,314
(6,113) 12,037
2,276
6,638
8,659
622
1,599
–
2,709
–
–
–
41
72
7,913
1,199
25,105 73,860
62,002
4,745
9,470
923
9,504 66,751
3,027
1,703
57
1,396
70
1,846
44
84
112,690 85,439 81,988
3,284
–
–
–
–
–
27
–
27
– 10,880
10,757
–
113
70
– 11,821
9,714
– 99,958
87,349
– 140,103 124,498
–
7,900
7,509
– 12,653
10,708
– 283,428 250,605
98
1,721
–
1,310
–
1,788
–
1,083
–
482
–
–
98
6,384
3
7,257
118,012 87,257 99,983
6,769
4,345
(6,113) 310,253 272,745
Assets
Intangible assets attributable to shareholders:
Goodwill
Deferred acquisition costs and other
intangible assets
Total
Intangible assets attributable to with-profi ts funds:
In respect of acquired subsidiaries for
venture fund and other investment
purposes
Deferred acquisition costs and other
intangible assets
Total
Total 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:
Loans
Equity securities and portfolio holdings
in unit trusts
Debt securities
Other investments
Deposits
Total investments
Properties held for sale
Cash and cash equivalents
Total assets
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy
described in note A5.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
187
2012 £m
2011* £m
Shareholder-backed business
Unit-
linked
and
variable
annuity
Partici-
pating
funds
Non-
linked
business
Asset
manage-
ment
operations
E2
Unallo-
cated to a
segment
(central
operations)
Intra-
group
elimina-
tions
31 Dec
Group
total
31 Dec
Group
total
–
1
1
–
–
–
9,905
4
1,937
–
(1,483)
–
– 10,359
5
–
8,564
43
9,909
1,937
(1,483)
– 10,364
8,607
Equity and liabilities
Equity
Shareholders’ equity
Non-controlling interests
Total equity
Liabilities
Policyholder liabilities and unallocated surplus
of with-profi ts funds:
Contract liabilities (including amounts in
respect of contracts classifi ed as
investment contracts under IFRS 4)
Unallocated surplus of with-profi ts funds
Total policyholder liabilities and unallocated
surplus of with-profi ts funds
108,384 85,523 77,456
97,795 85,523 77,456
–
10,589
–
–
–
–
–
–
–
– 260,774 227,075
– 10,589
9,215
– 271,363 236,290
Core structural borrowings of
shareholder-fi nanced operations:
Subordinated debt
Other
Total
Operational borrowings attributable to
shareholder-fi nanced operations
Borrowings attributable to with-profi ts
operations
Deferred tax liabilities
Other non-insurance liabilities
–
–
–
–
–
–
–
1
–
153
153
–
275
2,577
549
275
3,126
–
–
–
2,577
977
2,652
959
3,554
3,611
159
1
2,084
–
2,245
3,340
1,033
1,086
7,508
–
46
1,687
–
2,809
9,497
–
13
4,543
–
16
602
–
–
1,033
3,970
(6,113) 17,724
972
3,929
15,996
Total liabilities
118,011 87,257 90,074
4,832
5,828
(6,113) 299,889 264,138
Total equity and liabilities
118,012 87,257 99,983
6,769
4,345
(6,113) 310,253 272,745
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy
described in note A5.
B
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u
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m
a
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s
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188
Financial statements Prudential plc Annual Report 2012
B: Summary of results continued
B5: Group statement of fi nancial position continued
b Reconciliation of movement in policyholder liabilities and unallocated surplus of with-profi ts funds
A reconciliation of the total policyholder liabilities and unallocated surplus of with-profi ts funds of the Group from the beginning of the
year to the end of the year is as follows:
At 1 January 2011
Comprising:
Policyholder liabilities
Unallocated surplus of with-profi ts funds
Premiums
Surrenders
Maturities/deaths
Net fl ows
Shareholders' transfers post-tax
Investment-related items and other movements
Foreign exchange translation differences
As at 31 December 2011
Comprising:
Policyholder liabilities
Unallocated surplus of with-profi ts funds
At 1 January 2012
Premiums
Surrenders
Maturities/deaths
Net fl ows
Shareholders' transfers post-tax
Investment-related items and other movements
Foreign exchange translation differences
Acquisition of REALIC
At 31 December 2012
Comprising:
Policyholder liabilities
Unallocated surplus of with-profi ts funds
Average policyholder liability balances*
2012
2011
Insurance operations £m
Note
UK
US
Asia
Total
135,717
60,523
28,740
224,980
125,530
10,187
6,988
(4,255)
(7,813)
(5,080)
(216)
5,862
(94)
60,523
–
12,914
(4,270)
(820)
7,824
–
136
706
28,674
66
5,079
(2,237)
(664)
2,178
(30)
365
(341)
214,727
10,253
24,981
(10,762)
(9,297)
4,922
(246)
6,363
271
136,189
69,189
30,912
236,290
127,024
9,165
136,189
8,340
(4,785)
(8,009)
(4,454)
(205)
13,006
(98)
–
69,189
–
69,189
14,907
(4,356)
(954)
9,597
–
4,241
(3,678)
12,912
30,862
50
30,912
5,620
(2,541)
(658)
2,421
(31)
2,178
(816)
–
227,075
9,215
236,290
28,867
(11,682)
(9,621)
7,564
(236)
19,425
(4,592)
12,912
144,438
92,261
34,664
271,363
133,912
10,526
130,468
126,277
92,261
–
77,497
64,856
34,601
63
260,774
10,589
32,732
29,768
240,697
220,901
I1
* Averages have been based on opening and closing balances and adjusted for acquisitions and disposals in the period and exclude unallocated surplus of
with-profi ts funds.
The items above represent the amount attributable to changes in policyholder liabilities and unallocated surplus of with-profi ts funds
as a result of each of the components listed. The policyholder liabilities shown include investment contracts without discretionary
participation features (as defi ned in IFRS 4) and their full movement in the year. The items above are shown gross of reinsurance.
The analysis includes the impact of premiums, claims and investment movements on policyholders’ liabilities. The impact does not
represent premiums, claims and investment movements as reported in the income statement. For example, the premiums shown
above will exclude any deductions for fees/charges and claims represent the policyholder liabilities provision released rather than the
claim amount paid to the policyholder.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
189
c Debt securities and loans
i Information on the credit risks of debt securities
S&P – AAA
S&P – AA+ to AA-
S&P – A+ to A-
S&P – BBB+ to BBB-
S&P – Other
Moody’s – Aaa
Moody’s – Aa1 to Aa3
Moody’s – A1 to A3
Moody’s – Baa1 to Baa3
Moody’s – Other
Implicit ratings of MBS based on NAIC valuations
(see below)
NAIC 1
NAIC 2
NAIC 3-6
Fitch
Other
2012 £m
2011 £m
Insurance operations
UK
US
Asia
Total
insurance
operations
Asset
manage-
ment
Group
total
Group
total
9,200
9,623
23,000
17,720
3,043
187
6,343
7,728
10,230
1,173
785
5,523
3,282
1,906
3,132
10,172
21,489
34,010
29,856
7,348
1,046
106
206
235
37
11,218
21,595
34,216
30,091
7,385
12,593
17,038
31,161
25,860
6,346
62,586
25,661
14,628 102,875
1,630 104,505
92,998
8,446
1,420
927
1,385
307
55
18
21
56
13
1,389
271
169
375
112
9,890
1,709
1,117
1,816
432
135
36
–
12
–
10,025
1,745
1,117
1,828
432
9,615
806
1,352
1,228
318
12,485
163
2,316
14,964
183
15,147
13,319
–
–
–
–
527
8,264
2,934
207
321
3,462
184
3,523
–
–
–
–
2,934
207
321
3,462
–
–
–
–
2,934
207
321
2,577
147
368
3,462
3,092
533
3,925
1,244
15,712
21
12
1,265
15,724
1,039
14,050
Total debt securities
83,862
32,993
21,402 138,257
1,846 140,103 124,498
In the table above, with the exception of some 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. For some mortgage-backed securities within Jackson, the table above includes these
securities using the regulatory ratings detail issued by the National Association of Insurance Commissioners (NAIC). These
regulatory ratings levels were established by external third parties (PIMCO for residential mortgage-backed securities and
BlackRock Solutions for commercial mortgage-backed securities). Notes D2(c), D3(c), D4(c) and E2 provide further details on
the credit risks of debt securities by segment.
B
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m
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190
Financial statements Prudential plc Annual Report 2012
B: Summary of results continued
B5: Group statement of fi nancial position continued
ii Group’s exposure to holdings in asset-backed securities
The Group’s exposure to holdings in asset-backed securities (ABS), which comprise residential mortgage-backed securities
(RMBS), commercial mortgage-backed securities (CMBS), collateralised debt obligations (CDO) funds and other asset-backed
securities, at 31 December 2012 is as follows:
Shareholder-backed operations:
UK insurance operations (2012: 34% AAA, 17% AA) note (i)
US insurance operations D3
Asia insurance operations note (ii)
Asset management operations note (iii)
With-profi ts operations:
UK insurance operations (2012: 60% AAA, 9% AA) note (i)
Asia insurance operations note (ii)
Total
2012 £m
2011 £m
1,408
5,626
144
566
7,744
5,850
241
6,091
1,358
5,380
176
594
7,508
5,351
454
5,805
13,835
13,313
Notes
(i)
UK insurance operations
All of the exposure of the shareholder-backed business relates to the UK market and primarily relates to investments held by PRIL. Of the £5,850 million
(2011: £5,351 million) relating to with-profi ts business, £1,697 million (2011: £1,314 million) relates to exposure to the US and with the remaining exposure
being primarily to the UK market.
(ii) Asia insurance operations
The Asia insurance operations’ exposure to asset-backed securities is primarily held by the with-profi ts operations. Of the £241 million, 63 per cent
(2011: £454 million, 75 per cent) are investment grade.
(iii) Asset management operations
Asset management operations’ exposure to asset-backed securities is held by Prudential Capital with no sub-prime exposure. Of the £566 million,
77 per cent (2011: £595 million, 77 per cent) are graded AAA.
iii Group sovereign debt exposure
The exposures held by the shareholder-backed business and with-profi ts funds in sovereign debts and bank debt securities
at 31 December 2012 are given within the Risk and capital management section of the Business review under Credit risk.
iv 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.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
191
C: Group risk management
C: Group risk management
Disclosures concerning the Group’s risk framework and the management of the risk attached to the Group’s fi nancial instruments and
insurance liabilities, together with the inter-relationship with the management of capital have been included in the audited sections of
the Risk and capital management disclosure in the Business review. Additional disclosures are shown in section D1.
C
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192
Financial statements Prudential plc Annual Report 2012
D: Life assurance business
D1: Group overview
a Products and classifi cation for IFRS reporting
The measurement basis of assets and liabilities of long-term business contracts is dependent upon the classifi cation of the contracts
under IFRS. Under IFRS 4, contracts are initially classifi ed as being either ‘insurance’ contracts, if the level of insurance risk in the
contracts is signifi cant, or ‘investment’ contracts, if the risk is insignifi cant.
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-profi ts 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 Modifi ed
Statutory Basis (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:
AAAAAAAAAAAAAAAA UK insurance operations
– bulk and individual annuity business, and other categories of non participating UK business;
AAAAAAAAAAAAAAAA Jackson
– fi xed and variable annuity business and life insurance; and
AAAAAAAAAAAAAAAA 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 classifi ed as investment contracts that do not contain discretionary participation features, can
be summarised as:
AAAAAAAAAAAAAAAA UK
– certain unit-linked savings and similar contracts;
AAAAAAAAAAAAAAAA Jackson
– Guaranteed Investment Contracts (GICs) and funding agreements
– minor amounts of ‘annuity certain’ contracts; and
AAAAAAAAAAAAAAAA Prudential Corporation Asia
– minor amounts for a number of small categories of business.
b Concentration of risk
i Business accepted
The Group’s exposure to life assurance risks is well diversifi ed. 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’s capital and profi tability metrics involving IGD, Group
economic capital, EEV and IFRS, to help identify concentrations of risks by risk types, products and business units, as well as the
benefi ts of diversifi cation of risks.
An example of the diversifi cation benefi ts 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 benefi t from increasing rates. Conversely, these Asian business units are
sensitive towards low interest rates, whereas certain products in the US benefi t 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 refl ects 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.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
193
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 fi nancial 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. At 31 December 2012
the reinsurers’ share of insurance contract liabilities was £6,859 million (2011: £1,344 million). The increase arises from the
acquisition of REALIC. Further details are shown in note D3(f) and I1. At 31 December 2012, 97 per cent (2011: 91 per cent)
of the reinsurance recoverable insurance assets were ceded by the Group’s UK and US operations, of which 92 per cent
(2011: 94 per cent) of the balance were from reinsurers with Standard & Poor’s rating A- and above.
c Guarantees
Notes D2(d), D3(d) and D4(d) provide details of guarantee features of the Group’s life assurance products. In the UK, guarantees of
the with-profi ts products are valued for accounting purposes on a market consistent basis for 2012 as described in section D2(e)(ii).
The UK business also has products with guaranteed annuity option features, mostly within Scottish Amicable Insurance Fund (SAIF),
as described in section D2(d). There is little exposure to fi nancial options and guarantees in the shareholder-backed business of the
UK operations. The US business annuity products have a variety of option and guarantee features as described in section D3(d).
Jackson’s derivative programme seeks to manage the exposures as described in section D3(h).
d Sensitivity of EEV shareholders’ basis profi t and equity to market and other risks
The Group prepares supplementary EEV basis fi nancial statements for half-yearly and annual publication. These statements include
sensitivity disclosures which are part of the market risk information provided to key management.
e Sensitivity of IFRS basis profi t or loss and shareholders’ equity to market and other risks
i Overview of risks by business unit
The fi nancial 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 profi t or loss
and shareholders’ equity.
Market risk is the risk that the fair value or future cash fl ows of a fi nancial instrument or, in the case of liabilities of insurance
contracts, their carrying value, will fl uctuate because of changes in market prices. Market risk comprises three types of risk,
namely:
AAAAAAAAAAAAAAAAA Currency risk: due to changes in foreign exchange rates;
AAAAAAAAAAAAAAAAA Interest rate risk: due to changes in market interest rates; and
AAAAAAAAAAAAAAAAA Other price risk: due to fl uctuations 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.
Three key points are to be noted, namely:
AAAAAAAAAAAAAAAAA The Group’s with-profi ts 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-profi ts business,
shareholder results are not directly affected by market value movements on the assets of these funds;
AAAAAAAAAAAAAAAAA The Group’s shareholder results are most sensitive to market risks for assets of the shareholder-backed business; and
AAAAAAAAAAAAAAAAA The main exposures of the Group’s IFRS basis results to market risk for its life assurance operations on investments of the
shareholder-backed business are for debt securities.
The most signifi cant items for which the IFRS shareholders’ profi t or loss and shareholders’ 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.
D
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194
Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D1: Group overview continued
Type of business
Market and credit risk
Insurance and lapse risk
Investments/derivatives
Liabilities/unallocated surplus Other exposure
UK insurance operations (see also section D2(h))
With-profi ts 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)
Shareholder-backed
annuity business
Asset/liability mismatch risk
Credit risk for assets
covering liabilities and
shareholder capital
Interest rate risk for assets
in excess of liabilities
ie assets representing
shareholder capital
US insurance operations (see also section D3(h))
All business
Currency risk
Variable annuity
business
Fixed indexed annuity
business
Net effect of market risk arising from incidence 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 indexed annuities,
Fixed annuities and
GIC business
Credit risk
Interest rate risk
earned by M&G
Investment
performance through
asset management fees
Persistency risk
Mortality experience
and assumptions for
longevity
Persistency risk
Spread difference
between earned
rate and
rate credited
to policyholders
Lapse risk, but the
effects of extreme
events are mitigated
by the application of
market value
adjustments and by
the use of swaption
contracts
Profi t and loss and
shareholders’ equity are
volatile for these risks as
they affect the values of
derivatives and embedded
derivatives and
impairment losses.
In addition, shareholders’
equity is volatile for the
incidence of these risks on
unrealised appreciation of
fi xed income securities
classifi ed as available-for-sale
under IAS 39
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
195
Type of business
Market and credit risk
Insurance and lapse risk
Investments/derivatives
Liabilities/unallocated surplus Other exposure
Asia insurance operations (see also section D4(h))
All business
Currency risk
With-profi ts business
Net neutral direct exposure (Indirect exposure only)
Unit-linked business
Net neutral direct exposure (Indirect exposure only)
Asset/liability mismatch risk
Non-participating
business
Credit risk
Interest rate and
price risk
Interest rates for those
operations where the
basis of insurance
liabilities is sensitive to
current market
movements
Investment performance
subject to smoothing
through declared
bonuses
Investment performance
through asset
management fees
Mortality and
morbidity risk
Persistency risk
.
ii IFRS shareholder results – Exposures for market and other risk
Key Group exposures
Detailed analyses of sensitivity of IFRS basis profi t or loss and shareholders’ equity to key market and other risks are provided in
notes D2(h), D3(h), D4(h) and E4. The sensitivity analyses provided show the effect on profi t or loss and shareholders’ equity to
changes in the relevant risk variables, all of which are reasonably possible at the relevant balance sheet date. Other features to note
are as follows.
UK
The IFRS operating profi t 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 UK shareholder-backed annuity
business. At the total IFRS profi t level, the result is particularly sensitive to temporary value movements on assets backing US and
Asia policyholder liabilities (which in general are measured on a basis that is insensitive to current market movements) and
shareholder equity.
US
For Jackson, at the level of operating profi t based on longer-term investment returns, the results are sensitive to market conditions
to the extent of income earned on spread-based products and second order equity-based exposure in respect of variable annuity
asset management fees. Further information is given below in note D3h(iv).
Jackson’s derivative programme is used to manage interest rate risk associated with a broad range of products and equity
market risk attaching to its equity-based products. Movements in equity markets, 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.
Combined with the use of US GAAP measurement (as ‘grandfathered’ under IFRS 4) for the insurance contracts assets and
liabilities which is largely insensitive to current period market movements, the Jackson total profi t (ie including short-term
fl uctuations in investment returns) is very sensitive to market movements. In addition to these effects the Jackson shareholders’
equity is sensitive to the impact of interest rate and credit spread movements on the value of fi xed income securities. Movements
in unrealised appreciation on these securities are included as movement in shareholders’ equity (ie outside the income statement).
See D3(h) for details of the hedging.
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Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D1: Group overview continued
Asia
For Asia operations, the operating profi t based on longer-term investment returns is mainly affected by the impact of market levels
on unit-linked business persistency, and other insurance risks.
At the total IFRS profi t level the Asia result is affected by short-term value movements on the asset portfolio for non-linked
shareholder-backed business.
Impact of diversifi cation on risk exposure
The Group enjoys signifi cant diversifi cation benefi ts. This arises because not all risk scenarios will happen at the same time and
across all geographic regions. Relevant correlation factors include:
Correlation across geographic regions
AAAAAAAAAAAAAAAAA Financial risk factors
AAAAAAAAAAAAAAAAA Non-fi nancial risk factors
Correlation across risk factors
AAAAAAAAAAAAAAAAA Longevity risk
AAAAAAAAAAAAAAAAA Expenses
AAAAAAAAAAAAAAAAA Persistency
AAAAAAAAAAAAAAAAA Other risks
The effect of Group diversifi cation across the Group’s life businesses is to signifi cantly reduce the aggregate standalone volatility
risk to IFRS operating profi t 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 refl ect the actuarially determined best estimate of the likely incidence of these factors on contract duration. Details are
shown in sections D2(i), D3(i) and D4(i).
In the years 2008 to 2012, claims paid on the Group’s life assurance contracts, including those classifi ed as investment contracts
under IFRS 4, ranged from £17 billion to £21 billion. Indicatively, it is to be expected that, of the Group’s policyholder liabilities
(excluding unallocated surplus) at 31 December 2012 of £260.8 billion, the amounts likely to be paid in 2013 will be of a similar
magnitude.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
197
D2: UK insurance operations
a Summary statement of fi nancial position
In order to show the statement of fi nancial position by reference to the differing degrees of policyholder and shareholder economic
interest of the different types of fund and business, the analysis below is structured to show separately assets and liabilities of the
Scottish Amicable Insurance Fund (SAIF), the PAC with-profi ts sub-fund (WPSF), unit-linked assets and liabilities and annuity
(principally PRIL) and other long-term business.
£97 billion of the £150 billion of investments are held by SAIF and the PAC WPSF. Shareholders are exposed only indirectly to value
movements on these assets.
By operating segment
Assets
Intangible assets attributable to shareholders:
Deferred acquisition costs and other intangible assets
Total
Intangible assets attributable to with-profi ts funds:
In respect of acquired subsidiaries for venture fund and
other investment purposes
Deferred acquisition costs
Total
Total intangible assets
Deferred tax assets
Other non-investment and non-cash assets
Investments of long-term business and other operations:
Investment propertiesnote (iv)
Associate investments accounted for using the
equity method
Financial investments:
Loansnote (v)
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investmentsnote (vi)
Deposits
Total investments
Properties held for sale
Cash and cash equivalents
Total assets
31 Dec 2012 £m
Other funds and subsidiaries
31 Dec
2011 £m
Scottish
Amicable
Insurance
Fund
note (iii)
PAC with-
profi ts
fund
notes (i), (ii)
Unit-
linked
assets
and
liabilities
Annuity
and other
long-term
business
UK
insurance
operations
Total
UK
insurance
operations
Total
Total
–
–
–
–
–
–
–
–
178
6
184
184
–
–
–
–
–
–
105
105
105
105
–
–
–
–
–
–
105
105
105
105
178
6
184
289
113
113
178
6
184
297
1
369
113
2,440
–
385
69
2,230
69
2,615
183
5,424
231
4,771
500
8,159
622
1,571
2,193 10,852
10,712
–
–
–
72
72
72
70
116
1,264
1,993
–
2,070 19,875 14,071
3,864 46,643
3,958
8,395
3,373
11 14,082 36,027
6,310 27,045 33,355 83,862
4,576
1,826 11,131
325
1,004
283
910
10
822
1,264
335
3,115
36,722
77,953
4,568
9,287
7,743 89,023 21,835 31,292 53,127 149,893 142,427
–
120
98
1,077
–
889
–
552
–
1,441
98
2,638
–
2,965
8,233 92,935 23,109 34,248 57,357 158,525 150,691
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Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D2: UK insurance operations continued
By operating segment
Equity and liabilities
Equity
Shareholders’ equity
Non-controlling interests
Total equity
Liabilities
Policyholder liabilities and unallocated surplus of with-profi ts
funds:
Contract liabilities (including amounts in respect of
contracts classifi ed as investment contracts under
IFRS 4)
Unallocated surplus of with-profi ts funds (refl ecting
application of ‘realistic’ basis provisions for UK
regulated with-profi ts funds)
31 Dec 2012 £m
Other funds and subsidiaries
31 Dec
2011 £m
Scottish
Amicable
Insurance
Fund
note (iii)
PAC with-
profi ts
fund
notes (i), (ii)
Unit-
linked
assets
and
liabilities
Annuity
and other
long-term
business
UK
insurance
operations
Total
UK
insurance
operations
Total
Total
–
–
–
–
1
1
–
–
3,033
–
3,033
–
3,033
1
2,581
33
–
3,033
3,033
3,034
2,614
7,878 76,529 22,197 27,308 49,505 133,912 127,024
– 10,526
–
–
– 10,526
9,165
Total
7,878 87,055 22,197 27,308 49,505 144,438 136,189
Operational borrowings attributable to shareholder-fi nanced
operations
Borrowings attributable to with-profi ts funds
Deferred tax liabilities
Other non-insurance liabilities
Total liabilities
Total equity and liabilities
–
17
39
299
–
1,016
663
4,200
1
–
–
911
126
–
483
3,298
127
–
483
4,209
127
1,033
1,185
8,708
103
972
1,349
9,464
8,233 92,934 23,109 31,215 54,324 155,491 148,077
8,233 92,935 23,109 34,248 57,357 158,525 150,691
Notes
(i)
For the purposes of this table and subsequent explanation, references to the WPSF also include, for convenience, the amounts attaching to the Defi ned
Charges Participating Sub-fund which comprises 3.3 per cent of the total assets of the WPSF and includes the with-profi ts annuity business transferred
to Prudential from the Equitable Life Assurance Society on 1 December 2007 (with assets of approximately £1.7 billion). Profi ts to shareholders on this
with-profi ts annuity business emerge on a ‘charges less expenses’ basis and policyholders are entitled to 100 per cent of the investment earnings.
Included in the PAC with-profi ts fund is £13.3 billion (2011: £12.6 billion) of non-profi ts annuities liabilities.
Excluding policyholder liabilities of the Hong Kong branch of PAC.
(ii)
(iii) SAIF is a separate sub-fund within the PAC long-term business fund.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
199
(iv)
Investment properties
At 31 December 2012, the Group’s UK insurance operations had £10,852 million (2011: £10,712 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 A3.
Offi ce buildings
Shopping centres/commercial
Retail warehouses/industrial
Development
Other
Total
2012
2011
£m
4,195
4,389
1,624
465
179
%
38.7
40.4
15.0
4.3
1.6
£m
4,443
4,315
1,406
383
165
%
41.5
40.3
13.1
3.6
1.5
10,852
100.0
10,712
100.0
47.6 per cent (2011: 42.9 per cent) of the UK held investment property is located in London and Southeast England with 35.4 per cent (2011: 41.1 per cent)
located throughout the rest of the UK and the remaining 17.0 per cent (2011: 16.0 per cent) located overseas.
Loans
The loans of the Group’s UK insurance operations comprise:
(v)
SAIF and PAC WPSF:
Mortgage loans*
Policy loans
Other loans†
Total SAIF and PAC WPSF loans
Shareholder-backed:
Mortgage loans*
Other loans
Total shareholder-backed loans
Total UK insurance operations loans
2012 £m
2011 £m
1,311
16
782
2,109
1,259
5
1,264
3,373
1,036
20
917
1,973
1,137
5
1,142
3,115
* The mortgage loans are collateralised by properties. By carrying value, 86 per cent of the £1,259 million held for shareholder-backed business relates to
lifetime (equity release) mortgage business which has an average loan to property value of 29 per cent.
† Other loans held by the PAC with-profi ts fund are all commercial loans and comprise mainly syndicated loans.
(vi) Other investments comprise:
Derivative assets*
Partnerships in investment pools and other†
2012 £m
2011 £m
1,349
3,227
4,576
1,461
3,107
4,568
* Aft er including derivative liabilities of £1,007 million (2011: £1,298 million), which are also included in the statement of fi nancial position, the overall
derivative position was a net asset of £342 million (2011: £163 million).
† Partnerships in investment pools and other comprise mainly investments held by the PAC with-profi ts fund. These investments are primarily investments
in limited partnerships and additionally, investments in property funds.
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Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D2: UK insurance operations continued
b Reconciliation of movement in policyholder liabilities and unallocated surplus of with-profi ts funds
A reconciliation of the total policyholder liabilities and unallocated surplus of with-profi ts funds of UK insurance operations from the
beginning of the year to the end of the year is as follows:
At 1 January 2011
Comprising:
Policyholder liabilities
Unallocated surplus of with-profi ts funds
Premiums
Surrenders
Maturities/Deaths
Net fl owsnote (a)
Shareholders’ transfers post tax
Switches
Investment-related items and other movementsnote (b)
Foreign exchange translation differences
Other shareholder-backed
funds and subsidiaries
SAIF and PAC
with-profi ts
sub-fund
£m
Unit-linked
liabilities
£m
Annuity
and other
long-term
business
£m
Total
£m
91,773
21,671
22,273
135,717
81,586
10,187
3,413
(2,285)
(5,551)
(4,423)
(216)
(237)
3,338
(94)
21,671
–
1,854
(1,851)
(655)
(652)
–
237
25
–
22,273
–
1,721
(119)
(1,607)
(5)
–
–
2,499
–
125,530
10,187
6,988
(4,255)
(7,813)
(5,080)
(216)
–
5,862
(94)
At 31 December 2011/1 January 2012
90,141
21,281
24,767
136,189
Comprising:
Policyholder liabilities
Unallocated surplus of with-profi ts funds
Premiums
Surrenders
Maturities/Deaths
Net fl owsnote (a)
Shareholders’ transfers post tax
Switches
Investment-related items and other movementsnote (b)
Foreign exchange translation differences
At 31 December 2012
Comprising:
Policyholder liabilities
Unallocated surplus of with-profi ts funds
Average policyholder liability balances*
2012
2011
80,976
9,165
4,539
(2,200)
(5,664)
(3,325)
(205)
(236)
8,656
(98)
21,281
–
1,775
(2,378)
(658)
(1,261)
–
236
1,941
–
24,767
–
2,026
(207)
(1,687)
132
–
–
2,409
–
127,024
9,165
8,340
(4,785)
(8,009)
(4,454)
(205)
–
13,006
(98)
94,933
22,197
27,308
144,438
84,407
10,526
82,691
81,281
22,197
–
21,739
21,476
27,308
–
133,912
10,526
26,038
23,520
130,468
126,277
* Averages have been based on opening and closing balances and exclude unallocated surplus of with-profi ts funds.
Notes
(a) Net outfl ows decreased from £5,080 million in 2011 to £4,454 million in 2012. An improvement in the net outfl ows of the with-profi ts business, following
increased sales of with-profi ts bonds in the year, has been greater than the increase in outfl ows in the unit-linked business. The levels of infl ows/outfl ows
for unit-linked business is driven by the activity of corporate pension schemes with transfers in or out from only one or two schemes infl uencing the level
of fl ows in the year. The net fl ows of negative £1,261 million in unit-linked business was a result of lower single premiums in and higher transfers out of this
business in 2012.
Investment-related items and other movements of £13,006 million across fund types refl ected the continued strong performance of UK equity markets in
2012, as well as investment gains from debt securities following falling bond yields, and other asset classes.
(b)
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
201
Information on credit risk of debt securities
c
The following table summarises by rating the securities held by UK insurance operations as at 31 December 2012 and 2011:
UK insurance operations
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
31 Dec 2012 £m
Other funds and subsidiaries
31 Dec
2011 £m
Scottish
Amicable
Insurance
Fund
PAC
with-
profi ts
fund
441
527
4,716
4,908
1,031 12,345
911 10,614
2,358
224
Unit-
linked
assets
582
829
1,805
1,340
115
PRIL
3,023
3,041
6,934
4,210
307
Other
annuity
and
long-term
business
Total
Total
9,200
438
318
9,623
885 23,000
645 17,720
3,043
39
9,928
8,647
21,474
15,746
3,175
3,134 34,941
4,671 17,515
2,325 62,586
58,970
241
41
32
54
15
3,780
538
505
818
224
1,239
106
26
113
30
2,557
622
321
370
30
629
113
43
30
8
8,446
1,420
927
1,385
307
7,945
651
1,008
1,030
242
383
5,865
1,514
3,900
823 12,485
10,876
20
327
295
5,542
26
99
165
2,157
21
139
527
8,264
492
7,615
Total debt securities
3,864 46,643
6,310 23,737
3,308 83,862
77,953
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. The £8,264 million total debt securities
held at 31 December 2012 (2011: £7,615 million) which are not externally rated are either internally rated or unrated. These are
analysed as follows:
Internal ratings or unrated:
AAA to A-
BBB to B-
Below B- or unrated
Total
2012 £m
2011 £m
3,150
3,752
1,362
8,264
2,726
3,773
1,116
7,615
The majority of unrated debt security investments were held in SAIF and the PAC with-profi ts sub-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 £2,296 million
PRIL and other annuity and long-term business investments which are not externally rated, £6 million were internally rated AAA,
£429 million AA, £737 million A, £895 million BBB, £115 million BB and £114 million were internally rated B+ and below or unrated.
During 2011 Standard & Poor’s withdrew its ratings of debt securities issued by a number of sovereigns. Where these are no longer
available Moody’s ratings have been used. This primarily impacts the UK and Asia insurance operations.
As detailed in note D2(h) below, the primary sensitivity of IFRS basis profi t or loss and shareholders’ equity relates to non-linked
shareholder-backed business which is represented by ‘PRIL’ and ‘other annuity and long-term business’ in the table above.
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Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D2: UK insurance operations continued
d Products and guarantees
Prudential’s long-term products in the UK consist of life insurance, pension products and pension annuities.
These products are written primarily in:
AAAAAAAAAAAAAAAA One of three separate sub-funds of the PAC long-term fund, namely the with-profi ts sub-fund (WPSF), SAIF, and the non-profi t
sub-fund;
AAAAAAAAAAAAAAAA Prudential Annuities Limited (PAL), which is owned by the PAC with-profi ts sub-fund;
AAAAAAAAAAAAAAAA Prudential Retirement Income Limited (PRIL), a shareholder-owned subsidiary; or
AAAAAAAAAAAAAAAA Other shareholder-backed subsidiaries writing mainly non-profi t unit-linked business.
i With-profi ts products and PAC with-profi ts sub-fund
Within the statement of fi nancial position of UK insurance operations at 31 December 2012, as shown in note D2(a), there are
policyholder liabilities and unallocated surplus of £87.1 billion (2011: £81.6 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-profi ts business but it also contains some non-profi t business (unit-linked, term assurances and annuities). The WPSF’s profi ts
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 £47 million at 31 December 2012 (2011: £90 million) to honour guarantees on a small amount of
guaranteed annuity products. SAIF’s exposure to guaranteed annuities is described below.
With-profi ts products provide returns to policyholders through bonuses that are ‘smoothed’. There are two types of bonuses:
‘annual’ and ‘fi nal’. Annual bonuses are declared once a year, and once credited, are guaranteed in accordance with the terms of
the particular product. Unlike annual bonuses, fi nal bonuses are guaranteed only until the next bonus declaration. The main factors
that infl uence the determination of bonus rates are the return on the investments of the with-profi ts fund, infl ation, 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 infl uences on bonus rates.
A high proportion of the assets backing the with-profi ts business are invested in equities and real estate. If the fi nancial strength
of the with-profi ts business is affected, then a higher proportion of fi xed interest or similar assets might be held by the fund.
Further details on the determination of the two types of the bonuses: ‘regular’ and ‘fi nal’, the application of signifi cant
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 of directors (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. 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 fi nal 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 fi nal 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 as explained below.
In general, the same fi nal bonus scale applies to maturity, death and surrender claims except that:
AAAAAAAAAAAAAAAAA The total surrender value may be impacted by the application of a Market Value Reduction for accumulating with-profi ts policies
and is the surrender bases for conventional with-profi ts business; and
AAAAAAAAAAAAAAAAA For the SAIF and Scottish Amicable, the fi nal bonus rates applicable on surrender may be adjusted to refl ect expected future
bonus rates.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
203
Application of signifi cant judgement
The application of the above method for determining bonuses requires the PAC Board to apply signifi cant judgement in many
respects, including in particular the following:
AAAAAAAAAAAAAAAAA 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 defi ned;
AAAAAAAAAAAAAAAAA Smoothing of investment returns: This is an important feature of with-profi ts products. Determining when particular
circumstances, such as a signifi cant 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 signifi cant judgement; and
AAAAAAAAAAAAAAAAA Determining at what level to set bonuses to ensure that they are competitive: The overall return to policyholders is an important
competitive measure for attracting new business.
Key assumptions
As noted above, the overall rate of return on investments and the expectation of future investment returns are the most important
infl uences 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-profi ts business as described above. As such, it is not possible to specifi cally
quantify the effects of each of these assumptions, or of reasonably likely changes in these assumptions.
Prudential’s approach, in applying signifi cant judgement and discretion in relation to determining bonus rates, is consistent
conceptually with the approach adopted by other fi rms that manage a with-profi ts business. It is also consistent with the
requirements of UK law, which require all UK fi rms that carry out a with-profi ts business to defi ne, and make publicly available,
the Principles and Practices of Financial Management (PPFM) that are applied in the management of their with-profi ts funds.
Accordingly, Prudential’s PPFM contains an explanation of how it determines regular and fi nal bonus rates within the
discretionary framework that applies to all with-profi ts policies, subject to the general legislative requirements applicable.
The purpose of Prudential’s PPFM is therefore to:
AAAAAAAAAAAAAAAAA Explain the nature and extent of the discretion available;
AAAAAAAAAAAAAAAAA Show how competing or confl icting 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
AAAAAAAAAAAAAAAAA Provide a knowledgeable observer (eg a fi nancial adviser) with an understanding of the material risks and rewards from starting
and continuing to invest in a with-profi ts policy with Prudential.
Furthermore, in accordance with industry-wide regulatory requirements, the PAC Board has appointed:
AAAAAAAAAAAAAAAAA An Actuarial Function Holder who provides the PAC Board with all actuarial advice;
AAAAAAAAAAAAAAAAA A With-Profi ts Actuary whose specifi c 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 confl icting interests have been
addressed; and
AAAAAAAAAAAAAAAAA A With-Profi ts Committee of independent individuals, which assesses the degree of compliance with the PPFM and the manner
in which confl icting rights have been addressed.
Smoothing of investment return
In determining bonus rates for the UK with-profi ts policies, smoothing is applied to the allocation of the overall earnings of the UK
with-profi ts fund of which the investment return is a signifi cant element. The smoothing approach differs between accumulating
and conventional with-profi ts policies to refl ect 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 fl exibility may
be required in certain circumstances, for example, following a signifi cant 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.
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Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D2: UK insurance operations continued
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-profi ts fund for each year presented.
Net income of the fund:
Investment return
Claims incurred
Movement in policyholder liabilities
Add back policyholder bonuses for the year (as shown below)
Claims incurred and movement in policyholder liabilities
(including charge for provision for asset shares and excluding policyholder bonuses)
Earned premiums, net of reinsurance
Other income
Acquisition costs and other 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
2012 £m
2011 £m
8,350
(6,857)
(3,989)
1,865
(8,981)
4,558
39
(740)
(292)
2,934
(863)
2,071
1,865
206
2,071
4,094
(6,411)
(614)
1,945
(5,080)
3,404
17
(696)
(63)
1,676
485
2,161
1,945
216
2,161
ii Annuity business
Prudential’s conventional annuities include level, fi xed-increase and infl ation-linked annuities, the link being to the Retail Prices
Index (RPI) in the majority of cases. They are mainly written within the subsidiaries PAL, PRIL, the PAC non-profi t sub-fund and
the PAC with-profi ts sub-fund, but there are some annuity liabilities in Prudential Pensions Limited and SAIF.
Prudential’s fi xed-increase annuities incorporate automatic increases in annuity payments by fi xed 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-profi ts annuities, which are written in the WPSF, combine the income features of annuity products with the
investment smoothing features of with-profi ts 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 specifi c 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 2012, £41.7 billion (2011: £38.3 billion) of investments relate to non-profi t annuity business of the PAC WPSF
(including PAL) and the annuity business of PRIL. These investments are predominantly in debt securities (including retail price
index-linked bonds to match retail price index-linked annuities), loans, deposits and property, 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 benefi t of policyholders of SAIF. Shareholders have no interest in the profi ts of this fund although they
are entitled to asset management fees on this business.
The process for determining policyholder bonuses of SAIF with-profi ts policies, which constitute the vast majority of obligations
of the funds, is similar to that for the with-profi ts 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 benefi ts ie in excess of those based
on asset share.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
205
Provision is made for the risks attaching to some SAIF unitised with-profi ts policies that have (Market Value Reduction)
MVR-free dates and for those SAIF products which have a guaranteed minimum benefi t on death or maturity of premiums
accumulated at 4 per cent per annum.
The Group’s main exposure to guaranteed annuities in the UK is through SAIF and a provision of £371 million was held in
SAIF at 31 December 2012 (2011: £370 million) to honour the guarantees. As SAIF is a separate sub-fund solely for the benefi t
of policyholders of SAIF, this provision has no impact on the fi nancial position of the Group’s shareholders’ equity.
iv Unit-linked (non-annuity) and other non-profi t business
Prudential UK insurance operations also have an extensive book of unit-linked policies of varying types and provide a range
of other non-profi t business such as credit life and protection contracts. These contracts do not contain signifi cant fi nancial
guarantees.
There are no guaranteed maturity values or guaranteed annuity options on unit-linked policies except for minor amounts
for certain policies linked to cash units within SAIF.
e 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-profi ts 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-profi t 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-profi t business a
margin for adverse deviation is added to this amount. Expense infl ation 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 specifi ed in agreements with the Group’s asset
management operations, plus a margin for adverse deviation for non-profi t business.
Tax assumptions are set equal to current rates of taxation.
For non-profi t 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 fi xed interest securities the gross redemption
yield is used, except for the PAL (including the business recaptured by PAC WPSF in 2011) 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 fi xed interest securities and property to refl ect 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 infl ation of maintenance expenses, as well as for the
valuation interest rate as described above.
ii WPSF and SAIF
The policyholder liabilities reported for the WPSF are primarily for two broad types of business. These are accumulating and
conventional with-profi ts 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-profi ts contracts, which refl ects the amounts expected to be paid based on the current
value of investments held by the with-profi ts funds and current circumstances. These contracts are a combination of insurance and
investment contracts with discretionary participation features, as defi ned by IFRS 4.
The FSA’s Peak 2 calculation under the realistic regime requirement is explained further in note A3(2)(a) under the UK regulated
with-profi ts section.
The contract liabilities for with-profi ts business also require assumptions for persistency. These are set based on the results of
recent experience analysis.
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Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D2: UK insurance operations continued
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 refl ected 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 signifi cant increase in the actual
and perceived credit risk associated with corporate bonds as refl ected in the signifi cant 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 allowance for credit risk comprises (i) an amount for long-term best estimate defaults, and (ii) additional provisions for
credit risk premium, downgrade resilience and short-term defaults.
The weighted components of the bond spread over swap rates for shareholder-backed fi xed and linked annuity business for
PRIL at 31 December 2012 and 31 December 2011, based on the asset mix at the relevant balance sheet date are shown below.
31 December 2012
Bond spread over swap ratesnote (i)
Credit risk allowance
Long-term expected defaultsnote (ii)
Additional provisionsnote (iii)
Total credit risk allowance
Liquidity premium
31 December 2011
Bond spread over swap ratesnote (i)
Credit risk allowance
Long-term expected defaultsnote (ii)
Additional provisionsnote (iii)
Total credit risk allowance
Liquidity premium
Pillar 1
regulatory
basis
(bps)
161
15
50
65
96
Adjustment
from
regulatory to
IFRS basis
(bps)
–
–
(23)
(23)
23
Pillar 1
regulatory
basis
(bps)
Adjustment
from
regulatory to
IFRS basis
(bps)
201
15
51
66
135
–
–
(24)
(24)
24
IFRS
(bps)
161
15
27
42
119
IFRS
(bps)
201
15
27
42
159
Notes
(i)
(ii)
Bond spread over swap rates refl ect market observed data.
Long-term expected defaults are derived by applying Moody’s data from 1970 to 2009 and the defi nition of the credit rating used is the second highest
credit rating published by Moody’s, Standard & Poor’s and Fitch.
(iii) Additional provisions comprise credit risk premium, which is derived from Moody’s data from 1970 to 2009, an allowance for a one-notch downgrade
of the portfolio subject to credit risk and an additional allowance for short-term defaults.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
207
The prudent Pillar 1 regulatory basis refl ects the overriding objective of maintaining suffi cient 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’.
Movement in the credit risk allowance for PRIL for the year ended 31 December 2012
The movement during 2012 of the average basis points allowance for PRIL on Pillar 1 regulatory and IFRS bases are as follows:
Total allowance for credit risk at 31 December 2011
Credit rating changes
Asset trading
New business and other
Total allowance for credit risk at 31 December 2012
Pillar 1
regulatory
basis
(bps)
Total
66
3
1
(5)
65
IFRS
(bps)
Total
42
2
1
(3)
42
For periods prior to full year 2011, favourable credit experience was retained in short-term allowances for credit risk on both the
Pillar 1 and IFRS bases. From full year 2011 onwards, the methodology applied is to continue to retain such surplus experience in
the IFRS credit provisions but not for Pillar 1.
Overall the movement has led to the credit allowance for Pillar 1 purposes to be 40 per cent (2011: 33 per cent) of the bond
spread over swap rates. For IFRS purposes it represents 26 per cent (2011: 20 per cent) of the bond spread over swap rates.
The reserves for credit risk allowance at 31 December 2012 for the UK shareholder annuity fund were as follows:
PRIL
PAC non-profi t sub-fund
Total – 31 December 2012
Total – 31 December 2011
Pillar 1
regulatory
basis
£bn
Total
1.9
0.2
2.1
2.0
IFRS
£bn
Total
1.2
0.1
1.3
1.3
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 fl oor. Since 2009, new mortality projection models have been released annually by the CMI. The CMI
2009 model was used to produce the 2010 and 2011 results, with calibration to refl ect an appropriate view of future mortality
improvements. The CMI 2011 model was used to produce the 2012 results, again with calibration to refl ect an appropriate view
of future mortality improvements.
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208
Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D2: UK insurance operations continued
The tables and range of percentages used are set out in the following tables:
2012
In payment
Non-profi t annuities within the WPSF
(including PAL)
PRIL
Males
Females
Males
Females
93% – 99% PCMA00
with future
improvements in line
with Prudential’s own
calibration of the CMI
2011 mortality model,
with a long-term
improvement rate
of 2.25%.
89% – 101% PCFA00
with future
improvements in line
with Prudential’s own
calibration of the CMI
2011 mortality model,
with a long-term
improvement rate
of 1.50%.
92% – 96% PCMA00
with future
improvements in line
with Prudential’s own
calibration of the CMI
2011 mortality model,
with a long-term
improvement rate
of 2.25%.
84% – 97% PCFA00
with future
improvements in line
with Prudential’s own
calibration of the CMI
2011 mortality model,
with a long-term
improvement rate
of 1.50%.
In deferment
AM92 minus 4 years
AF92 minus 4 years
AM92 minus 4 years
AF92 minus 4 years
2011
In payment
Non-profi t annuities within the WPSF
(including 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%.
93% – 94% 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% – 96% 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
2010
In payment
Non-profi t annuities within the WPSF
(including 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
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
209
iv Unit-linked (non-annuity) and other non-profi t 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 refl ects 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 profi le.
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 insignifi cant, the assets and liabilities arising under the contracts are
distinguished between those that relate to the fi nancial 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.
f Reinsurance
The Group’s UK insurance business cedes only minor amounts of business outside the Group. During 2012, reinsurance
premiums for externally ceded business were £135 million (2011: £132 million) and reinsurance recoverable assets were £608 million
(2011: £589 million) in aggregate. The gains and losses recognised in profi t and loss for the 2012 and 2011 contracts were immaterial.
g Eff ect of changes in assumptions used to measure insurance assets and liabilities
Credit risk
There has been no change of approach in the setting of assumption levels.
However, changes in the portfolio have given rise to altered levels of credit risk allowance as set out in note D2 (e)(iii).
2012
Other operating assumption changes
In 2012, for the shareholder-backed business, the net effect of assumption changes, other than the allowance for credit risk described
above was a charge to shareholder results of £17 million. This comprises the aggregate effect of strengthening of mortality
assumptions for the annuity business, offsetting releases of margins and altered expenses and other assumptions.
For the with-profi ts sub-fund, the aggregate effect of assumption changes in 2012 was a net charge to unallocated surplus of
£90 million, relating to changes in mortality and offsetting releases of margins, expense, persistency and economic assumptions.
2011
Other operating assumption changes
In 2011, for the shareholder-backed business, the aggregate effect of assumption changes other than the allowance for credit risk
described above, was a net charge to the shareholder results of £9 million, comprising a number of individually small assumption
changes.
For the with-profi ts sub-fund, the aggregate effect of assumption changes in 2011 was a net charge to unallocated surplus of
£59 million, relating to changes in mortality, expense, persistency and economic assumptions.
h Exposure and sensitivity of IFRS basis profi t or loss and shareholders’ equity to market and other risks
i With-profi ts business
SAIF
Shareholders have no interest in the profi ts of the ring-fenced fund of SAIF but are entitled to the asset management fees paid
on the assets of the fund.
With-profi ts sub-fund business
Shareholder UK results of UK with-profi ts business (including non-participating annuity business of the WPSF and of Prudential
Annuities Limited (PAL), which is owned by the WPSF) are only sensitive to market risk through the indirect effect of investment
performance on declared policyholder bonuses.
The investment assets of PAC with-profi ts funds are subject to market risk. Changes in their carrying value, net of related
changes to asset-share liabilities of with-profi t contracts, affect the level of unallocated surplus of the fund. Therefore, the level of
unallocated surplus is particularly sensitive to the level of investment returns on the portion of the assets that represents surplus.
The effects for 2012 and 2011 are demonstrated in note D5. However, as unallocated surplus is accounted for as a liability under
IFRS, movements in its value do not affect shareholders’ profi t and equity.
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210
Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D2: UK insurance operations continued
The shareholder results of the UK with-profi ts fund correspond to the shareholders’ share of the cost of bonuses declared on the
with-profi ts business which is currently one-ninth of the cost of bonuses declared. Investment performance is a key driver of
bonuses, and hence the shareholders’ share of the cost of bonuses. Due to the ‘smoothed’ basis of bonus declaration, the
sensitivity to investment performance in a single year is low relative to movements in the period to period performance. However,
over multiple periods, it is important.
Mortality and other insurance risk are relatively minor factors in the determination of the bonus rates. Adverse persistency
experience can affect the level of profi tability from with-profi ts but in any given one year, the shareholders’ share of cost of bonus
may only be marginally affected. However, altered persistency trends may affect future expected shareholder transfers.
ii Shareholder-backed annuity business
The principal items affecting the IFRS results of the UK shareholder-backed annuity business are mortality experience and
assumptions, and credit risk. The assets covering the 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 refl ect the market rates of return attaching to the covering assets.
Asset/liability duration matching is reviewed regularly. Except to the extent of any asset/liability duration mismatch and
exposure to credit risk, the sensitivity of the Group’s results to market risk for movements in the carrying value of the liabilities
and covering assets is broadly neutral on a net basis.
The main market risk sensitivity for the UK shareholder-backed annuity business arises from interest rate risk on the debt
securities which substantially represent shareholders’ equity. This shareholders’ 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.
In summary, profi ts from shareholder-backed annuity business are most sensitive to:
AAAAAAAAAAAAAAAAA The extent to which the duration of the assets held closely matches the expected duration of the liabilities under the contracts;
AAAAAAAAAAAAAAAAA Actual versus expected default rates on assets held;
AAAAAAAAAAAAAAAAA The difference between long-term rates of return on corporate bonds and risk-free rates;
AAAAAAAAAAAAAAAAA The variance between actual and expected mortality experience;
AAAAAAAAAAAAAAAAA The extent to which changes to the assumed rate of improvements in mortality give rise to changes in the measurement of
liabilities; and
AAAAAAAAAAAAAAAAA Changes in renewal expense levels.
A decrease in assumed mortality rates of 1 per cent would decrease gross profi ts by approximately £74 million (2011: £64 million).
A decrease in credit default assumptions of fi ve basis points would increase gross profi ts by £157 million (2011: £137 million).
A decrease in renewal expenses (excluding asset management expenses) of 5 per cent would increase gross profi ts by £25 million
(2011: £25 million). The effect on profi ts 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.
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 liabilities of other business and are also broadly insensitive to market risk. Profi ts 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 profi ts are relatively insensitive to changes in mortality experience.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
211
iv Shareholder exposure to interest rate risk and other market risk
By virtue of the fund structure, product features and basis of accounting, the policyholder liabilities of the UK insurance operations
are, except for pension annuity business, not generally exposed to interest rate risk. At 31 December 2012, pension annuity
liabilities accounted for 98 per cent (2011: 98 per cent) of UK shareholder-backed business liabilities. For pension annuity business,
liabilities are exposed to interest rate risk. However, the net exposure to the PAC WPSF (for PAL) and shareholders (for annuity
liabilities of PRIL and the non-profi t 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 profi ts 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 and credit risk.
The estimated sensitivity of the UK non-linked shareholder-backed business (principally pension annuities business) to
a movement in interest rates is as follows:
Carrying value of debt securities and
derivatives
Policyholder liabilities
Related deferred tax effects
Net sensitivity of profi t after tax and
shareholders’ equity
2012 £m
2011 £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%
9,006
(7,878)
(259)
3,993
(3,513)
(110)
(3,265)
2,867
91
(5,983)
5,235
172
7,676
(6,842)
(208)
3,426
(3,060)
(91)
(2,820)
2,510
77
(5,178)
4,593
146
869
370
(307)
(576)
626
275
(233)
(439)
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 fl ows to the policyholder, a fall in their value would have given rise to the following effects on pre-tax profi t, profi t after
tax and shareholders’ equity.
Pre-tax profi t
Related deferred tax effects
Net sensitivity of profi t after tax and shareholders’ equity
2012 £m
2011 £m
A decrease
of 20%
A decrease
of 10%
A decrease
of 20%
A decrease
of 10%
(316)
73
(243)
(158)
36
(122)
(319)
80
(239)
(160)
40
(120)
A 10 or 20 per cent increase in their value would have an approximately equal and opposite effect on profi t and shareholders’
equity to the sensitivities shown above. The market risk sensitivities shown above refl ect the impact of temporary market
movements and therefore, the primary effect of such movements would, in the Group’s segmental analysis of profi ts, be included
within the short-term fl uctuations in investment returns.
In the equity risk sensitivity analysis shown 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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Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D2: UK insurance operations continued
i Duration of liabilities
With the exception of most unitised with-profi ts 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 refl ects the earlier of death, maturity,
or lapsation. In addition, with-profi ts contract liabilities as noted in note D2(e) 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 above show the carrying value of the policyholder liabilities. The tables in the accompanying notes below show the
maturity profi le of the cash fl ows for insurance contracts, as defi ned by IFRS, ie those containing signifi cant insurance risk, and
investment contracts, which do not.
With-profi ts business
2012 £m
Annuity business
(insurance contracts)
Other
Insurance
contracts
Investment
contracts
Total
Non-profi t
annuities
within
WPSF
(including
PAL)
PRIL
Total
Insurance
contracts
Investment
contracts
Total
T OTAL
Policyholders liabilities
37,698 33,486 71,184 13,223 20,114 33,337 13,231 16,160 29,391 133,912
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
45
24
13
8
5
5
39
25
17
11
6
2
42
24
15
10
5
4
30
24
18
12
8
8
2012 %
26
22
17
13
9
13
27
22
18
13
9
11
35
25
17
10
6
7
28
23
17
12
9
11
31
24
17
11
8
9
36
24
16
11
7
6
With-profi ts business
2011 £m
Annuity business
(insurance contracts)
Other
Insurance
contracts
Investment
contracts
Total
Non-profi t
annuities
within
WPSF
(including
PAL)
PRIL
Total
Insurance
contracts
Investment
contracts
Total
T OTAL
Policyholder liabilities
38,974
29,365
68,339 12,637
18,236
30,873 12,885
14,927 27,812 127,024
Expected maturity:
0 to 5 years
5 to 10 years
10 to 15 years
15 to 20 years
20 to 25 years
over 25 years
47
24
13
8
5
3
32
26
19
14
7
2
41
25
16
10
6
2
29
24
18
12
8
9
2011 %
25
22
18
13
10
12
27
22
18
13
9
11
34
25
18
11
7
5
28
22
18
12
9
11
31
24
18
11
7
9
35
24
17
11
7
6
Notes
(i)
The cash fl ow projections of expected benefi t payments used in the maturity profi le table above are from value of in-force business and exclude the value
of future new business, including future vesting of internal pension contracts.
Benefi t payments do not refl ect the pattern of bonuses and shareholder transfers in respect of the with-profi ts business.
Investment contracts under ‘Other’ comprise certain unit-linked and similar contracts accounted for under IAS 39 and IAS 18.
(ii)
(iii)
(iv) For business with no maturity term included within the contracts, for example with-profi ts investment bonds such as Prudence Bonds, an assumption is
made as to likely duration based on prior experience.
The maturity tables shown above have been prepared on a discounted basis. Details of undiscounted cash fl ow for investment contracts are shown in note G2.
(v)
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
213
D3: US insurance operations
a Summary results and statement of fi nancial position
i Results and movements in shareholders’ equity
Operating profi t based on longer-term investment returns
Short-term fl uctuations in investment returns
Amortisation of acquisition accounting adjustments arising on the purchase of REALIC I1
Profi t before shareholder tax
Tax
Profi t for the year
Profi t for the year (as above)
Items recognised in other comprehensive income:
Exchange movements
Unrealised valuation movements on securities classifi ed as available-for-sale:
Unrealised holding gains arising during the year
Deduct net gains included in the income statement
Total unrealised valuation movements
Related change in amortisation of deferred 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:
As previously reported
Effect of change in accounting policy for deferred acquisition costs*
After effect of change
Shareholders’ equity at end of year
2012 £m
2011* £m
964
(90)
(19)
855
(234)
621
651
(167)
–
484
(127)
357
2012 £m
2011* £m
621
(181)
930
(68)
862
(270)
(205)
206
827
(245)
582
4,271
(510)
3,761
4,343
357
35
912
(101)
811
(275)
(187)
384
741
(330)
411
3,815
(465)
3,350
3,761
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy
described in note A5.
Included within the movements in shareholders’ equity is a net increase in value of Jackson’s debt securities classifi ed as
‘available-for-sale’ under IAS 39 of £862 million (2011: £811 million).
With the exception of debt securities for US insurance operations classifi ed 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 classifi ed 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 classifi cation is applied for most of the debt securities
of the Group’s US operations. In 2012, Jackson recorded £37 million (2011: £62 million) of impairment losses arising from:
Residential mortgage-backed securities
Public fi xed income
Other
2012 £m
2011 £m
8
2
27
37
21
–
41
62
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Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D3: US insurance operations continued
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 fl ows, 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 fl ows 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 fl ow shortfall under
management’s base case set of assumptions is so minor that relatively small and justifi able changes to the base case assumptions
would eliminate the need for an impairment loss to be recognised. The impairment loss refl ects the difference between the fair
value and book value.
In 2012, there was a movement in the statement of fi nancial position value for debt securities classifi ed as available-for-sale
from a net unrealised gain of £2,057 million to a net unrealised gain of £2,807 million. The gross unrealised gain in the statement
of fi nancial position increased from £2,303 million at 31 December 2011 to £2,985 million at 31 December 2012, while the gross
unrealised loss decreased from £246 million at 31 December 2011 to £178 million at 31 December 2012.
Available for sale securities
Assets fair valued at below book value
Book value*
Unrealised (loss) gain
Fair value (as included in statement of fi nancial position)
Assets fair valued at or above book value
Book value*
Unrealised gain (loss)
Fair value (as included in statement of fi nancial position)
Total
Book value*
Net unrealised gain (loss)
Fair value (as included in statement of fi nancial position)‡
2012 £m
2011 £m
Changes in
unrealised
appreciation†
Foreign
exchange
translation
Refl ected as part of movement
in consolidated statement of
comprehensive income
59
9
803
(121)
862
(112)
4,551
(178)
4,373
25,467
2,985
28,452
30,018
2,807
32,825
2,455
(246)
2,209
22,504
2,303
24,807
24,959
2,057
27,016
* Book value represents cost/amortised cost of the debt securities.
† Translated at the average rate of US$1.5849: £1.00
‡ Debt securities for US operations included in the statement of fi nancial position at 31 December 2012 comprise:
Available-for-sale
Fair value through profi t and loss:
Securities of consolidated investment funds
Securities held to back liabilities for funds withheld under reinsurance arrangement
2012 £m
2011 £m
32,825
27,016
–
168
6
–
32,993
27,022
Included within the movement in gross unrealised losses for the debt securities of Jackson of £59 million (2011: £122 million) as
shown above was a net decrease in value of £33 million (2011: £12 million increase) relating to the sub-prime and Alt-A securities
as referred to in section B5.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
215
ii Statement of fi nancial position
Assets
Intangible assets attributable to shareholders:
Deferred acquisition costs and other intangibles
Total
Deferred tax assets
Other non-investment and non-cash assetsnote (vi)
Investments of long-term business and other operations:
Investment properties
Financial investments:
Loansnote (ii)
Equity securities and portfolio holdings in unit trustsnote (v)
Debt securities
Other investmentsnote (iii)
Deposits
Total investments
Properties held for sale
Cash and cash equivalents
Total assets
Equity and liabilities
Equity
Shareholders’ equitynote (iii)
Total equity
Liabilities
Policyholder:
Contract liabilities (including amounts in respect of contracts
classifi ed as investment contracts under IFRS 4)note (iv)
Total
Core structural borrowings of shareholder-fi nanced operations
Operational borrowings attributable to shareholder-fi nanced operations
Deferred tax liabilities
Other non-insurance liabilitiesnote (vi)
Total liabilities
Total equity and liabilities
31 Dec 2012 £m
31 Dec 2011* £m
Variable
annuity
separate
account
assets and
liabilities
note (i)
Fixed annuity,
GIC and other
business
note (i)
Total†
Total
–
–
–
–
–
3,222
3,222
1,889
6,792
3,222
3,222
1,889
6,792
3,115
3,115
1,392
1,542
24
24
35
–
49,298
–
–
–
6,235
253
32,993
2,296
211
6,235
49,551
32,993
2,296
211
49,298
42,012
91,310
–
–
–
513
–
513
4,110
38,036
27,022
2,376
167
71,746
3
271
49,298
54,428
103,726
78,069
–
–
4,343
4,343
4,343
4,343
3,761
3,761
49,298
42,963
92,261
49,298
42,963
92,261
–
–
–
–
153
26
2,168
4,775
153
26
2,168
4,775
49,298
50,085
99,383
49,298
54,428
103,726
69,189
69,189
160
127
1,818
3,014
74,308
78,069
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy
described in note A5.
† The statement of fi nancial position at 31 December 2012 includes the assets and liabilities of the acquired REALIC business. Details of the acquisition are
described in note I1.
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Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D3: US insurance operations continued
Notes
(i)
(ii)
Assets and liabilities attaching to variable annuity business that are not held in the separate account are shown within other business.
Loans
The loans of the Group’s US insurance operations comprise:
Mortgage loans*
Policy loans†
Total US insurance operations loans
2012 £m
2011 £m
3,543
2,692
6,235
3,559
551
4,110
* All of the mortgage loans are commercial mortgage loans which are collateralised by properties. The property types are industrial, multi-family
residential, suburban offi ce, retail and hotel. The breakdown by property type is as follows:
Industrial
Multi-family residential
Offi ce
Retail
Hotels
2012 %
2011 %
29
25
19
17
10
100
28
23
19
19
11
100
The US insurance operations’ commercial mortgage loan portfolio does not include any single-family residential mortgage loans and is therefore,
not exposed to the risk of defaults associated with residential sub-prime mortgage loans. The average loan size is £6.3 million (2011: £6.6 million). The
portfolio has a current estimated average loan to value of 65 per cent (2011: 68 per cent) which provides signifi cant cushion to withstand substantial
declines in value.
At 31 December 2012, Jackson had mortgage loans with a carrying value of £78 million where the contractual terms of the agreements had been
restructured. In addition to the regular impairment review aff orded all loans in the portfolio, restructured loans are also reviewed for impairment.
An impairment will be recorded if the expected cash fl ows under the newly restructured terms discounted at the original yield (the pre-structured
interest rate) are below the carrying value of the loan.
† The policy loans are fully secured by individual life insurance policies or annuity policies. The increase in 2012 refl ects the purchase of REALIC as
explained in note I1. The policy loans from the purchase of REALIC amounted to £1,842 million at 31 December 2012, and are accounted for at fair value
through profi t and loss as described above. All other policy loans are accounted for at amortised cost, less any impairment.
(iii) Other investments comprise:
Derivative assets*G3
Partnerships in investment pools and other†
2012 £m
2011 £m
1,546
750
2,296
1,677
699
2,376
* In the US, Prudential uses derivatives:
– To reduce interest rate risk;
– To facilitate effi cient portfolio management to match liabilities under annuity policies; and
– For certain equity-based product management activities.
Aft er taking account of the derivative liabilities of £645 million (2011: £887 million), which are also included in Other non-insurance liabilities, the
derivative position for US operations is a net asset of £901 million (2011: £790 million).
† Partnerships in investment pools and other comprise primarily investments in limited partnerships. These include interests in the PPM America Private
Equity Fund and diversifi ed investments in 167 (2011: 167) other partnerships by independent money managers that generally invest in various equities
and fi xed income loans and securities.
(iv) Summary policyholder liabilities (net of reinsurance) and reserves at 31 December 2012
The policyholder liabilities, net of reinsurers’ share of £6,076 million (2011: £907 million), refl ect balances in respect of the following:
Policy reserves and liabilities on non-linked business:
Reserves for future policyholder benefi ts and claims payable
Deposits on investment contracts (as defi ned under IFRS ‘grandfathered’ US GAAP)
Guaranteed investment contracts
Unit-linked (variable annuity) business
2012 £m
2011 £m
7,663
27,425
1,799
49,298
86,185
518
28,314
1,617
37,833
68,282
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 £825 million (2011: £1,070 million) and are included in ‘Other
non-insurance liabilities’ in the statement of fi nancial position above.
Equity securities and portfolio holdings in unit trusts includes investments in mutual funds, the majority of which are equity based.
(v)
(vi) Reinsurance balances relating to REALIC
Included within Other non-investment and non-cash assets of £6,792 million (2011: £1,542 million) were balances of £6,076 million (2011: £907 million)
for reinsurers’ share of insurance contract liabilities. Of the £6,076 million as at 31 December 2012, £5,234 million related to the reinsurance ceded by the
newly acquired REALIC business. REALIC holds collateral for certain of these reinsurance arrangements with a corresponding funds withheld liability.
As of 31 December 2012, the funds withheld liability of £2,021 million was recorded within Other non-insurance liabilities.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
217
b Reconciliation of movement in policyholder liabilities
A reconciliation of the total policyholder liabilities of US insurance operations from the beginning of the year to the end of the year
is as follows:
US insurance operations
At 1 January 2011
Premiums
Surrenders
Maturities/Deaths
Net fl owsnote (b)
Transfers from general to separate account
Investment-related items and other movements
Foreign exchange translation differencesnote (a)
At 31 December 2011/1 January 2012
Premiums
Surrenders
Maturities/Deaths
Net fl owsnote (b)
Transfers from general to separate account
Investment-related items and other movementsnote (c)
Foreign exchange translation differencesnote (a)
Acquisition of REALICnotes (d), I1
At 31 December 2012
Average policyholder liability balances*
2012
2011
Variable
annuity
separate
account
liabilities
£m
31,203
9,176
(1,898)
(300)
6,978
957
(1,735)
430
Fixed annuity,
GIC and other
business
£m
29,320
3,738
(2,372)
(520)
846
(957)
1,871
276
Total
£m
60,523
12,914
(4,270)
(820)
7,824
–
136
706
37,833
31,356
69,189
10,361
(2,149)
(404)
7,808
1,577
4,014
(1,998)
64
4,546
(2,207)
(550)
1,789
(1,577)
227
(1,680)
12,848
14,907
(4,356)
(954)
9,597
–
4,241
(3,678)
12,912
49,298
42,963
92,261
43,549
34,518
33,948
30,338
77,497
64,856
* Averages have been based on opening and closing balances, and adjusted for acquisitions and disposals in the period.
Notes
(a) Movements in the year have been translated at an average rate of US$1.58/£1.00 (2011: US$1.60/£1.00). The closing balances have been translated at closing
rate of US$1.63/£1.00 (2011: US$1.55/£1.00). Diff erences upon retranslation are included in foreign exchange translation diff erences.
(b) Net fl ows for the year were £9,597 million compared with £7,824 million in 2011 driven largely by increased new business volumes.
(c)
Positive investment-related items and other movements in variable annuity separate account liabilities of £4,014 million for 2012 refl ects the increase in the
US equity market during the year with the S&P index increasing by 13.4 per cent. Fixed annuity, GIC and other business investment and other movements
primarily refl ects the interest credited to policyholder account in the year, net of falls in the technical provisions held for the guarantees issued with variable
annuity business.
(d) The acquisition of REALIC refl ects the liabilities, before reduction for reinsurances ceded, acquired at the date of acquisition.
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Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D3: US insurance operations continued
c
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 US debt securities
2012 £m
2011 £m
4,126
19,699
3,542
27,367
2,400
2,639
587
2,163
16,281
3,198
21,642
2,591
2,169
620
32,993
27,022
* A 1990 SEC rule that facilitates the resale of privately placed securities that are without SEC registration to qualifi ed institutional investors. The rule was designed
to develop a more liquid and effi cient institutional resale market for unregistered securities.
i Credit quality
The following table summarises by rating the debt securities, as at 31 December 2012 and 2011 using Standard & 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
2012 £m
2011 £m
187
6,343
7,728
10,230
1,173
133
4,476
6,382
8,446
999
25,661
20,436
55
18
21
56
13
62
15
29
67
17
163
190
2,934
207
321
3,462
184
3,523
2,577
147
368
3,092
184
3,120
32,993
27,022
* The Securities Valuation Offi ce of the National Association of Insurance Commissioners (NAIC) classifi es debt securities into six quality categories ranging
from Class 1 (the highest) to Class 6 (the lowest). Performing securities are designated as Classes 1 to 5 and securities in or near default are designated Class 6.
† The amounts within Other which are not rated by S&P, Moody’s nor Fitch, nor are MBS securities using the revised regulatory ratings, have the following
NAIC classifi cations:
NAIC 1
NAIC 2
NAIC 3-6
2012 £m
2011 £m
1,453
2,022
48
3,523
1,258
1,792
70
3,120
For some mortgage-backed securities within Jackson, the table above includes these securities using the regulatory ratings
detail issued by the NAIC. These regulatory ratings levels were established by external third parties (PIMCO for residential
mortgage-backed securities and BlackRock Solutions for commercial mortgage-backed securities) based on Jackson’s
carrying value.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
219
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 where markets for the securities are no longer active as a result of market conditions, IAS 39 requires that
valuation techniques be applied. IFRS 7 requires classifi cation of the fair values applied by the Group into a three level hierarchy.
Note G1 sets out further details of the Group’s approach to determining fair value and classifi es these fair values into a three
level hierarchy as required by IFRS 7. At 31 December 2012, 0.1 per cent of Jackson’s debt securities were classifi ed as level 3
(31 December 2011: 0.1 per cent) comprising of fair values where there are signifi cant 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 2012, are exposures to asset-backed securities as follows:
RMBS:
Sub-prime (2012: 15% AAA, 6% AA)
Alt-A (2012: 4% AAA, 1% AA)
Prime including agency (2012: 0% AAA, 75% AA)
CMBS (2012: 40% AAA, 24% AA)
CDO funds (2012: 0% AAA, 27% AA)*, including £nil exposure to sub-prime
Other ABS (2012: 24% AAA, 15% AA), including £nil exposure to sub-prime
Total
* Including Group’s economic interest in Piedmont and other consolidated CDO funds.
2012 £m
2011 £m
261
323
1,816
2,639
44
543
5,626
207
310
2,074
2,169
44
576
5,380
Jackson defi nes 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 classifi ed as available-for-sale in an unrealised loss position
The following table shows the fair value of those securities that are in a gross unrealised loss position for various percentages
of book value at 31 December:
Between 90% and 100%
Between 80% and 90%
Below 80%*
Total
2012 £m
2011 £m
Fair value
Unrealised
loss
Fair value
Unrealised
loss
4,214
85
74
4,373
(112)
(13)
(53)
(178)
1,829
172
208
2,209
(60)
(28)
(158)
(246)
* The unrealised losses as at 31 December 2012 include £77 million (2011: £183 million) relating to mortgage-backed and other debt securities. The unrealised
losses in the portfolio by reference to the length of time of three years or more as at 31 December 2012 are £36 million (2011: £105 million) in the investment
grade and £31 million (2011: £61 million) in non-investment grade.
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Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D3: US insurance operations continued
d Products and guarantees
Jackson provides long-term savings and retirement products to retail and institutional customers throughout the US. Jackson offers
fi xed annuities (interest-sensitive, fi xed indexed and immediate annuities), variable annuities (VA), life insurance and institutional
products.
i Fixed annuities
Interest-sensitive annuities
At 31 December 2012, interest-sensitive fi xed annuities accounted for 13 per cent (2011: 16 per cent) of policy and contract
liabilities of Jackson. Interest-sensitive fi xed annuities are primarily deferred annuity products that are used for asset accumulation
in retirement planning and for providing income in retirement. They permit tax-deferred accumulation of funds and fl exible payout
options.
The policyholder of an interest-sensitive fi xed 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 benefi t payments at a future date as specifi ed 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.
At 31 December 2012, Jackson had fi xed interest rate annuities totalling £11.7 billion (US$19.0 billion) (2011: £11.5 billion
(US$17.8 billion)) in account value with minimum guaranteed rates ranging from 1.0 per cent to 5.5 per cent and a
3.09 per cent average guaranteed rate (2011: 1.0 per cent to 5.5 per cent and a 3.08 per cent average guaranteed rate).
Approximately 50 per cent (2011: 48 per cent) of the interest-sensitive fi xed annuities Jackson wrote in 2012 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 (FIA) accounted for 8 per cent (2011: 9 per cent) of Jackson’s policy and contract liabilities at
31 December 2012. 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 between 1.0 per cent and 3.0 per cent. Jackson had fi xed indexed annuities
allocated to indexed funds totalling £5.6 billion (US$9.2 billion) (2011: £5.0 billion (US$7.8 billion)) in account value with minimum
guaranteed rates on indexed accounts ranging from 1.0 per cent to 3.0 per cent and a 1.82 per cent average guaranteed rate
(2011: 1.0 per cent to 3.0 per cent and a 1.76 per cent average guarantee rate). Jackson also offers fi xed interest accounts on
some fi xed indexed annuity products. Fixed interest accounts of fi xed indexed annuities totalled £1.5 billion (US$2.3 billion)
(2011: £1.4 billion (US$2.1 billion)) in account value with minimum guaranteed rates ranging from 1.0 per cent to 3.0 per cent
and a 2.53 per cent average guaranteed rate (2011: 1.0 per cent to 3.0 per cent and a 2.50 per cent average guarantee rate).
Jackson hedges the equity return risk on fi xed 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 2012, immediate annuities accounted for 1 per cent (2011: 1 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 fi xed 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 2012, VAs accounted for 60 per cent (2011: 63 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 fi xed indexed annuities.
The primary differences between VAs and interest-sensitive or fi xed 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 fi xed or a selection of variable accounts. Investment risk on the variable account is borne by
the policyholder, while investment risk on the fi xed account is borne by Jackson through guaranteed minimum fi xed rates of return.
At 31 December 2012, approximately 8 per cent (2011: approximately 10 per cent) of VA funds were in fi xed accounts. Jackson had
fi xed interest rate accounts in variable annuities totalling £4.3 billion (US$7.0 billion) (2011: £4.3 billion (US$6.7 billion)) in account
value with minimum guaranteed rates ranging from 1.0 per cent to 3.0 per cent and a 1.89 per cent average guaranteed rate
(2011: 1.0 per cent to 3.0 per cent and a 1.99 per cent average guarantee rate).
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
221
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 specifi ed anniversary date adjusted for any withdrawals
following the contract anniversary. These guarantees include benefi ts that are payable in the event of death (guaranteed minimum
death benefi t (GMDB)), annuitisation (guaranteed minimum income benefi t (GMIB)), or at specifi ed dates during the accumulation
period (guaranteed minimum withdrawal benefi t (GMWB) and guaranteed minimum accumulation benefi t (GMAB)). Jackson
hedges these risks using equity options and futures contracts as described in note D3(h). The GMAB was eliminated from
Jackson’s product offerings in 2011. The GMIB is no longer offered, with existing coverage being reinsured.
In March 2012, Jackson launched a new variable annuity product, Elite Access, which has no guaranteed benefi ts and provides
tax effi cient access to alternative investments. Single premium sales in the period since launch were £849 million.
iii Aggregate distribution of account values
The table below shows the distribution of account values for fi xed annuities (interest sensitive and fi xed indexed) and variable
annuities within the range of minimum guaranteed interest rates as described in notes i and ii above as at 31 December 2012
and 2011:
Minimum guaranteed interest rate
1.0%
> 1.0% – 2.0%
> 2.0% – 3.0%
> 3.0% – 4.0%
> 4.0% – 5.0%
> 5.0%
Total
Account value
2012 £m
2011 £m
2,534
8,374
9,174
1,236
1,518
209
1,988
8,321
9,352
841
1,425
167
23,045
22,094
iv Life insurance
Jackson’s life insurance products accounted for 15 per cent (2011: 7 per cent) of Jackson’s policy and contract liabilities at
31 December 2012. The increase from 2011 was a result of the acquisition of REALIC. Jackson discontinued new sales of life
insurance products effective 1 August 2012. The life products included term life, universal life and variable universal life. Term
life provides protection for a defi ned period and a benefi t that is payable to a designated benefi ciary upon death of the insured.
Universal life provides permanent individual life insurance for the life of the insured and includes a savings element. Variable
universal life is a type of life insurance policy that combines death benefi t protection with the ability for the policyholder account
to be invested in separate account funds.
At 31 December 2012, Jackson (including the newly acquired REALIC) had interest sensitive life business in force with
total account value of £6.0 billion (US$9.7 billion) (2011: £3.3 billion (US$5.1 billion)), with minimum guaranteed interest rates
ranging from 2.5 per cent to 6.0 per cent with a 4.67 per cent average guaranteed rate (2011: 3.0 per cent to 6.0 per cent with
a 4.88 per cent average guaranteed rate). The table below shows the distribution of the interest-sensitive life business’ account
values within this range of minimum guaranteed interest rates as at 31 December 2012 and 2011:
Minimum guaranteed interest rate
1.0%
> 1.0% – 2.0%
> 2.0% – 3.0%
> 3.0% – 4.0%
> 4.0% – 5.0%
> 5.0%
Total
Account value
2012 £m
2011 £m
–
–
183
2,141
2,097
1,550
5,971
–
–
130
1,145
686
1,317
3,278
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Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D3: US insurance operations continued
v 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 2012,
institutional products accounted for 3 per cent of policy and contract liabilities (2011: 4 per cent). Under a traditional GIC, the
policyholder makes a lump sum deposit. The interest rate paid is fi xed and established when the contract is issued. If deposited
funds are withdrawn earlier than the specifi ed 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 specifi ed periodic deposits. Jackson
agrees to pay a rate of interest, which may be fi xed but which is usually a fl oating short-term interest rate linked to an external
index. The average term of the funding arrangements is one to two years. In 2012 and 2011, there were no funding agreements
terminable by the policyholder with less than 90 days’ notice.
Medium-term note funding agreements are generally issued to support trust instruments issued on non-US exchanges or to
qualifi ed investors (as defi ned by SEC Rule 144A). Through the funding agreements, Jackson agrees to pay a rate of interest, which
may be fi xed or fl oating, to the holders of the trust instruments.
e 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 refl ect the previously applied UK GAAP basis. Accordingly,
and consistent with the basis explained in note A3, 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 defi ned for US GAAP purposes) are accounted for by applying, in the fi rst instance,
a retrospective deposit method to determine the liability for policyholder benefi ts. This is then augmented by potentially three
additional amounts. These amounts are for:
AAAAAAAAAAAAAAAA Any amounts that have been assessed to compensate the insurer for services to be performed over future periods
(ie deferred income);
AAAAAAAAAAAAAAAA Any amounts previously assessed against policyholders that are refundable on termination of the contract; and
AAAAAAAAAAAAAAAA Any probable future loss on the contract (ie premium defi ciency).
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 profi ts is generally computed using the rate of interest that accrues to policyholder balances (sometimes
referred to as the contract rate). Estimated gross profi ts 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:
AAAAAAAAAAAAAAAA Amounts expected to be assessed for mortality less benefi t claims in excess of related policyholder balances;
AAAAAAAAAAAAAAAA Amounts expected to be assessed for contract administration less costs incurred for contract administration;
AAAAAAAAAAAAAAAA Amounts expected to be earned from the investment of policyholder balances less interest credited to policyholder balances;
AAAAAAAAAAAAAAAA Amounts expected to be assessed against policyholder balances upon termination of contracts (sometimes referred to as
surrender charges); and
AAAAAAAAAAAAAAAA Other expected assessments and credits.
VA contracts written by Jackson may, as described above, provide for GMDB, GMIB, GMWB and GMAB features. In general terms,
liabilities for these benefi ts are accounted for under US GAAP by using estimates of future benefi ts and fees under best estimate
persistency assumptions.
In accordance with US GAAP, the ‘grandfathered’ basis for IFRS, which specifi es how certain guarantee features should be
accounted for, the GMDB and the ‘for life’ portion of GMWB liabilities are not fair valued but are instead determined each period end
by estimating the expected value of benefi ts 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 2012, these liabilities were valued using a series of deterministic
investment performance scenarios, a mean investment return of 8.4 per cent (2011: 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 benefi ts 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.
GMIB benefi ts are essentially fully reinsured, subject to annual claim limits. As this reinsurance benefi t 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 fl uctuations.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
223
The assumptions used for calculating the direct GMIB liability at 31 December 2012 and 2011, 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 fl uctuations, resulting in removal of the market impact
from the operating profi t based on longer-term investment returns.
Jackson regularly evaluates, estimates used and adjusts the additional GMDB, GMIB and GMWB ‘for life’ liability balances, with a
related charge or credit to benefi t expense, if actual experience or other evidence suggests that earlier assumptions should be revised.
GMWB ‘not for life’ features are considered to be embedded derivatives under IAS 39. Therefore, provisions for these benefi ts are
recognised at fair value, with the change in fair value included in short-term fl uctuations.
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 fi nancial guarantee features of Jackson’s
contracts are in most circumstances not explicitly valued, but the impact of any interest guarantees would be refl ected as they are
earned in the current account value (ie the US GAAP liability).
For traditional life insurance contracts, provisions for future policy benefi ts 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 classifi ed as being in respect of
fi nancial instruments rather than insurance contracts, as defi ned 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 profi ts on the relevant contracts. For fi xed 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 profi ts 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 fi xed and indexed annuity and interest-sensitive life business, acquisition costs for Jackson’s variable annuity products are
amortised in line with the emergence of profi ts. The measurement of the amortisation, in part, refl ects current period fees (including
those for guaranteed minimum death, income, or withdrawal benefi ts) earned on assets covering liabilities to policyholders, and the
historical and expected level of future gross profi ts which depends on the assumed level of future fees, as well as components related
to mortality, lapse and expense.
Change of accounting policy
As explained in note A5, the Company has adopted the US Financial Accounting Standards Board requirements in the Emerging Issues
Task Force (EITF) Update No. 2010-26 on ‘Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts’ from
1 January 2012 into Prudential’s Group IFRS reporting for the results of Jackson and those Asia operations whose IFRS insurance
assets and liabilities are measured principally by reference to US GAAP principles. Under the Update, insurers are required to
capitalise only those incremental costs directly relating to successfully acquiring a contract from 1 January 2012. For Group IFRS
reporting, the Company has chosen to apply this new basis retrospectively for the results of these operations.
On application of the new policy for Jackson, the deferred costs balance for business in force at 31 December 2011, was
retrospectively reduced from £3,880 million to £3,095 million.
D
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Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D3: US insurance operations continued
Mean reversion technique
For variable annuity products, under US GAAP (as ‘grandfathered’ under IFRS 4) the projected gross profi ts, against which
acquisition costs are amortised, refl ect 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 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 fi ve 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 realised on average over the entire eight year period. Projected returns after the mean reversion period
revert back to the 8.4 per cent assumption.
However, to ensure that the methodology does not over anticipate a reversion to trend following adverse markets, the mean
reversion technique has a cap and fl oor feature whereby the projected returns in each of the next fi ve years can be no more than
15 per cent per annum and no less than 0 per cent per annum (both gross of asset management fees) in each year. The capping feature
was relevant in late 2008, 2009 and 2010 due to the very sharp market falls in 2008. Notwithstanding this capping feature, the mean
reversion technique gave rise to a benefi t in 2008 of £110 million. This benefi t was effectively ‘paid back’ under the mean reversion
technique through charges for accelerated amortisation in 2011, as discussed below.
At 31 December 2012, the projected rate of return for the next fi ve years is materially the same as the long-term assumption of
8.4 per cent, and so the mean reversion technique had little effect at that date.
Sensitivity of amortisation charge
The amortisation charge to the income statement is refl ected in operating profi t and short-term fl uctuations in investment returns.
The amortisation charge to the operating profi t in a reporting period comprises:
(i) A core amount that refl ects a relatively stable proportion of underlying profi t; and
(ii) An element of acceleration or deceleration arising from market movements differing from expectations.
In periods where the cap and fl oor feature of the mean reversion technique are not relevant, the technique operates to dampen the
second element above. Nevertheless, extreme market movements can cause material acceleration or deceleration of amortisation in
spite of this dampening effect.
Furthermore, in those periods where the cap or fl oor is relevant, the mean reversion technique provides no further dampening and
additional volatility may result.
2011
In 2011, the DAC amortisation charge to operating profi t included £190 million of accelerated amortisation. This amount refl ected the
combined effect of:
(a) The separate account performance in the year of negative 4 per cent, net of all fees as it compared with the assumed level for the
year; and
(b) The reduction in the previously assumed future rates of return for the upcoming fi ve years from 15 per cent, to a level nearer the
middle of the corridor (of 0 per cent and 15 per cent), so that, in combination with the historical returns, the eight-year average in
the mean reversion calculation was the 8.4 per cent assumption.
The reduction in assumed future rates refl ected, in large part, the elimination from the calculation in 2011 of the 2008 negative returns.
Setting aside other complications and the growth in the book, the 2011 accelerated amortisation can be broadly equated as ‘paying
back’ the benefi t experienced in 2008.
2012
In 2012, the DAC amortisation charge to operating profi t of £356 million was determined after taking credit for decelerated
amortisation of £56 million. This amount primarily refl ects the separate account performance of 11 per cent, net of all fees, over
the assumed level for the year.
2013
The application of the mean reversion formula has the effect of dampening the impact of equity market movements on DAC
amortisation while the mean reversion assumption lies within the corridor. It would take a very signifi cant movement in equity
markets in 2013 (outside the range of negative 20 per cent to positive 50 per cent) for the mean reversion assumption to move
outside the corridor.
Statement of changes in equity – ‘shadow DAC adjustments’
Consequent upon the positive unrealised valuation movement in 2012 of £862 million (2011: positive £811 million), there is a debit
of £270 million (2011: £275 million debit) for altered ‘shadow’ DAC amortisation booked within other comprehensive income. These
adjustments refl ect movement from period to period, in the changes to the pattern of reported gross profi ts that would have happened
if the assets refl ected in the statement of fi nancial 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 2012, the cumulative ‘shadow DAC balance’ was negative
£952 million (2011: negative £720 million).
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
225
f Reinsurance
The reinsurance asset for business ceded outside the Group was £6,076 million (2011: £907 million). The increase from 2011 is due
to the acquisition of REALIC as described in note I1, whereby certain former REALIC business was retained by Swiss Re through
100 per cent reinsurance agreements. Apart from the reinsurance acquired through the purchase of REALIC, 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 2012, the premiums for such ceded business amounted to £193 million (2011: £72 million). Net commissions
received on ceded business and claims incurred ceded to external reinsurers totalled £24 million and £123 million respectively during
2012 (2011: £9 million and £84 million respectively). There were no deferred gains or losses on reinsurance contracts in either 2012
or 2011.
g Eff ect of changes in assumptions used to measure insurance assets and liabilities
In 2012 and 2011, there were no changes of assumptions that had a material impact on the results of US insurance operations.
h Exposure and sensitivity of IFRS basis profi t and shareholders’ equity to market and other risks
Jackson’s main exposures are to market risk through its exposure to interest rate risk and equity risk. Approximately 94 per cent
(2011: 92 per cent) of its general account investments support interest-sensitive and fi xed indexed annuities, life business and surplus
and 6 per cent (2011: 8 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 fi xed income or fi xed maturity.
Jackson is exposed primarily to the following risks in the US arising from fl uctuations in interest rates:
AAAAAAAAAAAAAAAAAAA The risk of loss related to meeting guaranteed rates of accumulation following a sharp and sustained fall in interest rates;
AAAAAAAAAAAAAAAAAAA The risk of loss related to policyholder withdrawals following a sharp and sustained increase in interest rates; and
AAAAAAAAAAAAAAAAAAA The risk of mismatch between the expected duration of certain annuity liabilities and prepayment risk and extension risk inherent
in mortgage-backed securities.
Jackson is also exposed to the following risks in the US arising from equity market movements:
AAAAAAAAAAAAAAAAAAA The risk of loss related to the incidence of benefi ts related to guarantees issued in connection with its VA contracts; and
AAAAAAAAAAAAAAAAAAA The risk of loss related to meeting contractual accumulation requirements in FIA contracts.
Jackson enters into fi nancial 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 fl ows or quantity of, or a degree of exposure with respect
to assets, liabilities or future cash fl ows, 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, fi xed indexed annuities, certain GMWB variable annuity features and reinsured GMIB variable
annuity features, contain embedded derivatives as defi ned by IAS 39, ‘Financial Instruments: Recognition and Measurement’. Jackson
does not account for such derivatives as either fair value or cash fl ow hedges as might be permitted if the specifi c hedge
documentation requirements of IAS 39 were followed. Financial derivatives, including derivatives embedded in certain host liabilities
that have been separated for accounting and fi nancial reporting purposes, are carried at fair value.
Value movements on the derivatives are reported within the income statement. In preparing Jackson’s segment profi t as shown
in note B1, value movements on Jackson’s derivative contracts, are included within short-term fl uctuations in investment returns and
excluded from operating results based on longer-term investment returns.
The types of derivatives used by Jackson and their purpose are as follows:
AAAAAAAAAAAAAAAAAAA Interest rate swaps generally involve the exchange of fi xed and fl oating 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;
AAAAAAAAAAAAAAAAAAA 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 signifi cant movements in interest rates;
AAAAAAAAAAAAAAAAAAA Equity index futures contracts and equity index options (including various call, put options and put spreads) are used to hedge
Jackson’s obligations associated with its issuance of fi xed indexed immediate and deferred annuities and certain VA guarantees.
These annuities and guarantees contain embedded options which are fair valued for fi nancial reporting purposes;
AAAAAAAAAAAAAAAAAAA Total return swaps in which Jackson receives equity returns or returns based on reference pools of assets in exchange for
short-term fl oating rate payments based on notional amounts, are held for both hedging and investment purposes;
AAAAAAAAAAAAAAAAAAA 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; and
AAAAAAAAAAAAAAAAAAA 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 default event occurs in exchange for periodic payments made by Jackson for the life of the agreement. Jackson does not write
default protection using credit derivatives.
The estimated sensitivity of Jackson’s profi t and shareholders’ equity to equity and interest rate risks provided below is net of the
related changes in amortisation of DAC. The effect on the related changes in amortisation of DAC provided is based on the current
‘grandfathered’ US GAAP DAC basis but does not include any effect from an acceleration or deceleration of amortisation of DAC.
Note A5 provides explanation of the new US GAAP DAC basis adopted by the Company from 1 January 2012. Note D3(e) above
provides an explanation of the dynamics that affect the amortisation charge.
D
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226
Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D3: US insurance operations continued
i Sensitivity to equity risk
Variable annuity contract related
At 31 December 2012 and 2011, Jackson had variable annuity contracts with guarantees, for which the net amount at risk (NAR)
is generally the amount of guaranteed benefi t in excess of current account value, as follows:
31 December 2012
Return of net deposits plus a minimum return
GMDB
GMWB – Premium only
GMWB*
GMAB – Premium only
Highest specifi ed anniversary account value minus
withdrawals post-anniversary
GMDB
GMWB – Highest anniversary only
GMWB*
Combination net deposits plus minimum return, highest
specifi ed anniversary account value minus withdrawals
post-anniversary
GMDB
GMIB‡
GMWB*
Minimum
return
0-6%
0%
0-5%
0%
Account
value
£m
40,964
2,213
3,359
53
4,554
1,880
697
Weighted
average
attained age
Period
until
expected
annuitisation
Net
amount
at risk
£m
1,839 64.4 years
91
88*
–
324 64.0 years
245
137*
0-6%
0-6%
0-8%†
2,705
1,588
31,167
348 66.4 years
469
1,918*
3.3 years
31 December 2011
Return of net deposits plus a minimum return
GMDB
GMWB – Premium only
GMWB*
GMAB – Premium only
Highest specifi ed anniversary account value minus
withdrawals post-anniversary
GMDB
GMWB – Highest anniversary only
GMWB*
Combination net deposits plus minimum return, highest
specifi ed anniversary account value minus withdrawals
post-anniversary
GMDB
GMIB‡
GMWB*
Minimum
return
0-6%
0%
0-5%
0%
Account
value
£m
31,571
2,325
2,582
54
4,002
1,855
735
0-6%
0-6%
0-8%†
2,098
1,661
21,902
Weighted
average
attained age
Period
until
expected
annuitisation
Net
amount
at risk
£m
2,914
195
582*
2
678
423
217*
479
575
2,263*
64.2 years
63.7 years
66.1 years
4.2 years
* Amounts shown for GMWB comprise sums for the ‘not for life’ portion (where the guaranteed withdrawal base less the account value equals to the net amount
at risk (NAR)), and a ‘for life’ portion (where the NAR has been estimated as the present value of future expected benefi t payment remaining aft er the amount of
the ‘not for life’ guaranteed benefi ts is zero).
† Ranges shown based on simple interest. The upper limits of 5 per cent, or 8 per cent simple interest are approximately equal to 4.1 per cent and 6 per cent
respectively, on a compound interest basis over a typical ten year bonus period. For example 1 + 10 x 0.05 is similar to 1.041 growing at a compound rate of
4.01 per cent for a further nine years.
‡ The GMIB reinsurance guarantees are fully reinsured.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
227
Account balances of contracts with guarantees were invested in variable separate accounts as follows:
Mutual fund type:
Equity
Bond
Balanced
Money market
Total
2012 £m
2011 £m
38,092
5,673
4,601
766
49,132
28,902
4,251
3,846
677
37,676
As noted above, Jackson is exposed to equity risk through the options embedded in the fi xed indexed liabilities and GMDB and
GMWB guarantees included in certain VA benefi ts. This risk is managed using an equity hedging programme to minimise the risk
of a signifi cant 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, the net effect on 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 in the fi nancial reporting the immediate impact of equity market movements as the free-standing derivatives reset
immediately, while the hedged liabilities reset more slowly and fees are recognised prospectively. The opposite impact would
be observed if the equity markets were to decrease.
At 31 December 2012, the estimated sensitivity of Jackson’s profi t for VA business, and shareholders’ equity to immediate
increases and decreases in equity markets is shown below. The sensitivities are shown net of related changes in DAC amortisation.
2012 £m
2011* £m
Decrease
of 20%
Decrease
of 10%
Increase
of 10%
Increase
of 20%
Decrease
of 20%
Decrease
of 10%
Increase
of 10%
Increase
of 20%
Pre-tax profi t, net of related changes in
amortisation of DAC (excluding impact
on future separate account fees)
Related deferred tax effects
Net sensitivity of profi t after tax and
shareholders’ equity
326
(114)
120
(42)
(86)
30
(215)
75
373
(130)
196
(69)
(242)
85
(539)
189
212
78
(56)
(140)
243
127
(157)
(350)
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy
described in note A5.
The above table provides sensitivity movements as at a point in time, while the actual impact on fi nancial results would vary
contingent upon the volume of new product sales and lapses, changes to the derivative portfolio, correlation of market returns
and various other factors including volatility, interest rates and elapsed time.
The directional movements in the sensitivities refl ect the hedging programme in place at 31 December 2012.
Other sensitivity to equity risk
In addition to the exposure explained above, Jackson is also exposed to equity risk from its holding of equity securities,
partnerships in investment pools and other fi nancial derivatives.
A range of reasonably possible movements in the value of equity securities, partnerships in investment pools and other fi nancial
derivatives have been applied to Jackson’s holdings at 31 December 2012 and 2011. The table below shows the sensitivity to a
10 per cent and 20 per cent fall in value, and the impact that this would have on pre-tax profi t, net of related changes in amortisation
of DAC, profi t after tax and shareholders’ equity.
Pre-tax profi t, net of related changes in amortisation of DAC
Related deferred tax effects
Net sensitivity of profi t after tax and shareholders’ equity
2012 £m
2011* £m
Decrease
of 20%
Decrease
of 10%
Decrease
of 20%
Decrease
of 10%
(143)
50
(93)
(72)
25
(47)
(129)
45
(84)
(64)
23
(41)
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy
described in note A5.
D
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228
Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D3: US insurance operations continued
A 10 or 20 per cent increase in their value is estimated to have an approximately equal and opposite effect on profi t and
shareholders’ equity to the sensitivities shown above.
In the equity risk sensitivity analysis shown 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.
ii Sensitivity to interest rate risk
Notwithstanding the market risk exposure previously described, 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 fi xed 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. The GMWB features attaching to
variable annuity business (other than ‘for-life’) are accounted for as embedded derivatives which are fair valued and so will be
sensitive to changes in interest rate.
Debt securities and related derivatives are marked to fair value. Value movements on derivatives, again net of related changes
to amortisation of DAC and deferred tax, are recorded within profi t 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 1 per cent and 2 per cent decrease (subject to a fl oor of zero) and increase
in interest rates at 31 December 2012 and 2011 is as follows:
2012 £m
2011* £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
Profi t and loss
Direct effect
Derivatives value change
Policyholder liabilities
Related effect on amortisation of DAC
1,525
(2,021)
309
778
(871)
93
(625)
610
(39)
(1,142)
970
(14)
1,549
(925)
(132)
Pre-tax profi t effect
Related effect on charge for deferred tax
Net profi t effect
(187)
65
(122)
–
–
–
(54)
19
(35)
(186)
65
(121)
492
(172)
320
736
(446)
(61)
229
(80)
149
(592)
395
33
(164)
57
(107)
(1,078)
753
46
(279)
98
(181)
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 shareholders’ equity
3,873
(1,332)
2,175
(748)
(2,175)
748
(3,873)
1,332
2,679
(954)
1,513
(539)
(1,513)
539
(2,679)
954
(889)
(499)
499
889
(604)
(341)
341
604
1,652
1,530
928
928
(928)
(1,652)
1,121
(963)
(1,773)
1,441
633
782
(633)
(1,121)
(740)
(1,302)
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy
described in note A5.
These sensitivities are shown only for interest rates in isolation and do not include other movements in credit risk that may affect
credit spreads and valuations of debt securities.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
229
iii Currency translation risk
Consistent with the Group’s accounting policies, the profi ts of the Group’s US operations are translated at average exchange rates
and shareholders’ equity at the closing rate for the reporting period. For 2012, the rates were US$1.58 (2011: US$1.60) and
US$1.63 (2011: US$1.55) to £1.00 sterling, respectively. A 10 per cent increase or decrease in these rates would reduce or increase
profi t before tax attributable to shareholders, profi t for the year and shareholders’ equity attributable to US insurance operations
respectively as follows:
Profi t before tax attributable to shareholders note
Profi t for the year
Shareholders’ equity attributable to US insurance operations
A 10% increase in US$: £
exchange rates
A 10% decrease in US$: £
exchange rates
2012 £m
2011* £m
2012 £m
2011* £m
(78)
(56)
(395)
(44)
(32)
(342)
95
69
483
53
39
418
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy
described in note A5.
Note
Sensitivity on profi t before tax ie aggregate of the operating profi t based on longer-term investment returns and short-term fl uctuations in investment returns.
In addition, the total profi t 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 benefi t payments and equity index
participation features, offset by variability of benefi t related fees and equity derivative hedging performance, short-term value
movements on derivatives held to manage the fi xed annuity and other general account business, and other temporary value
movements on portfolio investments classifi ed as fair value through profi t and loss.
iv Other sensitivities
As noted in section D1, total profi t is very sensitive to market risk on the assets covering liabilities other than variable annuity
business segregated in the separate accounts.
As with other shareholder-backed business the profi t or loss for Jackson is presented by distinguishing the result for the year
between an operating result based on longer-term investment returns and short-term fl uctuations in investment returns. In this
way, the most signifi cant direct effect of market changes that have taken place to the Jackson result are separately identifi ed.
The principal determinants of variations in operating profi t based on longer-term returns are:
AAAAAAAAAAAAAAAAA Growth in the size of assets under management covering the liabilities for the contracts in force;
AAAAAAAAAAAAAAAAA Variations in fees and other income, offset by variations in market value adjustment payments and, where necessary,
strengthening of liabilities;
AAAAAAAAAAAAAAAAA Spread returns for the difference between investment returns and rates credited to policyholders; and
AAAAAAAAAAAAAAAAA Amortisation of deferred acquisition costs.
For 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 expected gross profi ts 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 profi ts 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 expense, mortality and persistency studies.
Except to the extent of mortality experience, which primarily affects profi ts through variations in claim payments and GMDB
reserves, the profi ts of Jackson are relatively insensitive to changes in insurance risk.
Jackson is sensitive to lapse risk. However, Jackson uses swaption derivatives to ameliorate the effect of a sharp rise in interest
rates, which would be the most likely cause of a sudden change in policyholder behaviour.
For variable annuity business, the key assumption is the expected long-term level of separate account returns, which for 2012
and 2011 was 8.4 per cent. The impact of using this return is refl ected in two principal ways, namely:
AAAAAAAAAAAAAAAAA Through the projected expected gross profi ts which are used to determine the amortisation of deferred acquisition costs.
This is applied through the use of a mean reversion technique which is described in more detail in note D3(e) above; and
AAAAAAAAAAAAAAAAA The required level of provision for guaranteed minimum death benefi t claims.
D
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230
Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D3: US insurance operations continued
i Duration of liabilities
The table below shows the carrying value of policyholder liabilities. The table below also shows the maturity profi le of the cash fl ows
for 2012 and 2011:
2012 £m
2011 £m
Fixed
annuity and
other business
(including
GICs and
similar
contracts)
Fixed
annuity and
other business
(including
GICs and
similar
contracts)
Variable
annuity
Total
Variable
annuity
Total
Policyholder liabilities
42,963
49,298
92,261
31,356
37,833
69,189
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
2012 %
2011 %
45
27
12
7
5
4
46
31
13
6
2
2
46
29
13
6
3
3
47
27
11
6
5
4
47
30
13
6
2
2
47
29
12
6
3
3
The maturity tables shown above have been prepared on a discounted basis. Details of undiscounted cash fl ows for investment
contracts are shown in note G2.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
231
2012 £m
2011* £m
With-profi ts
business
note (i)
Unit-linked
assets and
liabilities
Other
business
Total
Total
–
–
–
72
–
324
–
–
–
–
–
–
123
–
600
3,160
11,495
504
165
–
10,491
3,194
47
574
15,924
14,306
239
908
239
908
235
977
1,147
1,147
1,212
–
83
670
4
414
659
6,713
406
488
8,684
72
83
1,117
83
115
1,024
4
10
1,014
14,310
21,402
957
1,227
38,914
1,233
11,997
17,681
470
1,165
32,556
1,977
524
421
723
1,668
16,844
14,850
11,307
43,001
36,967
–
–
–
–
–
–
2,529
4
2,533
2,529
4
2,533
2,306
5
2,311
13,388
63
14,028
–
13,451
14,028
–
384
3,009
–
46
776
16,844
14,850
7,185
–
7,185
7
158
1,424
8,774
34,601
63
34,664
7
588
5,209
40,468
16,844
14,850
11,307
43,001
30,862
50
30,912
141
506
3,097
34,656
36,967
D
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D4: Asia insurance operations
a Summary statement of fi nancial position
31 December
Assets
Intangible assets attributable to shareholders:
Goodwill
Deferred acquisition costs and other intangible assets
Total
Intangible assets attributable to with-profi ts 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
Financial investments:
Loansnote (iii)
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments
Deposits
Total investments
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-profi ts funds:
Contract liabilities (including amounts in respect of contracts
classifi ed as investment contracts under IFRS 4)
Unallocated surplus of with-profi ts fundsnote (ii)
Total
Operational borrowings attributable to shareholder-fi nanced
operations
Deferred tax liabilities
Other non-insurance liabilities
Total liabilities
Total equity and liabilities
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy described
in note A5.
Notes
(i)
(ii)
The statement of fi nancial position for with-profi ts business comprises the with-profi ts assets and liabilities of the Hong Kong, Malaysia and Singapore
with-profi ts operations. Assets and liabilities of other participating business are included in the column for ‘Other business’.
For the purposes of the presentation of unallocated surplus of with-profi ts within the statement of fi nancial position, the Hong Kong branch balance
is reported within the unallocated surplus of the PAC with-profi ts sub-fund of the UK insurance operations.
232
Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D4: Asia insurance operations continued
(iii) Asia insurance operations
The loans of the Group’s Asia insurance operations comprise:
Mortgage loans*
Policy loans*
Other loans†
Total Asia insurance operations loans
2012 £m
2011 £m
43
610
361
31
572
630
1,014
1,233
* 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 Malaysia operation and which are all investment graded by two local rating agencies.
Summary policyholder liabilities (net of reinsurance) and unallocated surplus
At 31 December 2012, the policyholder liabilities net of reinsurance of £175 million (2011: £151 million) and unallocated surplus for
Asia operations of £34.5 billion (2011: £30.8 billion) comprised the following:
Singapore
Hong Kong
Malaysia
Indonesia
Korea
Taiwan
Other countries
Total Asia operations
2012 £m
2011 £m
10,731
8,610
3,336
2,110
2,131
1,931
5,640
9,323
8,279
2,829
1,809
1,852
1,429
5,240
34,489
30,761
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
233
b Reconciliation of movement in policyholder liabilities and unallocated surplus of with-profi ts funds
A reconciliation of the total policyholder liabilities and unallocated surplus of with-profi ts funds of Asia insurance operations from the
beginning of the year to the end of the year is as follows:
At 1 January 2011
Comprising:
Policyholder liabilities
Unallocated surplus of with-profi ts funds
Premiums:
New business
In-force
Surrendersnote (c)
Maturities/Deaths
Net fl ows note (b)
Shareholders’ transfers post tax
Investment-related items and other movements
Foreign exchange translation differencesnote (a)
At 31 December 2011/1 January 2012
Comprising:
Policyholder liabilities
Unallocated surplus of with-profi ts funds
Premiums:
New business
In-force
Surrenders note (c)
Maturities/Deaths
Net fl ows note (b)
Shareholders’ transfers post tax
Investment-related items and other movementsnote (d)
Foreign exchange translation differencesnote (a)
At 31 December 2012
Comprising:
Policyholder liabilities
Unallocated surplus of with-profi ts funds
Average policyholder liability balances*
2012
2011
With-profi ts
business
£m
Unit-linked
liabilities
£m
Other
business
£m
Total
£m
11,024
12,724
4,992
28,740
10,958
66
12,724
–
162
1,110
1,272
(502)
(431)
339
(30)
1,274
36
1,136
1,163
2,299
(1,490)
(39)
770
–
(1,154)
(325)
4,992
–
723
785
1,508
(245)
(194)
1,069
–
245
(52)
28,674
66
2,021
3,058
5,079
(2,237)
(664)
2,178
(30)
365
(341)
12,643
12,015
6,254
30,912
12,593
50
12,015
–
216
1,263
1,479
(608)
(432)
439
(31)
639
(239)
1,336
1,292
2,628
(1,675)
(30)
923
–
1,451
(361)
13,451
14,028
13,388
63
12,990
11,775
14,028
–
13,022
12,370
6,254
–
636
877
1,513
(258)
(196)
1,059
–
88
(216)
7,185
7,185
–
6,720
5,623
30,862
50
2,188
3,432
5,620
(2,541)
(658)
2,421
(31)
2,178
(816)
34,664
34,601
63
32,732
29,768
* Averages have been based on opening and closing balances and exclude unallocated surplus of with-profi ts funds.
Notes
(a) Movements in the year have been translated at the average exchange rates for the year ended 31 December 2012. The closing balance has been translated
at the closing spot rates as at 31 December 2012. Diff erences upon retranslation are included in foreign exchange translation diff erences.
(b) Net fl ows have increased by £243 million to £2,421 million in 2012, compared with £2,178 million in 2011, refl ecting increased fl ows from new business and
growth in the in-force books.
In 2012 the rate of surrenders for shareholder-backed business (expressed as a percentage of opening liabilities) was 10.6 per cent (2011: 9.8 per cent).
Excluding India where the market has been going through a signifi cant period of change following regulatory changes in 2010, the surrender rate in 2012
was at 9.7 per cent (2011: 9.6 per cent). For with-profi ts business, surrenders have increased from £502 million in 2011 to £608 million in 2012, primarily as
a result of certain products in Hong Kong reaching their fi ve year anniversary, the point at which some product features trigger.
Positive investment-related items and other movements of £2,178 million in 2012 primarily refl ects improvements in the Asia equity market.
(c)
(d)
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Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D4: Asia insurance operations continued
Information on credit risks of debt securities
c
The following table summarises the credit quality of the debt securities of the Asia insurance operations as at 31 December 2012 by
rating agency ratings:
2012 £m
2011 £m
S&P – AAA
S&P – AA+ to AA-
S&P – A+ to A-
S&P – BBB+ to BBB-
S&P – Other
Moody’s – Aaa
Moody’s – Aa1 to Aa3
Moody’s – A1 to A3
Moody’s – Baa1 to Baa3
Moody’s – Other
Fitch
Other
Total Asia debt securities
With-profi ts
business
Unit-linked
assets
Other
business
675
2,960
2,059
1,377
1,443
8,514
700
139
93
196
98
1,226
322
1,433
11,495
19
466
279
112
815
1,691
215
34
14
122
12
397
93
1,013
3,194
91
2,097
944
417
874
4,423
474
98
62
57
2
693
118
1,479
6,713
The following table analyses debt securities of ‘Other business’ which are not externally rated:
Government bonds
Corporate bonds rated as investment grade by local external ratings agencies
Other
Total
785
5,523
3,282
1,906
3,132
Total
1,423
3,843
3,055
1,451
2,137
14,628
11,909
1,389
271
169
375
112
2,316
533
3,925
1,489
128
304
131
59
2,111
351
3,310
21,402
17,681
2012 £m
2011 £m
287
1,069
123
1,479
244
776
45
1,065
d Products and guarantees
The life insurance products offered by the Group’s Asia operations include a range of with-profi ts and non-participating term, whole
life, endowment and unit-linked policies. The Asia 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 Asia operations and, in particular, the products’ options and guarantees,
vary from territory to territory depending upon local market circumstances.
In general terms, the Asia participating products provide savings and protection where the basic sum assured can be
enhanced by a profi t share (or bonus) from the underlying fund, as determined at the discretion of the insurers. The Asia operations’
non-participating term, whole life and endowment products offer savings and/or protection where the benefi ts are guaranteed or
determined by a set of defi ned 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
benefi ts and include health, disability, critical illness and accident coverage. H&P products are commonly offered as supplements to
main life policies but can be sold separately.
Subject to local market circumstances and regulatory requirements, the guarantee features described in note D2(d) in respect
of UK business broadly apply to similar types of participating contracts written in the Hong Kong branch, Singapore and Malaysia.
Participating products have both guaranteed and non-guaranteed elements.
Non-participating long-term products are the only ones where the Group is contractually obliged to provide guarantees on
all benefi ts. Unit-linked products have the lowest level of guarantee.
Product guarantees in Asia can be broadly classifi ed 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.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
235
Cash value and interest rate guarantees are of three types:
AAAAAAAAAAAAAAAAAAA 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;
AAAAAAAAAAAAAAAAAAA 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; and
AAAAAAAAAAAAAAAAAAA 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 refl ected 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 fl oor levels of policyholder benefi ts that accrue at rates set at inception, and do not vary subsequently
with market conditions, are written in the Korean life operations, though this is not of a signifi cant extent 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 2012
of £505 million and £1,628 million respectively (2011: £447 million and £1,407 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 signifi cantly
increased leaving the potential for losses if bond values had depreciated signifi cantly. 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 Asia 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 defi ciency reserve calculations are performed each year to establish whether the carrying values of the
liabilities are suffi cient.
On the US GAAP basis the calculations are deterministic, that is to say based on a single set of projections, and expected long-term
rates of return are applied.
e Process for setting assumptions and determining liabilities
The future policyholder benefi t provisions for Asia 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 some countries in Asia 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 India,
Japan, Taiwan and until 2012, Vietnam. Under this basis, the future policyholder benefi t 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 benefi t provisions vary by operation depending on the circumstances attaching to
each block of business. In Vietnam, the Company improved its estimation basis for liabilities in 2012 from one determined substantially
by reference to US GAAP requirements. After making this change, the estimation basis for Vietnam is aligned substantially with that
used in Singapore, Malaysia and some other Asia operations.
f Reinsurance
The Asia businesses cede only minor amounts of business outside the Group with immaterial effects on reported profi t. During
2012, reinsurance premiums for externally ceded business were £178 million (2011: £226 million) and the reinsurance assets were
£175 million (2011: £151 million) in aggregate.
g Eff ect of changes in bases, estimates and assumptions used to measure insurance assets and liabilities
In 2012, the IFRS operating profi t based on longer-term investment returns for Asia insurance operations included a net £48 million credit
(2011: £38 million) representing a small number of non-recurring items that are not anticipated to re-occur in subsequent periods.
Separately, the IFRS policyholder liabilities of the shareholder-backed non-linked business of the Group’s Hong Kong operation are
measured on a prospective net premium valuation approach with zero allowance for lapses. In 2012, the basis of determining the
valuation rate of interest has been altered to align with a permitted practice of the Hong Kong authorities for regulatory reporting. The
main change is to apply a valuation rate of interest that incorporates a reinvestment yield that is weighted by reference to current and
the historical three year average, rather than the year end rate. The change reduced the carrying value of policyholder liabilities at
31 December 2012 by £95 million. This benefi t is included within the short-term fl uctuations in investment returns in the Group’s
supplementary analysis of profi t.
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Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D4: Asia insurance operations continued
h Exposure and sensitivity of IFRS basis profi t and shareholders’ equity to market and other risks
The Asia operations sell with-profi ts and unit-linked policies and, although the with-profi ts business generally has a lower terminal
bonus element than in the UK, the investment portfolio still contains a proportion of equities. Non-participating business is largely
backed by debt securities or deposits. The exposure to market risk of the Group arising from its Asia operations is therefore at modest
levels. This arises from the fact that the Asia operations have a balanced portfolio of with-profi ts, unit-linked and other types of
business.
In Asia, adverse persistency experience can impact the IFRS profi tability of certain business written in the region. This risk is
managed at a business unit level through regular 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 fi nancial impact of lapses is often mitigated through the specifi c features of the products,
eg surrender charges.
(i) Sensitivity of profi t and shareholders’ equity to risks other than currency translation risk
With-profi ts business
Similar principles to those explained for UK with-profi ts business apply to profi t emergence for the Asia with-profi ts business.
Correspondingly, the profi t emergence refl ects bonus declaration and is relatively insensitive to period by period fl uctuations
in insurance risk or interest rate movements.
Unit-linked business
As for the UK insurance operations, for unit-linked business, the main factor affecting the profi t and shareholders’ equity of the
Asia operations is investment performance through asset management fees. The sensitivity of profi ts and shareholders’ equity
to changes in insurance risk, interest rate risk and credit risk are not material.
Other business
Interest rate risk
Asia operations offer a range of insurance and investment products, predominantly with-profi ts and non-participating term, whole
life endowment and unit-linked. Excluding with-profi t and unit-linked business, the results of the Asia business are sensitive to the
vagaries of routine movements in interest rates.
For the purposes of analysing sensitivity to variations in interest rates, reference has been made to the movements in the
10-year government bond rates of the territories. At 31 December 2012, 10-year government bond rates vary from territory
to territory and range from 0.60 per cent to 9.50 per cent (2011: 0.99 per cent to 12.88 per cent).
For the sensitivity analysis as at 31 December 2011, as shown in the table below, for the majority of the territories, a movement
of 1 per cent in the 10-year government bond rate has been used. Exceptions to this approach are for Japan and Taiwan, where a
movement of 0.5 per cent has been used. Following falls in interest rates in many of the territories during 2012, the approach was
altered such that the reasonably possible interest rate movement used is 1 per cent for all territories but subject to a fl oor of zero
where the bond rates are currently below 1 per cent. This revised approach was applied in estimating the sensitivity at
31 December 2012.
The estimated sensitivity to the decrease and increase in interest rates at 31 December 2012 and 2011 is as follows:
Pre-tax profi t
Related deferred tax (where applicable)
Net effect on profi t and shareholders’ equity
* Except for Japan and Taiwan using 0.5 per cent sensitivity.
2012 £m
2011 £m
Decrease
of 1%
Increase
of 1%
Decrease
of 1%*
Increase
of 1%*
216
(56)
160
(269)
53
(216)
73
(22)
51
(159)
34
(125)
The pre-tax impacts, if they arose, would mostly be recorded within the category short-term fl uctuations in investments returns in
the Group’s segmental analysis of profi t before tax.
The degree of sensitivity of the results of the non-linked shareholder-backed business of the Asia operations to movements in
interest rates depends upon the degree to which the liabilities under the ‘grandfathered’ IFRS 4 measurement basis refl ects market
interest rates from period to period. For example, for those countries, such as those applying US GAAP, the results can be more
sensitive as the effect of interest rate movements on the backing investments may not be offset by liability movements.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
237
Equity price risk
The non-linked shareholder business has limited exposure to equity and property investment (£663 million at 31 December 2012).
Generally, changes in equity and property investment values are not directly offset by movements in policyholder liabilities.
The estimated sensitivity to a 10 per cent and 20 per cent change in equity and property prices for shareholder-backed Asia
other business, which would be refl ected in the short-term fl uctuation component of the Group’s segmental analysis of profi t
before tax, at 31 December 2012 and 2011 would be as follows:
Pre-tax profi t
Related deferred tax (where applicable)
Net effect on profi t and shareholders’ equity
2012 £m
2011 £m
Decrease
of 20%
Decrease
of 10%
Decrease
of 20%
Decrease
of 10%
(134)
31
(103)
(67)
15
(52)
(120)
24
(96)
(60)
12
(48)
A 10 per cent or 20 per cent increase in their value would have an approximately equal and opposite effect on profi t and
shareholders’ equity to the sensitivities shown above. The market risk sensitivities shown above refl ect the impact of temporary
market movements and therefore, the primary effect of such movements would, in the Group’s segmental analysis of profi ts,
be included within the short-term fl uctuations in investment returns.
In the equity risk sensitivity analysis shown 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.
Insurance risk
Many of the territories in Asia are exposed to mortality/morbidity risk and provision is made within policyholder liabilities on a
prudent regulatory basis to cover the potential exposure. If these prudent assumptions were strengthened by 5 per cent then it is
estimated that post tax profi t would be decreased by approximately £30 million (2011: £27 million). Mortality and morbidity has
a symmetrical effect on the portfolio and any weakening of these assumptions would have a similar equal and opposite impact.
(ii) Sensitivity of IFRS basis profi t and shareholders’ equity to currency translation risk
Consistent with the Group’s accounting policies, the profi ts of the Asia insurance operations are translated at average exchange
rates and shareholders’ equity at the closing rate for the reporting period. For 2012, the rates for the most signifi cant operations
are given in note B4.
A 10 per cent increase or decrease in these rates would have reduced or increased profi t before tax attributable to shareholders,
profi t for the year and shareholders’ equity, excluding goodwill, attributable to Asia operations respectively as follows:
A 10% increase in local
currency to £ exchange rates
A 10% decrease in local
currency to £ exchange rates
2012 £m
2011 £m
2012 £m
2011 £m
Profi t before tax attributable to shareholders note
Profi t for the year
Shareholders’ equity, excluding goodwill, attributable to Asia operations
(90)
(75)
(243)
(57)
(46)
(228)
110
92
297
70
56
278
Note
Sensitivity on profi t (loss) before tax ie aggregate of the operating profi t based on longer-term investment returns and short-term fl uctuations in
investment returns.
i Duration of liabilities
The table below shows the carrying value of policyholder liabilities. The table below also shows the maturity profi le of the cash fl ows,
taking account of expected future premiums and investment returns for 2012 and 2011:
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
2012 £m
2011 £m
34,601
30,862
%
23
19
17
13
9
19
%
22
19
15
13
10
21
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Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D5: Capital position statement for life assurance businesses
The primary purpose of this section is to meet the disclosure requirements of FRS 27, the UK GAAP Standard on Life Assurance.
Prudential, together with other major UK life assurers, undertook to the UK Accounting Standards Board in 2004 to adopt this
standard for Group IFRS reporting. Under the disclosure requirements of FRS 27 the capital position statement and related footnotes
are prepared by reference to local regulation.
a Summary statement
The Group’s estimated capital position for life assurance businesses with reconciliations to shareholders’ equity is shown below.
As noted above, available capital for each fund or group of companies has been determined by reference to local regulation at
31 December 2012 and 2011.
2012 £m
Total
PAC
with-
profi ts
fund
Other
UK life
assurance
subsidi-
aries and
funds
note (ii)
Asia
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
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-profi ts funds note (v)
Shareholders’ share of realistic
liabilities
Deferred acquisition costs of
non-participating business
not recognised for
regulatory reporting
purposes and goodwill
Jackson surplus notes note (iv)
Investment and policyholder
liabilities valuation
differences between IFRS
and regulatory basis for
Jackson note (vii)
Adjustment from IAS 19 basis
pension defi cit attributable
to WPSF to pension liability
for regulatory purposes
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
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
920
–
920
2,087
4,343
–
4,343
–
2,290
239
2,529
–
7,553
239
7,792
2,087
393
1,153
1,546
–
(1,143)
77
(1,066)
–
6,803
1,469
8,272
2,087
–
3,007
4,343
2,529
9,879
1,546
(1,066) 10,359
10,526 10,526
(2,469)
(2,469)
–
–
–
–
63 10,589
–
(2,469)
(6)
–
(6)
–
(103)
–
(3,199)
153
(893)
–
(4,201)
153
–
–
–
–
696
–
696
–
(107)
(107)
–
(215)
(215)
–
–
–
–
–
(107)
–
(215)
–
–
(729)
(729)
(534)
906
(78)
(435)
7,000
7,000
(637)
(1,444)
(908)
4,011
–
7,000
7,000
2,370
2,899
1,621 13,890
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
239
SAIF
WPSF
note (i)
Total PAC
with-profi ts
fund
2012 £m
Other UK life
assurance
subsidiaries
and funds
note (ii)
Asia life
assurance
subsidiaries
Total life
assurance
operations
Jackson
7,217
29,353
36,570
352
33,112
33,464
7,569
62,465
70,034
–
–
–
–
–
–
–
6,696
43,266
95
33,559
6,791
76,825
–
6,597
6,597
–
–
–
–
309
29
14,013
29
14,322
6,086
27,259
49,298
40,894
14,028
7,058
69,441
89,533
Policyholder liabilities
With-profi ts liabilities of UK
regulated with-profi ts funds:
Insurance contracts
Investment contracts (with
discretionary participation
features)
Total
Other liabilities:
Insurance contracts:
With-profi ts 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)
–
22
22
16,160
2,069
127
18,378
Total
309
14,064
14,373
49,505
92,261
27,810
183,949
Total policyholder liabilities
shown in the consolidated
statement of fi nancial position
7,878
76,529
84,407
49,505
92,261
34,601
260,774
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Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D5: Capital position statement for life assurance businesses continued
2011* £m
Total
PAC
with-
profi ts
fund
Other
UK life
assurance
subsidi-
aries and
funds
note (ii)
Asia
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
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-profi ts funds note (v)
Shareholders’ share of realistic
liabilities
Deferred acquisition costs of
non-participating business
not recognised for
regulatory reporting
purposes and goodwill
Jackson surplus notes note (iv)
Investment and policyholder
liabilities valuation
differences between IFRS
and regulatory basis for
Jackson note (vii)
Adjustment from IAS 19 basis
pension defi cit attributable
to WPSF to pension liability
for regulatory purposes
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
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
930
–
930
1,622
3,761
–
3,761
–
2,071
235
2,306
–
6,762
235
6,997
1,622
229
1,153
1,382
–
(1,514)
77
(1,437)
–
5,477
1,465
6,942
1,622
2,552
3,761
2,306
8,619
1,382
(1,437)
8,564
9,165
9,165
(2,394)
(2,394)
–
–
–
–
50
9,215
–
(2,394)
(6)
–
(6)
–
(111)
–
(3,095)
160
(929)
–
(4,141)
160
–
–
–
1,002
–
1,002
16
16
(640)
(640)
–
–
–
–
–
–
16
(640)
(2)
(2)
(504)
699
66
259
6,139
6,139
(615)
(1,234)
(813)
3,477
–
6,139
6,139
1,937
2,527
1,493
12,096
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy described
in note A5.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
241
Total PAC
with-profi ts
fund
2011 £m
Other UK life
assurance
subsidiaries
and funds
note (ii)
SAIF
WPSF
note (i)
Asia life
assurance
subsidiaries
Total life
assurance
operations
Jackson
7,934
30,077
38,011
412
8,346
28,936
59,013
29,348
67,359
–
–
–
–
–
–
–
–
–
–
6,777
44,788
397
7,174
29,745
74,533
–
5,419
5,419
Policyholder liabilities
With-profi ts liabilities of UK
regulated with-profi ts funds:
Insurance contractsnote (viii)
Investment contracts (with
discretionary participation
features)
Total
Other liabilities:
Insurance contracts:
With-profi ts liabilities
of non-UK regulated funds
Unit-linked, including variable
annuitynote (viii)
Other life assurance business
209
26
13,365
26
13,574
6,387
24,734
37,833
29,445
12,015
6,142
56,261
73,895
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 fi nancial position
–
209
17
17
13,408
13,617
14,927
46,048
1,911
112
16,967
69,189
23,688
152,542
8,555
72,421
80,976
46,048
69,189
30,862
227,075
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 Asia life assurance subsidiaries.
Excluding PAC shareholders’ equity that is included in ‘parent company and shareholders’ equity of other subsidiaries and funds’.
(ii)
(iii) The term shareholders’ equity held in long-term funds refers to the excess of assets over liabilities attributable to shareholders of funds which are required
by law to be maintained, ring-fenced 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-profi ts funds, deferred tax, admissibility and other items measured diff erently on the regulatory basis. For Jackson, the principal reconciling item
is deferred tax related to the diff erences between IFRS and regulatory basis, as shown in the table above, and other methodology diff erences.
Insurance business accounted for as fi nancial instruments under IAS 39.
(vi)
(vii) The investment and policyholder liabilities valuation diff erence 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 diff erence on annuity reserves.
(viii) The allocation between the with-profi ts liabilities and unit-linked liabilities within the WPSF column have been adjusted for those previously published
to align with the basis of presentation applied in 2012.
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Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D5: Capital position statement for life assurance businesses continued
b Basis of preparation, capital requirements and management
Each of the Group’s long-term business operations is capitalised to a suffi ciently strong level for its individual circumstances. Details
by the Group’s major operations are shown below.
i UK insurance operations
The FSA rules which govern the Prudential regulation of insurance form part of the Prudential Sourcebook for Insurers, the General
Prudential Sourcebook and Interim Prudential Sourcebook for Insurers. Overall, the net requirements of the General Prudential
Sourcebook are intended to align the capital adequacy requirements for insurance business more closely with those of banking
and investment fi rms 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 insuffi cient, it may draw up its own Individual Capital Guidance for a fi rm, which
can be superimposed as a requirement.
PAC WPSF and SAIF
Under FSA rules, insurers with with-profi ts 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-profi t insurer’s capital requirements, whereas the MCR is, broadly speaking, equivalent to the previous required minimum
margin under the Interim Prudential Sourcebook and satisfi es the minimum EU Standards.
Determination of the ECR involves the comparison of two separate measurements of the fi rm’s resources requirement, which
the FSA refers to as the ‘twin peaks’ approach.
The two separate peaks are:
i
ii
The requirement comprised by the mathematical reserves plus the ‘Long-Term Insurance Capital Requirement’ (LTICR),
together known as the ‘regulatory peak’; and
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 £7.0 billion (2011: £6.1 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 2012 (2011: £2.0 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 suffi cient assets to absorb a one in 200 year event. The RCM calculation achieves this by setting rules for
the determination of margins to cover defi ned stress changes in asset values and yields for market risk, credit risk and termination
risk for with-profi ts policies.
PAC has discretion in its management actions in the case of adverse investment conditions. Management actions encompass,
but are not confi ned to, investment allocation decisions, levels of reversionary bonuses, crediting rates and total claim values.
Other UK life assurance subsidiaries and funds
The available capital of £2,370 million (2011: £1,937 million) refl ects the excess of regulatory basis assets over liabilities of the
subsidiaries and funds, before deduction of the capital resources requirement of £1,376 million (2011: £1,194 million).
The capital resources requirement for these companies broadly refl ects 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 policyholder’s claims and maturities.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
243
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 using 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 £2,899 million (2011: £2,527 million) refl ects 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 signifi cantly in excess of regulatory requirements. At 31 December 2012, 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 net of tax was to decrease statutory surplus by £357 million at 31 December 2012.
Michigan insurance law specifi cally allows value of business acquired (VOBA) as an admitted asset as long as certain criteria
are met. US NAIC standards limit the admitted amount of goodwill/VOBA generally to 10 per cent of capital and surplus. At
31 December 2012, Jackson reported £289 million of statutory basis VOBA as a result of the REALIC acquisition, which is fully
admissible under Michigan insurance law.
iii Asia operations
The available capital shown above of £1,621 million (2011: £1,493 million) represents the excess of local regulatory basis assets
over liabilities before deduction of required capital of £661 million (2011: £608 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
A risk-based regulatory framework applies in Singapore.
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 specifi ed 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
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 fi nancial crisis, the local regulator provided relief in
solvency capital and the measure continued until 1 January 2012, when it was withdrawn. The withdrawal of this temporary relief
did not have a signifi cant impact on the Group’s Indonesia business;
Japan
Mathematical reserves for traditional business are determined on a net premium basis using prescribed mortality and interest rates.
Interest rates refl ect 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.
Solvency capital is determined using a risk-based capital approach. The adjusted solvency capital assets of the Company must
exceed 200 per cent of the risk related capital requirement value at risk. A number of changes to the risk-based capital rules in
Japan were effective in April 2012, but the changes did not have a signifi cant impact on the Group’s Japan business;
D
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Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D5: Capital position statement for life assurance businesses continued
Malaysia
A risk-based capital framework applies in Malaysia.
For participating business, a gross premium reserve on the guaranteed and non-guaranteed benefi ts determined using best
estimate assumptions is held. The amount held is subject to a minimum of a gross premium reserve on the guaranteed benefi ts,
determined using best estimate assumptions along with provisions of risk margin for adverse deviations 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 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.
Participating fund surplus is not allowed to be used to support defi cit (if any) and capital requirement of the non-participating
business. The capital requirement is calculated based on a prescribed series of risk charges. The local regulator has set a
Supervisory Target Capital Level of 130 per cent below which supervisory actions of increasing intensity will be taken. Each insurer
is also required to set its own Individual Target Capital Level to refl ect its own risk profi le and this is expected to be higher than the
Supervisory Target Capital Level;
Vietnam
Mathematical reserves are calculated using a modifi ed net premium approach, set using assumptions agreed with the regulator.
The capital requirement is determined as 4 per cent of reserves plus a specifi ed percentage of 0.1 per cent of sums at risk for
policies with original term less than or equal to fi ve years or 0.3 per cent of sums at risk for policies with original term of more than
fi ve years. An additional capital requirement of Vietnamese Dong 200 billion is also required for companies transacting unit-linked
business; and
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.
A risk-based capital framework applies in Korea. Under this risk-based 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 2012, together with
market risk sensitivity disclosure provided to key management, is provided in the business review section of the Group’s 2012
Annual Report.
c Movements in total available capital
Total available capital for the Group’s life assurance operations has changed as follows:
Available capital at 31 December 2011
Changes in assumptions
Changes in management policy
Changes in regulatory requirements
New business and other factorsnote (v)
Available capital at 31 December 2012
2012 £m
Other
UK life
assurance
subsidiaries
and funds
note (iii)
1,937
(145)
–
–
578
2,370
WPSF
note (i)
6,139
(136)
500
–
497
7,000
Asia life
assurance
subsidiaries
note (iv)
1,493
30
(24)
27
95
1,621
Jackson
note (ii)
2,527
–
–
–
372
2,899
Group
Total
12,096
(251)
476
27
1,542
13,890
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
245
Other
UK life
assurance
subsidiaries
and funds
note (iii)
1,707
38
–
–
192
1,937
WPSF
note (i)
6,800
(60)
(15)
–
(586)
6,139
2011 £m
Asia life
assurance
subsidiaries
note (iv)
1,378
(32)
–
17
130
1,493
Jackson
note (ii)
2,907
–
–
–
(380)
2,527
Group
Total
12,792
(54)
(15)
17
(644)
12,096
Available capital at 31 December 2010
Changes in assumptions
Changes in management policy
Changes in regulatory requirements
New business and other factorsnote (v)
Available capital at 31 December 2011
Notes
(i) WPSF
The increase in 2012 of £861 million refl ects primarily the positive impact of investment returns earned on the opening available capital.
The decrease in 2011 of £661 million refl ects primarily the negative eff ect of the lower interest rate used to value projected policyholder benefi t
(ii)
payments, partially off set by the positive impact of investment returns earned on the opening available capital.
Jackson
The increase of £372 million in 2012 refl ects an underlying increase of £483 million (applying the 2012 year end exchange rate of US$1.63:£1.00) and
£111 million of exchange translation loss.
The decrease of £380 million in 2011 refl ects an underlying decrease of £402 million (applying the 2011 year end exchange rate of US$1.55:£1.00) and
£22 million of exchange translation gains.
(iii) Other UK life assurance subsidiaries and funds
The eff ect from the changes in assumptions of valuation interest rates on insurance liabilities is broadly matched by the corresponding eff ect on assets
leaving no signifi cant impact on the available capital.
(iv) Asia life assurance subsidiaries
The increase of £128 million in 2012 refl ects an underlying increase of £177 million (applying the relevant 2012 year end exchange rates) and £49 million of
exchange translation loss.
The increase of £115 million in 2011 refl ected an underlying increase of £134 million (applying the relevant 2011 year end exchange rates) and £19 million
of exchange translation loss.
(v) New business and other factors comprise the eff ect of changes in new business, valuation interest rate, investment return, foreign exchange and
other factors.
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-profi ts sub-fund to shareholders refl ect 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-profi ts and other business of the fund by, for example, providing the benefi ts associated with
smoothing and guarantees. It also provides investment fl exibility for the fund’s assets by meeting the regulatory capital requirements
that demonstrate solvency and by absorbing the costs of signifi cant 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-profi ts funds, the excess of assets over liabilities is retained with
distribution tied to the shareholders’ share of bonuses through declaration of actuarially determined surplus. The Singapore and
Malaysian businesses may, in general, remit dividends to the UK, provided the statutory insurance fund meets the capital adequacy
standard required under local statutory regulations.
Available capital of the non-insurance business units is transferable to the life assurance businesses after taking account of
an appropriate level of operating capital, based on local regulatory solvency targets, over and above basis liabilities.
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Financial statements Prudential plc Annual Report 2012
D: Life assurance business continued
D5: Capital position statement for life assurance businesses continued
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 refl ecting 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. 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.
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.
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 fl ow 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 profi ts from changing interest rates. This type of analysis is used in the UK for annuity
business and by Jackson for its interest-sensitive and fi xed 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 refl ect the large diversity in returns that equities can
produce. This allows Prudential to devise an investment and with-profi ts policyholder bonus strategy that, on the model assumptions,
allows it to optimise returns to its policyholders and shareholders over time, while maintaining appropriate fi nancial strength.
Prudential uses this methodology extensively in connection with its UK with-profi ts business.
Intragroup arrangements in respect of SAIF
f
Should the assets of SAIF be inadequate to meet the guaranteed benefi t obligations of the policyholders of SAIF, the PAC long-term
fund would be liable to cover any such defi ciency in the fi rst instance. 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.
E: Asset management (including US broker-dealer) and other operations
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
247
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 and Europe is undertaken through M&G which is made up of three distinct businesses being Retail,
Institutional and Finance. M&G’s investment expertise covers all key asset classes, equities, fi xed interest and commercial real estate,
and includes a number of specialist fi xed income and real estate strategies. M&G manages its own retail fund operations, funds for
pensions, insurance companies and third-party entities.
Asset management in the US is undertaken through PPM America which manages assets for the Group’s UK, Asia and US affi liates
plus also provides investment services to other affi liated and unaffi liated institutional clients including collateralised debt obligations
(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.
Eastspring Investments 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.
Other operations cover unallocated corporate activities and includes the head offi ce functions.
a The profi t included in the income statement in respect of asset management operations for the year is as follows:
2012 £m
2011 £m
M&G
US
Eastspring
Investments
note (iii)
Total
Total
Revenue (excluding revenue of consolidated investment funds
and NPH broker-dealer fees)
Revenue of consolidated investment fundsnote (i)
NPH broker-dealer feesnote (i)
Gross revenue*
Charges (excluding charges of consolidated investment funds
and NPH broker-dealer fees)
Charges of consolidated investment fundsnote (i)
NPH broker-dealer feesnote (i)
Gross charges
Profi t before tax
Comprising:
Operating profi t based on longer-term investment returns
Short-term fl uctuations in investment returnsnote (ii)
Shareholder’s share of actuarial gains and losses on defi ned
benefi t pension schemes
Gain on dilution of Group's holdings
Profi t before tax
1,234
(11)
–
1,223
(713)
11
–
(702)
521
371
93
15
42
521
296
–
435
731
(257)
–
(435)
(692)
39
39
–
–
–
39
282
–
–
282
(207)
–
–
(207)
75
75
–
–
–
75
1,812
(11)
435
2,236
(1,177)
11
(435)
(1,601)
635
485
93
15
42
635
1,583
9
405
1,997
(1,147)
(9)
(405)
(1,561)
436
461
(29)
4
–
436
* For 2012, gross revenue includes the Group’s share of results from the associate PPM South Africa. In prior years, PPM South Africa was treated as a subsidiary and
accounted for accordingly.
Notes
(i)
(ii)
(iii)
Under IFRS, disclosure details of segment revenue are required. The segment revenue of the Group’s asset management operations are required to include
two items that are for amounts which, refl ecting their commercial nature, are also wholly refl ected as charges within the income statement. Aft er allowing
for these charges, there is no eff ect on profi t from these two items which are:
(a)
Investment funds which are managed on behalf of third parties and are consolidated under IFRS in recognition of the control arrangements for the
funds. The gains and losses of these funds are non-recourse to M&G and the Group; and
(b)
NPH broker-dealer fees which represent commissions received, that are then paid on to the writing brokers on sales of investment products.
The presentation in the table above shows the amounts attributable to these two items so that the underlying revenue and charges can be seen.
Short-term fl uctuations in investment returns for M&G are primarily in respect of unrealised fair value movements on Prudential Capital’s bond portfolio.
Included within Eastspring Investments revenue and charges are £42 million of commissions (2011: £44 million).
E
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Financial statements Prudential plc Annual Report 2012
E: Asset management (including US broker-dealer) and other operations continued
E1: Income statement for asset management operations continued
b M&G operating profi t based on longer-term investment returns:
Asset management fee income
Other income
Staff costs
Other costs
Underlying profi t before performance-related fees
Share of associate results
Performance-related fees
Operating profi t from asset management operations
Operating profi t from Prudential Capital
Total M&G operating profi t based on longer-term investment returns
2012 £m
2011* £m
728
6
(289)
(147)
298
13
9
320
51
371
662
4
(270)
(134)
262
26
13
301
56
357
* Following the divestment in the fi rst half of 2012 of M&G’s holding in PPM South Africa from 75 per cent to 49.99 per cent and its treatment from 2012 as an
associate, M&G’s operating income and expense no longer include any element from PPM South Africa, with the share of associates’ results being presented
in a separate line. The table above refl ects the retrospective application of this basis of presentation for the 2011 results. Total profi t remains the same.
The difference between the fees and other income shown above in respect of asset management operations, and the revenue fi gure
for M&G shown (excluding consolidated investment funds) in the main table primarily relates to the total revenue of Prudential Capital
(including short-term fl uctuations) of £218 million (2011: £96 million) and commissions which have been netted off in arriving at the
fee income of £728 million (2011: £662 million) in the table above. The difference in the presentation of commission is aligned with
how management reviews the business.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
249
E2: Statement of fi nancial position for asset management operations
Assets, liabilities and shareholders’ equity included in the Group consolidated statement of fi nancial position in respect of asset
management operations are as follows:
Assets
Intangible assets:
Goodwill
Deferred acquisition costs and other intangibles assets
Total
Other non-investment and non-cash assets
Associate investments accounted for using the equity method
Financial investments:
Loansnote (i)
Equity securities and portfolio holdings in unit trusts
Debt securitiesnote (ii)
Other investments
Deposits
Total investments
Cash and cash equivalents
Total assets
Equity and liabilities
Equity
Shareholders’ equity
Non-controlling interests
Total equity
Liabilities
Core structural borrowing of shareholder-fi nanced 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 funds
Other non-insurance liabilitiesnote (v)
Total liabilities
Total equity and liabilities
2012 £m
Eastspring
Investments
US
2011 £m
Total
Total
16
2
18
174
–
–
–
–
6
33
39
48
279
124
–
124
–
–
–
155
155
279
61
2
63
83
–
–
20
7
–
48
75
126
347
268
–
268
–
–
–
79
79
347
1,230
14
1,244
1,158
41
1,199
70
1,846
44
84
3,284
1,083
6,769
1,937
–
1,937
1,230
16
1,246
1,129
–
1,256
594
1,842
78
89
3,859
1,735
7,969
1,783
5
1,788
275
250
2,084
2,956
162
2,311
4,832
6,769
678
2,297
6,181
7,969
M&G
note (iii)
1,153
10
1,163
901
41
1,199
50
1,839
38
3
3,170
909
6,143
1,545
–
1,545
275
2,084
162
2,077
4,598
6,143
Notes
(i)
Loans
The M&G loans relate to loans and receivables managed by Prudential Capital. These assets are generally secured but most have no external credit ratings.
Internal ratings prepared by the Group’s asset management operations as part of the risk management process are:
Loans and receivables internal ratings:
A+ to A-
BBB+ to BBB-
BB+ to BB-
B+ to B-
Total M&G loans
2012 £m
2011 £m
–
836
339
24
1,199
129
1,000
89
38
1,256
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Financial statements Prudential plc Annual Report 2012
E: Asset management (including US broker-dealer) and other operations continued
E2: Statement of fi nancial position for asset management operations continued
(ii) Debt securities
Of the £1,846 million total debt securities at 31 December 2012 (2011: £1,842 million) for asset management operations, the following amounts were held by M&G.
M&G:
AAA to A- by Standard & Poor’s or Aaa rated by Moody’s
Other
Total M&G debt securities
2012 £m
2011 £m
1,493
346
1,839
1,547
287
1,834
(iii) The M&G statement of fi nancial position includes the 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 fi xed income security programme and comprise:
Commercial paper
Medium-Term Notes
Total intra-group debt represented by operational borrowings at Group level
(v) Other non-insurance liabilities consists primarily of intra-group balances, derivative liabilities and other creditors.
2012 £m
2011 £m
1,535
549
2,084
2,706
250
2,956
E3: Regulatory and other surplus for asset management operations
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
2012 £m
Eastspring
Investments
US
2011 £m
Total
Total
129
8
–
–
(8)
(5)
124
127
52
6
9
(56)
(4)
134
412
416
3
9
(318)
(9)
513
432
326
(14)
8
(342)
2
412
M&G
156
356
(3)
–
(254)
–
255
The movement in the year refl ects gains driven by profi ts generated during the year and also changes in regulatory requirements.
Distributions consist of dividends paid up to the parent company.
The M&G fi gures include those for Prudential Capital.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
251
E4: Sensitivity of profi t and shareholders’ equity to market and other fi nancial risk
i Currency translation
Consistent with the Group’s accounting policies, the profi ts of Eastspring Investments and US asset management operations are
translated at average exchange rates and shareholders’ equity at the closing rate for the reporting period. The rates for the functional
currencies of most signifi cant operations are shown in note B4.
A 10 per cent increase in the relevant exchange rates would have reduced reported profi t before tax attributable to shareholders
and shareholders’ equity, excluding goodwill attributable to Eastspring Investments and US asset management operations, by
£10 million (2011: £9 million) and £29 million (2011: £30 million) respectively.
ii Sensitivities to other fi nancial risks for asset management operations
The principal sensitivities to other fi nancial 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 2012 by asset management operations were £1,846 million (2011: £1,842 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 profi t or shareholders’ equity. The Group’s asset management operations do not hold
signifi cant investments in property or equities.
E5: Other operations
Other operations consist of unallocated corporate activities relating to Group Head Offi ce and the Asia regional head offi ce, with net
expenditure for the year of £498 million (2011: £483 million) as detailed in note B1. An analysis of the assets and liabilities of other
operations is shown in note B5.
The Group holds certain derivatives that are used to manage foreign currency movements and macroeconomic exposures. The fair
value of these derivatives is sensitive to the combined effect of movements in exchange rates, interest rates and infl ation rates. The
possible permutations cover a wide range of scenarios. For indicative purposes, a reasonably possible range of fair value movements
could be plus or minus £17 million.
E
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Financial statements Prudential plc Annual Report 2012
F: Income statement notes
F1: Segmental information
Year ended 31 December 2012 £m
Insurance operations
Asset management
E1
Gross premiums earned
Outward reinsurance premiums
Earned premiums, net of reinsurance
Investment return note (ii)
Other income
UK
US
Asia
M&G
7,020 14,660
(193)
(135)
6,885 14,467
6,193
(2)
14,495
213
8,230
(178)
8,052
3,112
153
–
–
–
251
972
Total revenue, net of reinsurance
21,593 20,658 11,317
1,223
Benefi ts and claims
Outward reinsurers’ share of benefi ts
(18,253) (18,703)
(7,875)
and claims note (iv)
159
(8)
108
Movement in unallocated surplus of
with-profi ts funds note (iii)
Benefi ts and claims and movements in
unallocated surplus of with-profi ts
funds, net of reinsurance
Acquisition costs and other operating
(863)
–
(518)
(18,957) (18,711)
(8,285)
–
–
–
–
US
–
–
–
6
725
731
–
–
–
–
Eastspring
Invest-
ments
Total
segment
Unallo-
cated
corporate
– 29,910
(506)
–
Group
total
29,910
(506)
– 29,404
8 24,065
2,335
274
– 29,404
(14) 24,051
2,021
(314)
282 55,804
(328) 55,476
– (44,831)
– (44,831)
–
–
259
(1,381)
–
–
259
(1,381)
– (45,953)
– (45,953)
expenditure F3
(1,478)
(1,079)
(1,965)
(686)
(692)
(207)
(6,107)
52
(6,055)
Finance costs: interest on core structural
borrowings of shareholder-fi nanced
operations
–
(13)
–
(16)
–
–
(29)
(251)
(280)
Total charges, net of reinsurance
(20,435) (19,803) (10,250)
(702)
(692)
(207) (52,089)
(199) (52,288)
Profi t (loss) before tax (being tax
attributable to shareholders’ and
policyholders’ returns) note (i)
Tax charge attributable to policyholders’
1,158
855
1,067
521
returns
(300)
–
(78)
–
Profi t (loss) from continuing operations
before tax attributable to shareholders
858
855
989
521
39
–
39
75
3,715
(527)
3,188
–
(378)
–
(378)
75
3,337
(527)
2,810
This is represented in the segmental analysis of profi t from continuing operations before tax attributable to shareholders in note B1
as follows:
Insurance operations
Asset management
Year ended 31 December 2012 £m
UK
US
Asia
M&G
US
Eastspring
Invest-
ments
Total
segment
Unallo-
cated
corporate
Group
total
Operating profi t based on longer-term
investment returns
736
964
913
371
39
75
3,098
(565)
2,533
Short-term fl uctuations in investment
returns on shareholder-backed business
136
(90)
76
93
Shareholders’ share of actuarial and
other gains and losses on defi ned
benefi t pension schemes
Gain on dilution of Group holdings
Amortisation of acquisition accounting
adjustments arising on purchase
of REALIC
Profi t (loss) from continuing operations
(14)
–
–
–
–
(19)
–
–
–
15
42
–
–
–
–
–
–
–
–
–
215
(11)
204
1
42
49
–
50
42
(19)
–
(19)
before tax attributable to shareholders
858
855
989
521
39
75
3,337
(527)
2,810
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
253
Year ended 31 December 2011* £m
Insurance operations
Asset management
E1
Gross premiums earned
Outward reinsurance premiums
Earned premiums, net of reinsurance
Investment return note (ii)
Other income
UK
US
Asia
M&G
5,678
(131)
12,650
(72)
5,547
7,604
193
12,578
1,447
(62)
7,378
(226)
7,152
283
155
–
–
–
128
923
Total revenue, net of reinsurance
13,344
13,963
7,590
1,051
Benefi ts and claims
Outward reinsurers’ share of benefi ts
(12,048)
(12,931)
(6,081)
and claims note (iv)
290
280
176
Movement in unallocated surplus of
with-profi ts funds note (iii)
Benefi ts and claims and movements in
unallocated surplus of with-profi ts
funds, net of reinsurance
Acquisition costs and other operating
485
–
540
(11,273)
(12,651)
(5,365)
–
–
–
–
US
–
–
–
1
653
654
–
–
–
–
Eastspring
Invest-
ments
Total
segment
Unallo-
cated
corporate
–
–
25,706
(429)
–
2
290
25,277
9,465
2,152
–
–
(105)
(283)
Group
total
25,706
(429)
25,277
9,360
1,869
292
36,894
(388)
36,506
–
(31,060)
–
(31,060)
–
–
746
1,025
–
–
746
1,025
–
(29,289)
–
(29,289)
expenditureF3
(1,239)
(815)
(1,562)
(704)
(630)
(212)
(5,162)
42
(5,120)
Finance costs: interest on core structural
borrowings of shareholder-fi nanced
operations
–
(13)
–
(15)
–
–
(28)
(258)
(286)
Total charges, net of reinsurance
(12,512)
(13,479)
(6,927)
(719)
(630)
(212)
(34,479)
(216)
(34,695)
Profi t (loss) before tax (being tax
attributable to shareholders’ and
policyholders’ returns) note (i)
Tax charge attributable to policyholders’
832
484
663
332
returns
68
–
(51)
–
Profi t (loss) from continuing operations
before tax attributable to shareholders
900
484
612
332
24
–
24
80
2,415
(604)
1,811
–
17
–
17
80
2,432
(604)
1,828
This is represented in the segmental analysis of profi t from continuing operations before tax attributable to shareholders in note B1
as follows:
Insurance operations
Asset management
Year ended 31 December 2011* £m
UK
US
Asia
M&G
US
Eastspring
Invest-
ments
Total
segment
Unallo-
cated
corporate
Group
total
Operating profi t based on longer-term
investment returns
723
651
704
357
24
80
2,539
(512)
2,027
Short-term fl uctuations in investment
returns on shareholder-backed business
159
(167)
(92)
(29)
Shareholders’ share of actuarial and
other gains and losses on defi ned
benefi t pension schemes
Profi t (loss) from continuing operations
18
–
–
4
–
–
–
–
(129)
(91)
(220)
22
(1)
21
before tax attributable to shareholders
900
484
612
332
24
80
2,432
(604)
1,828
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy described
in note A5.
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Financial statements Prudential plc Annual Report 2012
F: Income statement notes continued
F1: Segmental information continued
Notes
(i)
(ii)
This measure is the formal profi t (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 classifi ed as fair value through profi t and loss under IAS 39; and
– Realised gains and losses, including impairment losses, on securities classifi ed as available-for-sale under IAS 39.
(iii) The movement in unallocated surplus of with-profi ts 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-profi ts funds within the statement of fi nancial position, the Hong Kong branch balance is shown within the
unallocated surplus of the PAC with-profi ts sub-fund.
(iv) The increase in the credit for outwards reinsurers’ share of benefi ts and claims for Jackson from 2010 to 2011 arises from the fair value movements on the
GMIB reinsurance in 2011. As the GMIB reinsurance is net settled it is considered to be a derivative under IAS 39. The movement was particularly high in 2011
due to the reduction in US interest rates in 2011.
F2: Revenue
Long-term business premiums
Insurance contract premiums
Investment contracts with discretionary participation feature premiums
Inwards reinsurance premiums
Less: reinsurance premiums ceded
Earned premiums, net of reinsurance note (iv)
Investment return
Realised and unrealised gains and losses on securities at fair value through profi t and loss
Realised and unrealised losses and gains on derivatives at fair value through profi t and loss
Realised losses on available-for-sale securities, previously recognised in other comprehensive income
Realised losses on loans
Interest notes (i),(ii)
Dividends
Other investment return
Investment return
Fee income from investment contract business and asset management notes (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
Eastspring Investments
Total segment
Unallocated corporate
Total
2012 £m
2011 £m
27,447
2,243
220
(506)
29,404
15,338
75
68
(51)
6,600
1,462
559
24,051
2,021
23,705
1,861
140
(429)
25,277
866
86
101
(43)
6,440
1,304
606
9,360
1,869
55,476
36,506
2012 £m
2011 £m
4,310
1,778
403
114
1
3
6,609
(9)
6,600
4,286
1,717
339
110
1
3
6,456
(16)
6,440
Interest income includes £13 million (2011: £8 million) accrued in respect of impaired securities.
(ii)
(iii) Fee income includes £35 million (2011: £13 million) relating to fi nancial instruments that are not held at fair value through profi t and loss.
These fees primarily related to prepayment fees, late fees and syndication fees.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
255
(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:
Asia
US
UK
Intragroup
Total
2012 £m
8,205
274
–
(84)
8,395
14,465
725
–
(77)
15,113
7,098
972
19
(172)
7,917
2011 £m
–
(333)
–
333
–
29,768
1,638
19
–
31,425
Asia
US
UK
Intragroup
Total
7,307
290
–
(93)
7,504
12,516
653
–
(68)
13,101
5,740
923
40
(162)
6,541
–
(323)
–
323
–
25,563
1,543
40
–
27,146
Earned premiums, net of reinsurance
Fee income from investment contract business and asset management (presented as ‘Other income’)
Total revenue from external customers
2012 £m
2011 £m
29,404
2,021
31,425
25,277
1,869
27,146
In their capacity as fund managers to fellow Prudential Group subsidiaries, M&G, Eastspring Investments and US asset management
businesses generate fees for investment management and related services. These services are charged at appropriate arm’s length
prices, typically priced as a percentage of funds under management. Intragroup fees included within asset management revenue were
earned by the following asset management segment:
Intragroup revenue generated by:
M&G
Eastspring Investments
US broker-dealer and asset management (including Curian)
Total intragroup fees included within asset management segment
2012 £m
2011 £m
172
84
77
333
162
93
68
323
Revenue from external customers of Asia, US and UK insurance operations shown above are net of outwards reinsurance premiums
of £178 million, £193 million, and £135 million respectively (2011: £226 million, £72 million and £131 million respectively).
In Asia, revenue from external customers from no individual country exceeds 10 per cent of the Group total. The largest country
is Hong Kong with a total revenue from external customers of £1,745 million (2011: Singapore £1,383 million).
Due to the nature of the business of the Group, there is no reliance on any major customers.
F
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Financial statements Prudential plc Annual Report 2012
F: Income statement notes continued
F3: Acquisition costs and other expenditure
Acquisition costs incurred for insurance policies
Acquisition costs deferred less amortisation of acquisition costs for insurance policies
Administration costs and other expenditure
Movements in amounts attributable to external unit holders
Total acquisition costs and other expenditure
2012 £m
2011* £m
(2,649)
480
(3,728)
(158)
(6,055)
(2,264)
520
(3,524)
148
(5,120)
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy described
in note A5.
Notes
(i)
Acquisition costs in 2012 comprise amounts related to insurance contracts of £(1,949) million (2011: £(1,679) million), and investment contracts and asset
management contracts of £(220) million (2011: £(65) million).
(ii) There were no fee expenses relating to fi nancial liabilities held at amortised cost included in acquisition costs in 2012 and 2011.
(iii) The total depreciation and amortisation expense of £(731) million (2011: £(584) million) relates to amortisation of deferred acquisition costs of insurance
contracts and asset management contracts.
The segmental analysis of total depreciation and amortisation expense is as follows:
Insurance operations:
UK
US
Asia
Asset management operations:
M&G
US
Eastspring Investments
Total segment
Unallocated corporate
Total
2012 £m
2011* £m
(65)
(302)
(332)
(6)
(1)
(4)
(710)
(21)
(731)
(55)
(237)
(270)
(7)
(1)
(4)
(574)
(10)
(584)
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy
described in note A5.
(iv)
Interest expense, excluding interest on core structural borrowings of shareholder-fi nanced operations, amounted to £(140) million (2011: £(123) 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
Total segment
Unallocated corporate
Total
2012 £m
2011 £m
(62)
(28)
(7)
(18)
(115)
(25)
(140)
(49)
(31)
(10)
(11)
(101)
(22)
(123)
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
257
(v) Movements in amounts attributable to external unit holders are in respect of those OEIC and unit trusts which are required to be consolidated and
comprises a charge of £(195) million (2011: a credit of £28 million) for UK insurance operations and a credit of £37 million (2011: £120 million) for Asia
insurance operations.
(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 Offi ce
Asia Regional Head Offi ce:
Gross costs
Recharges to Asia operations
Total
2012 £m
2011 £m
(168)
(99)
36
(63)
(231)
(168)
(86)
35
(51)
(219)
F4: Finance costs – Interest on core structural borrowings of shareholder-fi nanced operations
Finance costs of £280 million (2011: £286 million) comprise £251 million (2011: £258 million) interest on core debt of the parent
company, £13 million (2011: £13 million) on US insurance operations’ surplus notes and £16 million (2011: £15 million) on PruCap’s
bank loan.
F5: Tax
a Total tax charge by nature of expense
An analysis of the total tax benefi t (expense) of continuing operations recognised in the income statement by nature of benefi t
(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) credit in respect of a previously unrecognised tax loss, tax credit or temporary difference
from a prior period
Total deferred tax (charge) credit
Total tax charge
The total tax expense arises as follows:
Current tax expense:
UK
Foreign
Deferred tax (charge) credit:
UK
Foreign
Total
2012 £m
2011* £m
(950)
143
(807)
(178)
(6)
(184)
(991)
(775)
33
(742)
293
57
350
(392)
2012 £m
2011* £m
(393)
(414)
(807)
(45)
(139)
(184)
(991)
(475)
(267)
(742)
455
(105)
350
(392)
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* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in the accounting policy
described in note A5.
258
Financial statements Prudential plc Annual Report 2012
F: Income statement notes continued
F5: Tax continued
The current tax charge of £807 million includes £18 million (2011: charge of £16 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) 5 per cent of the net insurance premium or
(ii) the estimated assessable profi ts, depending on the nature of the business written.
In the UK, life insurance companies are taxed on both their shareholders’ profi ts and on their policyholders’ investment returns on
certain insurance and investment products. Tax on shareholders’ profi ts is calculated at the standard corporation tax rate, and tax on
policyholders’ investment returns is calculated at the basic rate of income tax. Although both types of tax are included in the total tax
charge in the Group’s consolidated income statement, they are presented separately in the income statement to provide the most
relevant information about tax that the Group pays on its profi ts.
Until the end of 2012 for the Group’s UK life insurance companies, shareholders’ profi ts were calculated using regulatory surplus
as a starting point, with appropriate deferred tax adjustments for IFRS. Beginning in 2013, under new UK life tax rules, shareholders’
profi ts will be calculated using accounting profi t or loss as a starting point.
The total tax charge comprises tax attributable to policyholders and unallocated surplus of with-profi ts funds, unit-linked policies
and shareholders as shown below.
Tax charge
Tax (charge) credit to policyholders’ returns
Tax charge attributable to shareholders
Total tax charge
2012 £m
2011* £m
Current
tax
Deferred
tax
(488)
(319)
(807)
110
(294)
(184)
Total
(378)
(613)
(991)
Total
17
(409)
(392)
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy described
in note A5.
The principal reason for the increase in the tax charge attributable to policyholders’ returns is an increase in deferred tax on unrealised
gains and losses on investments.
The total deferred tax (charge)/credit arises as follows:
Unrealised gains and losses on investments
Balances relating to investment and insurance contracts
Short-term timing differences
Capital allowances
Unused tax losses
Deferred tax (charge)/credit
2012 £m
2011* £m
(91)
467
(226)
–
(334)
(184)
129
148
66
2
5
350
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy described
in note A5.
In 2012, a deferred tax charge of £198 million (2011: charge of £187 million) has been taken through other comprehensive income.
Other movements in deferred tax totalling a £378 million credit mainly arises as a result of bringing a deferred tax asset in respect of
the acquired REALIC business on to the balance sheet. When these amounts are taken with the deferred tax charge shown above
there is no signifi cant change in the Group’s net deferred tax liability (2011: decrease of £0.1 billion).
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
259
b Reconciliation of eff ective tax rate
The total tax charge is attributable to shareholders and policyholders as summarised in the income statement.
i Summary of pre-tax profi t and tax (charge)
The income statement includes the following items:
Profi t before tax
Tax (charge) credit attributable to policyholders’ returns
Profi t before tax attributable to shareholders
Tax attributable to shareholders’ profi ts:
Tax charge
Less: tax attributable to policyholders’ returns
Tax charge attributable to shareholders’ returns
Profi t for the year
2012 £m
2011* £m
3,188
(378)
2,810
(991)
378
(613)
1,811
17
1,828
(392)
(17)
(409)
2,197
1,419
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy
described in note A5.
ii Overview
For the purposes of explaining the relationship between tax expense and accounting profi t, it is appropriate to consider the sources
of profi t and tax by reference to those that are attributable to shareholders and policyholders, as follows:
Profi t (loss) before tax
Taxation charge:
Expected tax rate
Expected tax (charge) credit
Variance from expected tax charge note v(ii)
Actual tax (charge) credit
Average effective tax rate
2012 £m
2011* £m
Attributable to
shareholders
Attributable to
policyholders†
Total
Attributable to
shareholders
Attributable to
policyholders†
2,810
378
3,188
1,828
(17)
27%
(763)
150
(613)
22%
100%
(378)
–
(378)
100%
36%
(1,141)
150
(991)
31%
28%
(519)
110
(409)
22%
100%
17
–
17
100%
Total
1,811
28%
(502)
110
(392)
22%
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy
described in note A5.
† For the column entitled ‘Attributable to policyholders’, the profi t (loss) before tax represents income, before tax attributable to policyholders and unallocated
surplus of with-profi ts funds and unit-linked policies. This income has been determined aft er deduction of charges for policyholder benefi ts and movements
on unallocated surplus which are determined net of tax. Hence, the pre-tax results attributable to policyholders is the inverse of the tax charge attributable to
policyholders.
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260
Financial statements Prudential plc Annual Report 2012
F: Income statement notes continued
F5: Tax continued
iii Reconciliation of eff ective tax rate
The total tax charge is attributable to shareholders and policyholders as summarised in the income statement.
Reconciliation of tax charge on profi t attributable to shareholders for continuing operations:
2012 £m (except for tax rates)
Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
Other
operations
2012
Operating profi t (loss) based on longer-term investment
returns
Non-operating profi t (loss)
Profi t before tax attributable to shareholders
Expected tax rate:*
Tax at the expected tax rate
Effects of:
Adjustment to tax charge in relation to prior years
Movements in provisions for open tax matters
Income not taxable or taxable at concessionary rates
Deductions not allowable for tax purposes
Different local basis of tax on overseas profi ts
Impact of changes in local statutory tax rates
Deferred tax adjustments
Irrecoverable withholding taxes
Other
Total actual tax charge
Analysed into:
913
76
989
23%
227
(11)
–
(87)
30
–
–
(6)
–
5
964
(109)
855
35%
300
10
(3)
–
–
(68)
–
–
–
(5)
736
122
858
25%
210
(26)
–
–
–
–
(39)
8
–
8
158
234
161
Tax on operating profi t based on longer-term
investment returns
Tax on non-operating profi t
Actual tax rate:
Operating profi t based on longer-term investment returns
Total profi t
142
16
16%
16%
272
(38)
28%
27%
126
35
17%
19%
* The expected tax rates shown in the table above (rounded to the nearest whole percentage) refl ect the corporation tax rates generally applied to taxable
profi ts of the relevant country jurisdictions. For Asia operations the expected tax rates refl ect the corporation tax rates weighted by reference to the source
of profi ts of operations contributing to the aggregate business result. The expected tax rate for Other operations refl ects the mix of business between UK and
overseas non-insurance operations, which are taxed at a variety of rates. The rates will fl uctuate from year to year dependent on the mix of profi ts.
Total
2,533
277
2,810
27%
763
(37)
29
(89)
33
(68)
(30)
1
14
(3)
613
582
31
23%
22%
(80)
188
108
25%
26
(10)
32
(2)
3
–
9
(1)
14
(11)
60
42
18
(53)%
56%
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
261
Operating profi t (loss) based on longer-term investment
returns
Non-operating profi t
Profi t (loss) before tax attributable to shareholders
Expected tax rate:*
Tax at the expected tax rate
Effects of:
Adjustment to tax charge in relation to prior years
Movements in provisions for open tax matters
Income not taxable or taxable at concessionary rates
Deductions not allowable for tax purposes
Different local basis of tax on overseas profi ts
Impact of changes in local statutory tax rates
Deferred tax adjustments
Irrecoverable withholding taxes
Other
Total actual tax charge (credit)
Analysed into:
Tax on operating profi t based on longer-term
investment returns
Tax on non-operating profi t
Actual tax rate:
Operating profi t based on longer-term investment returns
Total profi t
2011† £m (except for tax rates)
Asia
insurance
operations
US
insurance
operations
UK
insurance
operations
Other
operations
704
(92)
612
25%
151
(7)
–
(36)
12
–
–
7
–
(3)
124
122
2
17%
20%
651
(167)
484
35%
170
–
–
–
–
(37)
–
–
–
(6)
127
185
(58)
28%
26%
723
177
900
27%
243
33
–
(1)
–
–
(32)
–
–
(14)
229
190
39
26%
25%
(51)
(117)
(168)
27%
(45)
(19)
(44)
–
4
–
1
–
13
19
(71)
(64)
(7)
125%
42%
Total
2,027
(199)
1,828
28%
519
7
(44)
(37)
16
(37)
(31)
7
13
(4)
409
433
(24)
21%
22%
* The expected tax rates shown in the table above (rounded to the nearest whole percentage) refl ect the corporation tax rates generally applied to taxable
profi ts of the relevant country jurisdictions. For Asia operations the expected tax rates refl ect the corporation tax rates weighted by reference to the source
of profi ts of operations contributing to the aggregate business result. The expected tax rate for Other operations refl ects the mix of business between UK and
overseas non-insurance operations, which are taxed at a variety of rates. The rates will fl uctuate from year to year dependent on the mix of profi ts.
† The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy
described in note A5.
c Taxes paid
In 2012 Prudential remitted £2.2 billion (2011: £1.6 billion) of tax to Revenue authorities, this includes £925 million (2011: £561 million)
of corporation tax, £184 million of other taxes and £1,078 million collected on behalf of employees, customers and third parties.
The geographical split of taxes remitted by Prudential is as follows:
2012 £m
2011 £m
Corporation
taxes* v
Other taxes†
Taxes
collected‡
221
181
522
1
925
37
25
121
1
184
152
264
662
–
1,078
Total
410
470
1,305
2
2,187
Corporation
taxes* v
Other taxes†
Taxes
collected‡
170
131
260
–
561
32
20
112
1
165
64
221
595
–
880
Total
266
372
967
1
1,606
Asia
US
UK
Other
Total tax paid
* In certain countries such as the UK, the corporation tax payments for the Group’s life insurance businesses are based on taxable profi ts which include
policyholder investment returns on certain life insurance products.
† Other taxes paid includes property taxes, withholding taxes, customs duties, stamp duties, employer payroll taxes and irrecoverable indirect taxes.
‡ Taxes collected are other taxes that Prudential remits to tax authorities which it is obliged to collect from employees, customers and third parties which includes
sales/VAT/GST taxes, employee and annuitant payroll taxes.
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262
Financial statements Prudential plc Annual Report 2012
G: Financial assets and liabilities
G1: Financial instruments – Designation and fair values
The Group designates all fi nancial assets as at fair value, either through profi t and loss or on an available-for-sale, or as loans and
receivables on an amortised cost basis, net of impairment basis. Financial liabilities are designated as either fair value through profi t
and loss, amortised cost, or as investment contracts with discretionary participation features accounted for under IFRS 4 as described
in note A3.
Financial assets
Cash and cash equivalents
Deposits
Equity securities and portfolio holdings in unit trusts
Debt securities note (i)
Loans note (ii)
Other investments note (iii)
Accrued investment income
Other debtors
Financial liabilities
Core structural borrowings of shareholder-fi nanced
operations notes (i), H13
Operational borrowings attributable to
shareholder-fi nanced operations H13
Borrowings attributable to with-profi ts funds H13
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 features note (iv)
Investment contracts without discretionary
participation features
Other creditors
Derivative liabilities
Other liabilities
Fair value
through
profi t and loss
Available-
for-sale
2012 £m
Loans and
receivables
at amortised
cost
–
–
99,958
107,278
2,068
7,900
–
–
–
–
–
32,825
–
–
–
–
6,384
12,653
–
–
9,753
–
2,798
1,361
Total
carrying
value
6,384
12,653
99,958
140,103
11,821
7,900
2,798
1,361
Fair value
6,384
12,653
99,958
140,103
12,333
7,900
2,798
1,361
217,204
32,825
32,949
282,978
2012 £m
Fair value
through
profi t and loss
note (v)
Amortised
cost
IFRS 4
basis
value
Total
carrying
value
Fair value
–
3,554
–
40
2,245
993
–
2,436
4,345
–
16,309
259
2,829
2,021
–
–
2,069
2,522
–
1,433
–
–
–
–
–
3,554
4,133
2,245
1,033
2,245
1,042
2,436
2,455
4,345
4,345
33,812
33,812
–
–
–
–
–
18,378
2,781
2,829
3,454
18,419
2,781
2,829
3,453
25,803
15,252
33,812
74,867
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
263
Financial assets
Cash and cash equivalents
Deposits
Equity securities and portfolio holdings in unit trusts
Debt securities note (i)
Loans note (ii)
Other investments note (iii)
Accrued investment income
Other debtors
Financial liabilities
Core structural borrowings of shareholder-fi nanced
operations notes (i), H13
Operational borrowings attributable to
shareholder-fi nanced operations H13
Borrowings attributable to with-profi ts funds H13
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 features note (iv)
Investment contracts without discretionary
participation features
Other creditors
Derivative liabilities
Other liabilities
Fair value
through
profi t and loss
Available-
for-sale
–
–
87,349
97,482
279
7,509
–
–
–
–
–
27,016
–
–
–
–
2011 £m
Loans and
receivables
at amortised
cost
7,257
10,708
–
–
9,435
–
2,710
987
Total
carrying
value
7,257
10,708
87,349
124,498
9,714
7,509
2,710
987
Fair value
7,257
10,708
87,349
124,498
9,828
7,509
2,710
987
192,619
27,016
31,097
250,732
2011 £m
Fair value
through
profi t and loss
note (v)
Amortised
cost
IFRS 4
basis
value
Total
carrying
value
Fair value
–
–
39
–
3,840
–
15,056
281
3,054
–
3,611
3,340
933
3,114
–
–
1,911
2,263
–
1,249
–
–
–
–
–
3,611
3,815
3,340
972
3,340
978
3,114
3,144
3,840
3,840
29,745
29,745
–
–
–
–
–
16,967
2,544
3,054
1,249
17,008
2,544
3,054
1,249
22,270
16,421
29,745
68,436
Notes
(i)
As at 31 December 2012 £525 million (2011: £523 million) of convertible bonds were included in debt securities and £673 million (2011: £702 million) were
included in borrowings.
Loans and receivables are reported net of allowance for loan losses of £83 million (2011: £89 million).
(ii)
(iii) See note G3 for details of the derivative assets included. The balance also contains the PAC with-profi ts fund’s participation in various investment funds
(iv)
(v)
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 fi nancial liabilities designated as fair value through profi t and loss, the impact on profi t from movements in credit risk during 2012 and 2011 was
negligible.
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264
Financial statements Prudential plc Annual Report 2012
G: Financial assets and liabilities continued
G1: Financial instruments – Designation and fair values continued
Determination of fair value
The fair values of the fi nancial 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 fi nancial investments
which by their nature do not have an externally quoted price based on regular trades and fi nancial investments for which markets are
no longer active as a result of market conditions eg 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 fl ow 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 refl ects 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 specifi c point in time, based upon available market information and judgements about the
fi nancial instruments, including estimates of the timing and amount of expected future cash fl ows and the credit standing of
counterparties. Such estimates do not refl ect any premium or discount that could result from offering for sale at one time the Group’s
entire holdings of a particular fi nancial instrument, nor do they consider the tax impact of the realisation of unrealised gains or losses
from selling the fi nancial instrument being fair valued. In some cases the disclosed value cannot be realised in immediate settlement
of the fi nancial instrument.
The loans and receivables have been shown net of provisions for impairment. The fair value of loans has been estimated from
discounted cash fl ows expected to be received. The rate of discount used was the market rate of interest.
The estimated fair value of derivative fi nancial instruments refl ects 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 fi xed and guaranteed terms the fair value is determined based on the present value
of future cash fl ows discounted at current interest rates.
The fair value of other fi nancial liabilities is determined using discounted cash fl ows of the amounts expected to be paid.
Level 1, 2 and 3 fair value measurement hierarchy of Group fi nancial instruments
The table below includes fi nancial instruments carried at fair value analysed by level of the IFRS 7 ‘Financial Instruments: Disclosures’
defi ned fair value hierarchy. This hierarchy is based on the inputs to the fair value measurement and refl ects the lowest level input that
is signifi cant to that measurement.
The classifi cation 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 includes fi nancial instruments where there is clear evidence that the valuation is based on a quoted publicly traded price
in an active market (eg exchange listed equities, mutual funds with quoted prices and exchange traded derivatives).
Level 2 – inputs other than quoted prices included within level 1 that are observable either directly (ie as prices) or indirectly
(ie derived from prices)
Level 2 includes investments where a direct link to an actively traded price is not readily apparent, but which are valued using inputs
which are largely observable either directly (ie as prices) or indirectly (ie derived from prices). A signifi cant proportion of the Group’s
Level 2 assets are corporate bonds, structured securities and other non-national government debt securities. These assets, in line
with market practice, are generally valued using independent pricing services or third-party broker quotes. 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 and 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.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
265
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 refl ect fair value (eg 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 refl ects 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 classifi ed as Level 3 where these signifi cant inputs are not based on
observable market data.
Of the total Level 2 debt securities of £105,839 million at 31 December 2012 (31 December 2011: £94,378 million), £8,248 million
are valued internally (31 December 2011: £6,847 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 in a specifi ed 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 – Signifi cant inputs for the asset or liability that are not based on observable market data (unobservable inputs)
Level 3 includes investments which are internally valued or subject to a signifi cant number of unobservable assumptions (eg private
equity funds and certain derivatives which are bespoke or long-dated).
At 31 December 2012, the Group held £6,660 million (2011: £4,565 million), 3 per cent of the fair valued fi nancial investments, net
of derivative liabilities (2011: 2 per cent), within Level 3.
Of these amounts, £3,916 million (2011: £3,732 million) was held by the Group’s participating funds and therefore shareholders’
profi t and equity are not impacted by movements in the valuation of these fi nancial instruments. At 31 December 2012, the
£3,916 million (2011: £3,732 million) represented 4.3 per cent (2011: 4.3 per cent) of the total fair valued fi nancial instruments,
net of derivative liabilities of the participating funds.
Included within the £2,703 million Level 3 fair valued fi nancial investments, net of derivative liabilities at 31 December 2012
(2011: £800 million) held to support non-linked shareholder-backed business were loans of £1,842 million, attaching to the purchase
of REALIC in 2012 held to back the liabilities for funds withheld under reinsurance arrangement. The funds withheld liability, which
was also accounted for on a fair value basis and classifi ed as Level 3, amounted to £2,021 million at 31 December 2012. This liability
is included within Other fi nancial liabilities held at fair value in the table below.
Excluding the fi nancial investments of £1,842 million held to back the funds withheld liability under REALIC’s reinsurance
arrangement, the Level 3 fair valued fi nancial investments, net of derivative liabilities, supporting non-linked shareholder-backed
business at 31 December 2012 were £861 million (2011: £800 million) (representing 1.2 per cent of the total fair valued fi nancial
investments net of derivative liabilities backing this business (2011: 1.3 per cent)). Of this amount, £837 million of net assets are
externally valued and £24 million of net liabilities are internally valued (2011: net assets of £757 million and £43 million respectively).
Internal valuations, which represent 0.03 per cent of the total fair valued fi nancial investments net of derivative liabilities supporting
non-linked shareholder-backed business at 31 December 2012 (2011: 0.1 per cent), are inherently more subjective than external
valuations.
If the value of all Level 3 investments backing non-linked shareholder-backed business valued internally was varied downwards by
10 per cent, the change in valuation would be £2 million (2011: £4 million), which would reduce shareholders’ equity by this amount
before tax. Of this amount, a £1 million increase (2011: £1 million decrease) would pass through the income statement substantially
as part of short-term fl uctuations in investment returns outside of operating profi t and a £3 million decrease (2011: £3 million decrease)
would be included as part of other comprehensive income, being unrealised movements on assets classifi ed as available-for-sale.
G
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s
a
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266
Financial statements Prudential plc Annual Report 2012
G: Financial assets and liabilities continued
G1: Financial instruments – Designation and fair values continued
Analysis of fi nancial investments, net of derivative liabilities
by business type
With-profi ts
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total fi nancial investments, net of derivative liabilities
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 fi nancial investments, net of derivative liabilities
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 fi nancial investments, net of derivative liabilities
Percentage of total
Group total analysis, including other fi nancial liabilities held at fair value
Group total
Loans
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total fi nancial investments, net of derivative liabilities
Borrowings attributable to the with-profi ts fund held at fair value
Investment contracts liabilities without discretionary participation
features held at fair value
Net asset value attributable to unit holders of consolidated unit trusts
and similar funds
Other fi nancial liabilities held at fair value
Total fi nancial instruments at fair value
Percentage of total
31 December 2012 £m
Level 1
Level 2
Level 3
Total
22,129
15,910
108
(61)
38,086
42%
73,632
3,843
47
–
77,522
93%
–
937
13,721
31
(16)
14,673
20%
2,496
45,550
1,743
(1,072)
48,717
54%
189
5,659
10
(1)
5,857
7%
226
7
54,630
2,306
(1,484)
55,685
76%
–
96,698
33,474
186
(77)
130,281
–
226
2,692
105,839
4,059
(2,557)
110,259
(40)
480
542
2,894
–
3,916
4%
39
2
–
–
41
0%
1,842*
49
246
761
(195)
2,703
4%
1,842*
568
790
3,655
(195)
6,660
–
25,105
62,002
4,745
(1,133)
90,719
100%
73,860
9,504
57
(1)
83,420
100%
2,068
993
68,597
3,098
(1,695)
73,061
100%
2,068
99,958
140,103
7,900
(2,829)
247,200
(40)
–
(16,309)
–
(16,309)
(3,309)
–
126,972
57%
(430)
(259)
93,221
41%
(606)
(2,021)*
(4,345)
(2,280)
4,033
2%
224,226
100%
* The Level 3 loans and other fi nancial liabilities held by the non-linked shareholder-backed business include amounts of £1,842 million and £(2,021) million,
respectively relating to the reinsurance arrangements attaching to the purchase of REALIC as described in note I1.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
267
Analysis of fi nancial investments, net of derivative liabilities
by business type
With-profi ts
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total fi nancial investments, net of derivative liabilities
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 fi nancial investments, net of derivative liabilities
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 fi nancial investments, net of derivative liabilities
Percentage of total
Group total analysis, including other fi nancial liabilities held at fair value
Group total
Loans
Equity securities and portfolio holdings in unit trusts
Debt securities
Other investments (including derivative assets)
Derivative liabilities
Total fi nancial investments, net of derivative liabilities
Borrowings attributable to the with-profi ts fund held at fair value
Investment contracts liabilities without discretionary participation
features held at fair value
Net asset value attributable to unit holders of consolidated unit trusts
and similar funds
Other fi nancial liabilities held at fair value
Total fi nancial instruments at fair value
Percentage of total
31 December 2011 £m
Level 1
Level 2
Level 3
Total
24,001
13,298
252
(214)
37,337
43%
59,662
4,160
18
(2)
63,838
93%
–
1,175
11,753
30
(78)
12,880
21%
–
84,838
29,211
300
(294)
114,055
–
1,762
43,279
1,378
(1,127)
45,292
53%
198
4,698
95
(7)
4,984
7%
279
176
46,401
2,237
(1,408)
47,685
78%
279
2,136
94,378
3,710
(2,542)
97,961
(39)
284
655
2,793
–
3,732
4%
30
3
–
–
33
0%
–
61
251
706
(218)
800
1%
–
375
909
3,499
(218)
4,565
–
26,047
57,232
4,423
(1,341)
86,361
100%
59,890
8,861
113
(9)
68,855
100%
279
1,412
58,405
2,973
(1,704)
61,365
100%
279
87,349
124,498
7,509
(3,054)
216,581
(39)
–
(15,056)
–
(15,056)
(2,586)
–
111,469
57%
(805)
(281)
81,780
41%
(449)
–
4,116
2%
(3,840)
(281)
197,365
100%
Reconciliation of movements in Level 3 fi nancial instruments measured at fair value
The following tables reconcile the value of Level 3 fi nancial instruments at 1 January 2012 to that presented at 31 December 2012
and at 1 January 2011 to that presented at 31 December 2011.
Total investment return recorded in the income statement represents interest and dividend income, realised gains and losses,
unrealised gains and losses on fi nancial instruments classifi ed at fair value through profi t and loss and foreign exchange movements
on an individual entity’s overseas investments.
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.
G
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Financial statements Prudential plc Annual Report 2012
G: Financial assets and liabilities continued
G1: Financial instruments – Designation and fair values continued
The transfers in and out of Level 3 during 2012 represent sundry individual fi nancial investments, none of which are materially
signifi cant as highlighted in the table below:
£m
Total
gains/
losses
recorded
in other
compre-
hensive
income
Total
gains/
losses in
income
statement
At
1 Jan
Acquisi-
tion of
REALIC
Pur-
chases
Sales
Settled
Issued
Transfers
into
level 3
Transfers
out of
level 3
At
31 Dec
2012
Loans
Equity securities and
–
(46)
(42) 1,858
–
–
(12)
84
–
–
1,842
portfolio holdings in
unit trusts
Debt securities
Other investments (including
derivative assets)
Derivative liabilities
375
909
3,499
(218)
49
65
250
13
44
(3)
(61)
–
–
–
–
–
255
260
482
–
(98)
(217)
(515)
–
–
(73)
–
–
–
–
–
–
6
18
–
–
(63)
(169)
568
790
–
10
3,655
(195)
Total fi nancial investments,
net of derivative liabilities
Net asset value attributable
to unit holders of
consolidated unit trusts
and similar funds
Other fi nancial investments
Total
2011
Equity securities and
portfolio holdings in
unit trusts
Debt securities
Other investments (including
derivative assets)
Derivative liabilities
Total fi nancial investments,
net of derivative liabilities
Net asset value attributable
to unit holders of
consolidated unit trusts
and similar funds
Total
4,565
331
(62) 1,858
997
(830)
(85)
84
24
(222) 6,660
(449)
–
(20)
41
4,116
352
(47)
46
(63)
–
(2,075)
2
–
1
–
–
73
(93)
(106)
–
–
–
–
(606)
(2,021)
(217)
999
(829)
(12)
(115)
24
(222) 4,033
576
1,117
3,106
(226)
50
46
224
(17)
(1)
5
(50)
–
–
–
–
–
62
274
691
–
(278)
(490)
(417)
–
–
(21)
–
–
4,573
303
(46)
–
1,027
(1,185)
(21)
(379)
4,194
(78)
225
–
(46)
–
–
(10)
18
–
1,017
(1,167)
(21)
–
–
–
–
–
–
–
–
51
–
–
(34)
(73)
(55)
25
375
909
3,499
(218)
51
(137)
4,565
–
51
–
(449)
(137)
4,116
Of the total gains and losses in the income statement of £357 million (2011: £225 million), £126 million (2011: £99 million) relates to
fi nancial instruments still held at the end of the year, which can be analysed as follows:
Equity securities
Debt securities
Other investments
Derivative liabilities
Net asset value attributable to unit holders of consolidated unit trusts and similar funds
Total
2012 £m
2011 £m
27
51
48
–
–
126
49
20
176
(68)
(78)
99
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
269
Transfers between Level 1 and Level 2
During 2012, the transfers between levels within the Group’s portfolio were primarily transfers from Level 1 to Level 2 of £600 million
(2011: £335 million) and transfers from Level 2 to Level 1 of £227 million (2011: nil). These transfers which relate to equity securities
and debt securities arose to refl ect the change in the observability of the inputs used in valuing these securities.
Interest income and expense
The interest income on fi nancial assets not at fair value through profi t and loss for the year ended 31 December 2012 from continuing
operations was £1,886 million (2011: £1,814 million).
The interest expense on fi nancial liabilities not at fair value through profi t and loss for the year ended 31 December 2012 from
continuing operations was £420 million (2011: £456 million).
G2: Market risk
Interest rate risk
The following table shows an analysis of the classes of fi nancial assets and liabilities except for cash and cash equivalents and their
direct exposure to interest rate risk. Each applicable class of the Group’s fi nancial assets or liabilities is analysed between those
exposed to fair value interest rate risk, cash fl ow interest rate risk and those with no direct interest rate risk exposure:
Financial assets
Deposits
Debt securities
Loans
Other investments (including derivatives)
Financial liabilities
Core structural borrowings of shareholder-fi nanced operations
Operational borrowings attributable to shareholder-fi nanced operations
Borrowings attributable to with-profi ts funds
Obligations under funding, securities lending and sale and repurchase
agreements
Investment contracts without discretionary participation features
Derivative liabilities
Other liabilities
Financial assets
Deposits
Debt securities
Loans
Other investments (including derivatives)
Financial liabilities
Core structural borrowings of shareholder-fi nanced operations
Operational borrowings attributable to shareholder-fi nanced operations
Borrowings attributable to with-profi ts funds
Obligations under funding, securities lending and sale and repurchase
agreements
Investment contracts without discretionary participation features
Derivative liabilities
Other liabilities
2012 £m
Fair value
interest
rate risk
Cash fl ow
interest
rate risk
Not directly
exposed to
interest
rate risk
Total
1,021
131,732
8,992
1,896
11,445
7,851
2,809
1,126
187
520
20
4,878
12,653
140,103
11,821
7,900
143,641
23,231
5,605
172,477
3,279
574
379
403
1,179
974
165
6,953
275
1,670
562
2,033
894
576
116
6,126
–
1
92
–
16,305
1,279
3,173
3,554
2,245
1,033
2,436
18,378
2,829
3,454
20,850
33,929
2011 £m
Fair value
interest
rate risk
Cash fl ow
interest
rate risk
Not directly
exposed to
interest
rate risk
790
117,988
6,424
1,912
9,439
5,788
3,091
1,077
127,114
19,395
3,362
3,114
120
580
1,011
1,426
158
9,771
249
213
743
2,534
903
615
142
5,399
479
722
199
4,520
5,920
–
13
109
–
15,053
1,013
949
17,137
Total
10,708
124,498
9,714
7,509
152,429
3,611
3,340
972
3,114
16,967
3,054
1,249
32,307
G
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270
Financial statements Prudential plc Annual Report 2012
G: Financial assets and liabilities continued
G2: Market risk continued
Liquidity analysis
i Contractual maturities of fi nancial liabilities
The following table sets out the contractual maturities for applicable classes of fi nancial liabilities, excluding derivative liabilities
and investment contracts that are separately presented. The fi nancial liabilities are included in the column relating to the
contractual maturities at the undiscounted cash fl ows (including contractual interest payments) due to be paid assuming conditions
are consistent with those of year end.
Financial liabilities
Core structural borrowings of
shareholder-fi nanced operations H13
Operational borrowings attributable to
shareholder-fi nanced operations H13
Borrowings attributable to with-profi ts
Total
carrying
value
1 year
or less
Aft er 1
year to
5 years
Aft er 5
years to
10 years
Aft er 10
years to
15 years
Aft er 15
years to
20 years
Over
20 years
No stated
maturity
Total
2012 £m
3,554
140
791
603
958
1,038
691
1,753
5,974
2,245
1,708
558
–
–
–
–
–
2,266
funds H13
1,033
115
542
199
71
12
73
194
1,206
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
Financial liabilities
Core structural borrowings of
shareholder-fi nanced operations H13
Operational borrowings attributable to
shareholder-fi nanced operations H13
Borrowings attributable to with-profi ts
funds H13
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
2,436
3,453
2,436
945
4,345
2,781
4,345
2,515
–
45
–
23
–
5
–
36
–
–
–
73
–
–
–
70
–
–
–
2,458
2,436
3,453
–
406
–
–
4,345
3,123
19,847 12,204
1,959
843
1,102
1,120
1,170
4,405 22,803
Total
carrying
value
1 year
or less
Aft er 1
year to
5 years
Aft er 5
years to
10 years
Aft er 10
years to
15 years
Aft er 15
years to
20 years
Over
20 years
No stated
maturity
Total
2011 £m
3,611
245
624
606
840
1,243
737
1,834
6,129
3,340
2,971
394
–
–
972
199
418
158
100
3,114
1,249
3,114
842
3,840
2,544
3,840
2,268
–
106
–
20
–
5
–
27
–
–
–
36
–
5
–
–
–
–
3,365
97
139
1,116
–
–
–
296
3,114
1,249
–
45
–
148
–
–
3,840
2,544
18,670 13,479
1,562
796
976
1,293
982
2,269 21,357
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
271
ii Maturity analysis of derivatives
The following table provides a maturity analysis of derivative assets and liabilities:
Net derivative position
Net derivative position
2012 £m
Total
carrying
value
1 year
or less
Aft er 1
year to
3 years
Aft er 3
years to
5 years
Aft er
5 years
Total
1,033
1,025
(22)
(14)
(50)
939
2011 £m
Total
carrying
value
1 year
or less
Aft er 1
year to
3 years
Aft er 3
years to
5 years
Aft er
5 years
Total
601
731
(18)
(11)
(31)
671
The net derivative positions as shown in the table above comprise the following derivative assets and liabilities:
Derivative assets
Derivative liabilities
Net derivative position
2012 £m
2011 £m
3,862
(2,829)
1,033
3,655
(3,054)
601
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 (ie to manage principally asset or liability value exposures). Contractual maturities are not
considered essential for an understanding of the timing of the cash fl ows for these instruments and, in particular, the Group has
no cash fl ow hedges. The only exception is certain identifi ed interest rate swaps which are fully expected to be held until maturity
solely for the purposes of matching cash fl ows on separately held assets and liabilities. For these instruments the undiscounted
cash fl ows (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 profi le for investment contracts on an undiscounted basis to the nearest £ billion. This maturity
profi le has been based on the cash fl ow projections of expected benefi t payments as part of the determination of the value of
in-force business when preparing EEV basis results.
Life assurance investment contracts
4
16
15
11
8
10
64
52
2012 £bn
1 year
or less
Aft er 1
year to
5 years
Aft er 5
years to
10 years
Aft er 10
years to
15 years
Aft er 15
years to
20 years
Over
20 years
Total
undis-
counted
value
Total
carrying
value
Life assurance investment contracts
3
12
13
11
9
10
58
47
2011 £bn
1 year
or less
Aft er 1
year to
5 years
Aft er 5
years to
10 years
Aft er 10
years to
15 years
Aft er 15
years to
20 years
Over
20 years
Total
undis-
counted
value
Total
carrying
value
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272
Financial statements Prudential plc Annual Report 2012
G: Financial assets and liabilities continued
G2: Market risk continued
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 profi le above excludes certain corporate unit-linked business with gross policyholder liabilities of £12 billion
(2011: £11 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 fi nancial 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 fi nancial assets are held to back the Group’s policyholder liabilities. Although asset/liability
matching is an important component of managing policyholder liabilities (both those classifi ed as insurance and those classifi ed
as investments), this profi le 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.
Market and other fi nancial risks
The Group’s maximum exposure to credit risk of fi nancial instruments before any allowance for collateral or allocation of losses to
policyholders is represented by the carrying value of fi nancial 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 D2a(iv), D3a(ii)(ii) and D4a(iii), 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, £25 million (2011: £39 million) are past their due date but have not been impaired. Of the
total past due but not impaired, £18 million is less than one year past their due date (2011: £3 million). The Group expects full recovery
of these loans and receivables.
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 £86 million
(2011: £90 million).
In addition, during the year the Group took possession of £16 million (2011: £13 million) of other collateral held as security, which
mainly consists of assets that could be readily convertible into cash.
Further details of collateral and pledges are provided in note G4.
Currency risk
As at 31 December 2012, the Group held 19 per cent (2011: 21 per cent) and 7 per cent (2011: 9 per cent) of its fi nancial assets
and fi nancial liabilities respectively, in currencies, mainly US dollar and Euro, other than the functional currency of the relevant
business unit.
Financial assets, of which 56 per cent (2011: 55 per cent) are held by the PAC with-profi ts fund, allow the PAC with-profi ts fund
to obtain exposure to foreign equity markets.
Financial liabilities, of which 28 per cent (2011: 28 per cent) are held by the PAC with-profi ts 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).
The amount of exchange loss recognised in the income statement in 2012, except for those arising on fi nancial instruments
measured at fair value through profi t and loss, is £213 million (2011: £1 million gain). This constitutes £1 million loss (2011: £11 million
loss) on Medium Term Notes (MTN) liabilities and £212 million of net loss (2011: £12 million net gain), mainly arising on investments of
the PAC with-profi ts fund. The gains/losses on MTN liabilities are fully offset by value movements on cross-currency swaps, which are
measured at fair value through profi t and loss.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
273
G3: Derivatives and Hedging
Derivatives
The Group enters into a variety of exchange traded and over-the-counter derivative fi nancial 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, with the exception of some Asia 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 2012 were as follows:
Derivative assets
Derivative liabilities
Derivative assets
Derivative liabilities
2012 £m
UK
insurance
operations
US
insurance
operations
Asia
insurance
operations
Asset
management
Unallocated
to a segment
1,349
(1,007)
342
1,546
(645)
901
927
(837)
90
38
(150)
(112)
2
(190)
(188)
2011 £m
UK
insurance
operations
US
insurance
operations
Asia
insurance
operations
Asset
management
Unallocated
to a segment
1,461
(1,298)
163
1,677
(887)
790
444
(480)
(36)
71
(182)
(111)
2
(207)
(205)
Group
total
3,862
(2,829)
1,033
Group
total
3,655
(3,054)
601
The above derivative assets are included in ‘other investments’ in the primary statements.
These derivatives are used for effi cient portfolio management to obtain cost effective and effi cient 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 with-profi ts funds use derivatives for the purposes of effi cient portfolio management or reduction in investment risks. For UK
annuity business derivatives are used to assist with asset and liability cash fl ow matching.
Some of the Group’s products, especially those sold in the US, have certain guarantee features linked to equity indexes. A mismatch
between guaranteed 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 has chosen to designate as a fair value hedge certain fi xed to fl oating 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 2012, was an asset of less than £1 million
(2011: asset of £3 million). Movements in the fair value of the hedging instruments of a net loss of £3 million (2011: net loss of
£2 million) and the hedged items of a net gain of £3 million (2011: net gain of £2 million) are recorded in the income statement
in respect of the fair value hedges above.
Net investment hedges
The Group has designated perpetual subordinated capital securities totalling US$2.85 billion (2011: US$2.85 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 £1,746 million as at 31 December 2012 (2011: £1,823 million). The foreign exchange loss of £81 million (2011: loss of
£18 million) on translation of the borrowings to pounds sterling at the statement of fi nancial position date is recognised in the
translation reserve in shareholders’ equity.
This net investment hedge was 100 per cent effective.
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Cash fl ow hedges
The Group has no cash fl ow hedges in place.
274
Financial statements Prudential plc Annual Report 2012
G: Financial assets and liabilities continued
G4: Derecognition and collateral
Securities lending and reverse repurchase agreements
The Group has entered into securities lending (including repurchase agreements) whereby blocks of securities are loaned to third
parties, primarily major brokerage fi rms. 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 fi nancial position, rather they are retained within the appropriate investment classifi cation.
Collateral typically consists of cash, debt securities, equity securities and letters of credit. At 31 December 2012, the Group had lent
£3,015 million (2011: £7,843 million) of securities of which £2,047 million (2011: £5,820 million) was lent by the PAC with-profi ts fund
and held collateral under such agreements of £3,137 million (2011: £8,160 million) of which £2,138 million (2011: £6,108 million) was
held by the PAC with-profi ts fund.
At 31 December 2012, 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 £943 million (2011: £1,607 million), together with
accrued interest.
Collateral and pledges under derivative transactions
At 31 December 2012, the Group had pledged £754 million (2011: £840 million) for liabilities and held collateral of £1,964 million
(2011: £1,953 million) in respect of over-the-counter derivative transactions.
These transactions are conducted under terms that are usual and customary to collateralised transactions including, where
relevant, standard securities lending and repurchase agreement.
G5: Impairment of fi nancial assets
In accordance with the Group’s accounting policy set out in note A3, 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 2012, impairment losses of £50 million (2011: £126 million) were recognised for available-for-
sale securities and loans and receivables analysed as shown in the attached table.
Available-for-sale securities held by Jackson
Loans and receivables*
2012 £m
2011 £m
37
13
50
62
64
126
* Relates to loans held by the UK with-profi ts fund and mortgage loans held by Jackson
Impairment losses recognised on available-for-sale securities amounted to £37 million (2011: £62 million). Of this amount, 22 per cent
(2011: 34 per cent) has been recorded on structured asset-backed securities, primarily due to reduced cash fl ow expectations on such
securities that are collateralised by diversifi ed pools of primarily below investment grade securities. Of the losses related to the
impairment of fi xed maturity securities, the top fi ve individual corporate issuers made up 74 per cent (2011: 75 per cent), refl ecting
a deteriorating business outlook of the companies concerned. The impairment losses have been recorded in ‘investment return’
in the income statement.
In 2012, the Group realised gross losses on sales of available-for-sale securities of £44 million (2011: £43 million) with 64 per cent
(2011: 64 per cent) of these losses related to the disposal of fi xed maturity securities of 10 (2011: 10) individual issuers, which were
disposed of as part of risk reduction programmes intended to limit future credit loss exposure. Of the £44 million (2011: £43 million),
£23 million (2011: £32 million) relates to losses on sales of impaired and deteriorating securities.
The effect of those reasonably likely changes in the key assumptions that underpin the assessment of whether impairment has
taken place depends on the factors described in note A4. A key indicator of whether such impairment may arise in future, and the
potential amounts at risk, is the profi le of gross unrealised losses for fi xed 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 2012, the amount of gross unrealised losses for fi xed maturity securities classifi ed as available-for-sale under IFRS in an
unrealised loss position was £178 million (2011: £246 million). Notes B1 and D3 provide further details on the impairment charges
and unrealised losses of Jackson’s available-for-sale securities.
H: Other information on statement of fi nancial position items
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
275
H1: Intangible assets attributable to shareholders
a Goodwill
Cost
At beginning of year
Additional consideration paid on previously acquired business
Exchange differences
At end of year
Aggregate impairment
Net book amount at end of year
Goodwill attributable to shareholders comprises:
M&G
Other
2012 £m
2011 £m
1,585
2
2
1,589
(120)
1,469
1,153
316
1,469
1,586
–
(1)
1,585
(120)
1,465
1,153
312
1,465
‘Other’ represents goodwill amounts across cash generating units (CGUs) in Asia and US operations. Other goodwill amounts are
not individually material.
Impairment testing
Goodwill does not generate cash fl ows independently of other groups of assets and thus is assigned to 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.
Assessment of whether goodwill may be impaired
Goodwill is tested for impairment by comparing the CGUs’ carrying amount, including any goodwill, with its recoverable amount.
With the exception of M&G, the goodwill attributable to shareholders in the statement of fi nancial 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 fi nancial 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.
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Financial statements Prudential plc Annual Report 2012
H: Other information on statement of fi nancial position items continued
H1: Intangible assets attributable to shareholders continued
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 fl ows expected to be derived from the M&G operating segment (based upon
management projections).
The discounted cash fl ow valuation has been based on a three-year plan prepared by M&G, and approved by management,
and cash fl ow projections for later years.
The value in use is particularly sensitive to a number of key assumptions as follows:
i
ii
The set of economic, market and business assumptions used to derive the three-year plan. The direct and secondary effects
of recent developments, eg changes in global equity markets, are considered by management in arriving at the expectations
for the fi nancial projections for the plan;
The assumed growth rate on forecast cash fl ows beyond the terminal year of the plan. A growth rate of 2.5 per cent
(2011: 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 (2011: 12 per cent) has been applied to post-tax
cash fl ows. The pre-tax risk discount rate was 15 per cent (2011: 15 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 5 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; and
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 2012 and 2011 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 (DAC) and other intangible assets in the Group consolidated statement of fi nancial position attributable
to shareholders comprise:
Deferred acquisition costs related to insurance contracts as classifi ed under IFRS 4
Deferred acquisition costs related to investment management contracts, including life
assurance contracts classifi ed as fi nancial instruments and investment management
contracts under IFRS 4
Present value of acquired in-force policies for insurance contracts as classifi ed under
IFRS 4 (PVIF)
Other intangibles
2012 £m
2011* £m
2010* £m
3,866
3,805
3,550
100
3,966
64
237
301
107
3,912
64
258
322
110
3,660
70
171
241
Total of deferred acquisition costs and other intangible assets
4,267
4,234
3,901
* The 2011 and 2010 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy
described in note A5.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
277
Balance at 1 January
As previously reported
Effect of change in accounting policy A5
Aft er eff ect of change
Additions
Acquisition of REALIC in 2012 and UOB Life
Assurance Ltd in 2010
Amortisation to the income statement:
Operating profi t
Amortisation related to short-term fl uctuations in
investment returns
Exchange differences
Change in shadow DAC related to movement in
unrealised appreciation of Jackson's securities
classifi ed as available-for-sale†
Disposals
Dilution of Group's holdings
Balance at 31 December
2012 £m
2011 £m
2010 £m
Deferred acquisition costs
UK
US
note (i)
Asia
111
–
111
12
3,880
(785)
3,095
798
744
(50)
694
249
–
–
–
(20)
(356)
(277)
–
(20)
–
–
–
–
76
(280)
(144)
(270)
–
–
–
(277)
(12)
–
–
–
Asset
manage-
ment
PVIF and
other
intan-
gibles
Total
Total
Total
12
–
12
3
–
(5)
–
(5)
–
–
–
–
322
–
322
31
5,069
(835)
4,234
1,093
4,667
(766)
3,901
1,117
4,097
(651)
3,446
968
5
5
–
12
(51)
(709)
(792)
(515)
–
(51)
(6)
–
–
–
76
(633)
(162)
(270)
–
–
287
(505)
(2)
(275)
(2)
–
283
(232)
129
(410)
(5)
(7)
103
3,199
654
10
301
4,267
4,234
3,901
* The 2011 and 2010 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy
described in note A5.
† (See note D3(g) for explanation).
US operations DAC
Summary balances
The DAC amount in respect of US insurance operations comprises amounts in respect of:
Variable annuity business
Other business
Cumulative shadow DAC (for unrealised gains/losses booked in other comprehensive income)
Total DAC for US operations
2012 £m
2011* £m
2010* £m
3,330
821
(952)
3,199
2,960
855
(720)
3,095
2,283
980
(434)
2,829
* The 2011 and 2010 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy
described in note A5.
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278
Financial statements Prudential plc Annual Report 2012
H: Other information on statement of fi nancial position items continued
H1: Intangible assets attributable to shareholders continued
Deferred acquisition costs related to insurance and investment contracts attributable to shareholders
The movement in deferred acquisition costs relating to insurance and investments contracts attributable to shareholders are as follows:
DAC at 1 January
Additions
Amortisation
Exchange differences
Change in shadow DAC related to movement
in unrealised appreciation of Jackson’s
securities classifi ed as available-for-sale
Dilution of holding in PruHealth
DAC at 31 December
2012 £m
2011* £m
2010* £m
Insurance
contracts
Investment
management
note
Insurance
contracts
Investment
management
note
Insurance
contracts
Investment
management
note
3,805
1,048
(563)
(154)
(270)
–
3,866
105
12
(17)
–
–
–
3,550
982
(450)
–
(275)
–
110
17
(20)
–
–
–
3,172
710
(19)
104
(410)
(7)
100
3,807
107
3,550
107
21
(18)
–
–
–
110
* The 2011 and 2010 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy
described in note A5.
Note
All of the additions are through internal development. The carrying amount of the balance comprises the following gross and accumulated amortisation amounts:
Gross amount
Accumulated amortisation
Net book amount
31 December
2012 £m
2011 £m
2010 £m
210
(110)
100
200
(93)
107
183
(73)
110
Present value of acquired in-force (PVIF) and other intangibles attributable to shareholders
2012 £m
Other intangibles
note (ii)
2011 £m
Other intangibles
note (ii)
At 1 January
Cost
Accumulated amortisation
Additions (including amounts arising
on acquisition of subsidiaries)
Amortisation charge
Disposals
Exchange differences
At 31 December
Comprising:
Cost
Accumulated amortisation
PVIF
note (i)
212
(148)
64
5
(5)
–
–
Distri-
bution
rights
Soft ware
Total
235
(36)
199
–
(17)
–
(5)
163
(104)
610
(288)
59
322
31
(29)
–
(1)
60
36
(51)
–
(6)
301
PVIF
note (i)
203
(133)
70
–
(5)
–
(1)
64
64
177
217
(153)
64
230
(53)
177
193
(133)
640
(339)
60
301
200
(136)
64
Distri-
bution
rights
Soft ware
Total
136
(23)
113
96
(9)
–
(1)
199
235
(36)
199
144
(86)
58
24
(21)
(2)
–
59
163
(104)
59
483
(242)
241
120
(35)
(2)
(2)
322
598
(276)
322
Notes
(i)
All of the PVIF balances relate to insurance contracts and is accounted for under UK GAAP as permitted by IFRS 4. Investment contracts have been fully
amortised. 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 profi ts emerge.
(ii) Other intangibles comprise distribution and soft ware rights. 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 fi xed period of time. The distribution rights amounts are amortised
over the term of the distribution contracts. Soft ware is amortised over its useful economic life, which generally represents the licence period of the soft ware
acquired. Amortisation is charged to the ‘acquisition costs and other expenditure’ line in the income statement.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
279
H2: Intangible assets attributable to with-profi ts funds
a Goodwill in respect of acquired investment subsidiaries for venture fund and other investment purposes
At 1 January
Additions in the year
At 31 December
2012 £m
2011 £m
178
–
178
166
12
178
All the goodwill relates to the UK insurance operations segment.
The venture fund investments consolidated by the Group relates to investments by PAC with-profi ts fund managed by M&G. The
goodwill shown in the table above relates to these venture fund investments. Goodwill is tested for impairment of 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
fl ow valuation. The valuations are based on cash fl ow projections to 2016 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 per cent to 14 per cent derived by reference to risk-free rates and an equity premium risk. In 2012, no goodwill was deemed
to be impaired following the impairment testing carried out.
b Deferred acquisition costs and other intangible assets
Other intangible assets in the Group consolidated statement of fi nancial position attributable to with-profi ts funds consist of:
Deferred acquisition costs related to insurance contracts attributable to the PAC with-profi ts fund
Distribution rights attributable to with-profi ts funds of the Asia insurance operations
Computer software attributable to with-profi ts funds of the Asia insurance operations
2012 £m
2011 £m
6
70
2
78
6
83
–
89
Deferred acquisition costs related to insurance contracts attributable to the PAC with-profi ts fund
The movement in deferred acquisition costs relating to insurance contracts attributable to the PAC with-profi ts fund is as follows:
At 1 January
Amortisation charge
At 31 December
The above costs relate to non-participating business written by the PAC with-profi ts sub-fund.
No deferred acquisition costs are established for the participating business.
2012 £m
2011 £m
6
–
6
13
(7)
6
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Financial statements Prudential plc Annual Report 2012
H: Other information on statement of fi nancial position items continued
H2: Intangible assets attributable to with-profi ts funds continued
Distribution rights attributable to with-profi t funds of the Asia 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 fi xed period of time. The distribution rights amounts are amortised over the term
of the distribution contracts.
At 1 January
Gross amount
Accumulated amortisation
Amortisation charge
Exchange differences
Reclassifi cation
At 31 December
Comprising:
Gross amount
Accumulated amortisation
H3: Reinsurers’ share of insurance contract liabilities
Insurance contract liabilities
Claims outstanding
Comprising amounts in respect of:
UK insurance operations D2 (f)
US insurance operations D3 (f)
Asia insurance operations D4 (f)
The movement on reinsurers’ share of insurance contract liabilities is as follows:
At 1 January
Acquisition of REALIC
Other movements in the year
Foreign exchange translation differences
At 31 December
2012 £m
2011 £m
96
(13)
83
(9)
(4)
–
70
92
(22)
70
108
(11)
97
(5)
1
(10)
83
96
(13)
83
2012 £m
2011 £m
6,079
780
6,859
608
6,076
175
6,859
1,486
161
1,647
589
907
151
1,647
2012 £m
2011 £m
1,486
4,810
(55)
(162)
6,079
1,167
–
303
16
1,486
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
281
H4: Tax assets and liabilities
Assets
Of the £254 million (2011: £546 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 2012 and 2011 arises in the following parts of the Group:
UK insurance operations:
SAIF
PAC with-profi ts fund (including PAL)
Other
US insurance operations
Asia insurance operations
Other operations
Total
2012 £m
2011 £m
102
1
2,097
15
99
2,314
297
13
1,513
15
438
2,276
2012 £m
2011 £m
1
113
69
1,889
83
159
2,314
1
78
153
1,392
114
538
2,276
The increase in the deferred tax asset primarily relates to additional short-term timing differences on US insurance reserves following
the REALIC acquisition partially offset by the utilisation of tax losses across the Group.
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 profi ts from which the future reversal
of the underlying temporary differences can be deducted.
The taxation regimes applicable across the Group often apply separate rules to trading and capital profi ts 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 2012 results and fi nancial position at 31 December 2012 the possible tax benefi t of
approximately £158 million (31 December 2011: £158 million), which may arise from capital losses valued at approximately £0.8 billion
(31 December 2011: £0.7 billion), is suffi ciently uncertain that it has not been recognised. In addition, a potential deferred tax asset
of £122 million (31 December 2011: £147 million), which may arise from trading tax losses and other potential temporary differences
totalling £0.5 billion (31 December 2011: £0.6 billion) is suffi ciently uncertain that it has not been recognised. Of these, losses of
£105 million will expire within the next seven years. The remaining losses have no expiry date. Until the end of 2012, for the Group’s
UK life insurance companies, shareholders’ profi ts were calculated using regulatory surplus as a starting point, with appropriate
deferred tax adjustments for IFRS. Beginning in 2013, under new UK life tax rules, shareholders’ profi ts will be calculated using
accounting profi t or loss as a starting point. As the 2012 Finance Act had been enacted at the balance sheet date, the effects of these
changes are refl ected in the fi nancial statements for the year ended 31 December 2012 but with no material impact on the Group’s
net assets.
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Financial statements Prudential plc Annual Report 2012
H: Other information on statement of fi nancial position items continued
H4: Tax assets and liabilities continued
The two tables that follow provide a breakdown of the recognised deferred tax assets set out above for both the short-term timing
differences and unused tax losses split by business unit. The table also shows the period of estimated recoverability for each
respective business unit. For these and each category of deferred tax asset recognised their recoverability against forecast taxable
profi ts is not signifi cantly impacted by any current proposed changes to future accounting standards.
Short-term timing diff erences
Asia
JNL
UK long-term business
Other
Total
Unused tax losses
Asia
UK long-term business
Other
Total
2012 £m
Expected period of recoverability
1 to 3 years
With run-off of in-force book
1 to 10 years
1 to 10 years
42
1,800
151
104
2,097
2012 £m
Expected period of recoverability
36
18
45
99
3 to 5 years
1 to 3 years
1 to 3 years
Liabilities
The current tax liability decreased to £445 million (2011: £930 million) refl ecting the settlement of prior year balances in the UK and
Asia following the agreement of tax positions.
Deferred tax liability
Unrealised gains on investments
Balances relating to investment and insurance contracts
Short-term timing differences
Capital allowances
Total
2012 £m
2011* £m
2010* £m
1,814
432
1,715
9
3,970
1,566
667
1,687
9
3,929
1,678
801
1,477
12
3,968
* The 2011 and 2010 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy
described in note A5.
Under IAS 12, ‘Income Taxes’, 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 the tax rates (and laws) that have been enacted or are substantively enacted at the end
of the reporting periods.
The UK government’s tax rate change to 23 per cent (from the 24 per cent effective from 1 April 2012) has had the effect of
reducing the UK with-profi ts and shareholder-backed business element of the net deferred tax balances as at 31 December 2012
by £52 million. The tax change to 23 per cent is effective from 1 April 2013 but has been enacted at 31 December 2012.
The subsequent proposed phased rate changes to 21 per cent are expected to have the effect of reducing the UK with-profi ts
and shareholder-backed business elements of the net deferred tax balances at 31 December 2012 by £52 million.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
283
H5: Accrued investment income and other debtors
Accrued investment income
Interest receivable
Other
Total
Other debtors
Amounts due from:
Policyholders
Intermediaries
Reinsurers
Other
Total
Total accrued investment income and other debtors
2012 £m
2011 £m
2,015
783
2,798
271
27
23
1,040
1,361
4,159
1,919
791
2,710
227
27
11
722
987
3,697
Of the £4,159 million (2011: £3,697 million) of accrued investment income and other debtors, £538 million (2011: £162 million) is
expected to be settled after one year or more.
H6: Property, plant and equipment
Property, plant and equipment comprise Group occupied properties 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
Cost
Accumulated depreciation
Net book amount
Year ended 31 December
Opening net book amount
Exchange differences
Depreciation charge
Additions
Arising on acquisitions of subsidiaries
Disposals and transfers
Closing net book amount
At 31 December
Cost
Accumulated depreciation
Net book amount
Group
occupied
property
2012 £m
Tangible
assets
262
(29)
233
233
(9)
(10)
4
–
(2)
216
255
(39)
216
915
(400)
515
515
(8)
(80)
135
(1)
(12)
549
999
(450)
549
Group
occupied
property
2011 £m
Tangible
assets
197
(24)
173
173
(2)
(5)
5
69
(7)
233
262
(29)
233
764
(383)
381
381
(7)
(69)
119
99
(8)
515
915
(400)
515
Total
1,177
(429)
748
748
(17)
(90)
139
(1)
(14)
765
1,254
(489)
765
Total
961
(407)
554
554
(9)
(74)
124
168
(15)
748
1,177
(429)
748
Capital expenditure: property, plant and equipment by segment
The capital expenditure of £135 million (2011: £124 million) arose as follows: £80 million in UK, £24 million in US and £20 million in
Asia in insurance operations with the remaining balance of £11 million arising from asset management operations and unallocated
corporate expenditure (2011: £69 million in UK, £20 million in US, £21 million in Asia insurance operations and £14 million in other).
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Financial statements Prudential plc Annual Report 2012
H: Other information on statement of fi nancial position items continued
H7: Investment properties
Investment properties principally relate to the PAC with-profi ts 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
Additions:
Resulting from acquisitions
Resulting from expenditure capitalised
Disposals
Net (loss) gain from fair value adjustments
Net foreign exchange differences
Transfers (to)/from held for sale assets
Transfers from owner occupied properties
At 31 December
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
2012 £m
2011 £m
10,757
11,247
1,025
118
(695)
(175)
(53)
(97)
–
393
45
(1,439)
522
(41)
25
5
10,880
10,757
2012 £m
2011 £m
559
64
606
128
Further information on the investment property held by the UK insurance operations further information is included in note D2(a).
Investment properties of £3,845 million (2011: £3,439 million) are held under fi nance leases. A reconciliation between the total
of future minimum lease payments at the statement of fi nancial position date, and their present value is shown below:
Future minimum lease payments at 31 December
Future fi nance charges on fi nance 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
2012 £m
2011 £m
988
(877)
111
6
23
959
988
6
19
86
111
1,071
(944)
127
7
26
1,038
1,071
6
23
98
127
Contingent rent is that portion of the lease payments that is not fi xed 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 2012 and 2011.
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 of the Group’s freehold investment properties are receivable in the following periods:
Less than 1 year
1 to 5 years
Over 5 years
Total
2012 £m
2011 £m
451
1,541
3,785
5,777
430
1,407
3,304
5,141
The total minimum future rentals to be received on non-cancellable sub-leases for the Group’s investment properties held under
fi nance leases at 31 December 2012 are £2,439 million (2011: £2,553 million).
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
285
H8: Investments in associates and joint ventures
Investments in associates
The Group had two associates at 31 December 2012 (31 December 2011: one) that were accounted for under the equity method.
The Group’s associates at 31 December 2012 are a 25 per cent interest in PruHealth Holdings Limited and a 49.99 per cent interest
in PPM South Africa, following the dilution of the Group’s holding in the period (see note I2). The Group’s share of the profi t during
the year was a profi t of £8 million (full year 2011: a loss of £3 million). The total carrying value of these associates are £113 million
(2011: £70 million). This is refl ected in the Group’s profi t after tax attributable to equity holders during the year.
Associates accounted for using the equity method
A summary of the movements in investments in associates accounted for using the equity method in 2012 and 2011 is set out below:
Balance at 31 December 2010
Capital injection
Disposals
Goodwill write off
Share of loss for the year after tax
Balance at 31 December 2011
Transfer of PPMSA as an associate I2
Exchange translation and other movements
Share of profi t for the year after tax
Balance at 31 December 2012
Share of
share capital
and share
premium
£m
Share of
retained
earnings
£m
Share of
net assets
£m
Goodwill
£m
Total
carrying
value
£m
101
4
(1)
–
–
104
–
–
–
104
(31)
–
–
–
(3)
(34)
39
(6)
10
9
70
4
(1)
–
(3)
70
39
(6)
10
113
1
–
–
(1)
–
–
–
–
–
–
71
4
(1)
(1)
(3)
70
39
(6)
10
113
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 profi t and loss of associates accounted for using the equity method at
31 December 2012 and 2011 is as follows:
Financial position
Total assets (excluding goodwill)
Total liabilities
Net assets
Results of operations
Revenue
Profi t (loss) in the year
2012 £m
2011 £m
162
(49)
113
96
10
109
(39)
70
81
(3)
There are several minor service agreements in place between the associates and the Group. During 2012, the aggregate amount
of the transactions was £42 million (2011: £33 million) and the balance due to the Group as at 31 December 2012 was £73.2 million
(2011: £74.2 million).
Associates and joint ventures carried at fair value through profi t and loss
In addition to the above the Group has associates that are carried at fair value through profi t and loss, as allowed under IAS 28, that
comprise investments in open-ended investment companies (OEICs), unit trusts, funds holding collateralised debt obligations,
property unit trusts and venture capital investments of the PAC with-profi ts funds where the Group has signifi cant infl uence. 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 2012 based on valuations or pricing information
at that specifi c date. The aggregate fair value of associates carried at fair value through profi t and loss where there are published price
quotations is approximately £0.8 billion (2011: £4.8 billion) at 31 December 2012.
The aggregate assets of these associates are approximately £2.2 billion (2011: £3.4 billion). Aggregate liabilities, excluding
liabilities to unit holders and shareholders for unit trusts and OEICs, are approximately £0.8 billion (2011: £1.1 billion). Fund revenues,
with revenue arising in unit trusts and OEICs deemed to constitute the investment return for these vehicles, were approximately
£0.1 billion (2011: £0.3 billion) and net profi t in the year, excluding unit trusts and OEICs where all investment returns accrue to unit
holders or shareholders respectively, was approximately £0.1 billion (2011: profi t of £0.2 billion).
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Financial statements Prudential plc Annual Report 2012
H: Other information on statement of fi nancial position items continued
H8: Investments in associates and joint ventures continued
Investments in joint ventures
The Group owns a number of joint ventures. Joint ventures represent activities over which the Group exercises joint control through
contractual agreement with one or more parties. The Group’s signifi cant joint ventures, which are accounted for using proportionate
consolidation, comprise following interests:
Investment
% held
Principal activity
Country
CITIC Prudential Life Insurance Company Limited
CITIC-Prudential Fund Management Company Limited
ICICI Prudential 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 (Hong Kong)
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 ICICI Prudential Asset Management Company Limited. Although these investments have reporting periods
ending 31 March, 12 months of fi nancial information up to 31 December is recorded. Accordingly, the information covers the same
period as that of the Group.
Joint ventures contributed £98 million (31 December 2011: £54 million) to profi t after tax attributable to equity holders during the
period. The year-on-year movement in these contributions refl ect the growth in their operating profi t based on longer-term
investment returns and the increase in short-term fl uctuations in investment returns by these joint ventures.
Further, in June 2012, the PAC with-profi ts fund, via its venture fund holdings and as part of its investment portfolio, entered into
a joint venture to acquire control of Veolia Water RegCo (now renamed Affi nity Water), the UK regulated water business of Veolia
Environnement S.A. This joint venture investment is carried at fair value through profi t and loss in the Group’s fi nancial statements,
as allowed under IAS 28. The results of this operation are refl ected in the movement in the unallocated surplus of the PAC with-profi ts
fund and therefore do not affect shareholders’ results.
The summarised fi nancial 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
Revenue
Expenses
Net profi t
2012 £m
2011 £m
442
3,504
3,946
(375)
(3,220)
(3,595)
351
706
2,757
3,463
(301)
(2,799)
(3,100)
363
2012 £m
2011 £m
1,040
(942)
98
1,056
(1,002)
54
The joint ventures have no signifi cant contingent liabilities or capital commitments to which the Group is exposed nor does the Group
have any signifi cant contingent liabilities or capital commitments in relation to its interest in the joint ventures.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
287
H9: Properties held for sale
Investment properties are classifi ed as held for sale when contracts have been exchanged but the sale has not been completed at the
period end. At 31 December 2012 the value of assets held for sale was £98 million (2011: £3 million).
Gains on disposal of held for sale assets are recorded in ‘investment return’ within the income statement.
H10: Cash and cash equivalents
Cash and cash equivalents consist of cash at bank and in hand, deposits held at call with banks, treasury bills and other short-term
highly liquid investments with less than 90 days maturity from the date of acquisition. Cash and cash equivalents included in the cash
fl ow statement comprise the following statement of fi nancial position amounts:
Cash
Cash equivalents
Total cash and cash equivalents
2012 £m
2011 £m
4,884
1,500
6,384
6,338
919
7,257
Cash and cash equivalents held centrally are considered to be available for general use by the Group. These funds amount to
£482 million and £309 million at 31 December 2012 and 2011, respectively. The remaining funds are considered not to be available
for general use by the Group, and include funds held for the benefi t of policyholders.
H11: Shareholders’ equity: share capital, share premium and reserves
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 2011
Shares issued under share option schemes
At 31 December 2011
Shares issued under share option schemes
At 31 December 2012
Number of
ordinary
shares
Share
capital
£m
Share
premium
£m
2,545,594,506
2,444,824
2,548,039,330
9,203,022
2,557,242,352
127
–
127
1
128
1,856
17
1,873
16
1,889
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.
At 31 December 2012, there were options outstanding under Save As You Earn schemes to subscribe for shares as follows:
31 December 2012
31 December 2011
Number of shares
to subscribe for
Share price
range
from
to
9,396,810 288p 629p
13,329,709 288p 572p
Exercisable
by year
2018
2017
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Financial statements Prudential plc Annual Report 2012
H: Other information on statement of fi nancial position items continued
H11: Shareholders’ equity: share capital, share premium and reserves continued
Transactions by Prudential plc and its subsidiaries in Prudential plc shares
The Group buys and sells Prudential plc (‘own shares’) either in relation to its employee share schemes or via transactions undertaken
by authorised investment funds that the Group is deemed to control. Further information about these transactions is set out below.
The cost of own shares of £97 million as at 31 December 2012 (2011: £109 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 2012, 8.0 million (2011: 8.1 million) Prudential plc shares with a market value of £69 million
(2011: £52 million) were held in such trusts. Of this total, 8.0 million (2011: 8.0 million) shares were held in trusts under employee
incentive plans.
In 2012, the Company purchased the following number of shares in respect of employee incentive plans.
2012
2011
Number
of shares
purchased
(in millions)*
9.4
8.2
Cost
£m
76.1
54.7
* The maximum number of shares held in 2012 was 8.0 million which was in December 2012.
Of the total shares held in trust no shares were held by a qualifying employee share ownership trust (2011: 0.1 million).
The shares purchased each month are as follows:
Number
of shares
15,573
12,678
4,022,002
368,901
939,541
482,377
15,047
28,488
712,649
12,549
492,993
2,277,012
9,379,810
2012 share price
Low
£
6.40
7.33
7.10
7.27
6.80
6.61
7.26
7.88
8.16
8.39
8.55
8.86
High
£
Cost
£
99,589
6.40
7.33
92,930
8.03 32,058,297
2,712,460
7.67
6,407,556
7.26
3,208,338
6.84
109,166
7.26
228,176
8.12
5,829,154
8.25
105,329
8.39
9.15
4,502,129
9.27 20,706,597
Number
of shares
12,723
11,688
2,106,702
263,361
174,614
1,418,209
98,334
1,520,620
19,273
15,385
110,951
2,456,692
76,059,721
8,208,552
2011 share price
Low
£
6.83
7.13
7.04
7.40
7.46
7.07
6.89
5.77
5.85
6.07
6.15
6.07
High
£
Cost
£
86,834
6.83
7.13
83,376
7.14 15,253,240
1,960,300
7.49
7.53
1,307,410
7.18 10,141,069
683,084
7.34
9,051,804
6.32
115,022
6.00
93,310
6.07
6.33
692,501
6.55 15,226,106
54,694,056
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 2012 was 4.5 million
(2011: 8.6 million) and the cost of acquiring these shares of £27 million (2011: £52 million) is included in the cost of own shares.
The market value of these shares as at 31 December 2012 was £39 million (2011: £54 million).
During 2012, these funds made net disposals of 4,143,340 Prudential shares (2011: net disposals of 1,171,635) for a net decrease
of £25.1 million to book cost (2011: net increase of £4.8 million).
All share transactions were made on an exchange other than the Stock Exchange of Hong Kong.
Other than set out above the Group did not purchase, sell or redeem any Prudential plc listed securities during 2012 or 2011.
Reserves
The translation reserve of £66 million (2011: £282 million) 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.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
289
H12: Insurance contract liabilities and unallocated surplus of with-profi ts funds
Movement in year
At 1 January 2011
Income and expense included in the income statement
Foreign exchange translation differences
At 1 January 2012
Income and expense included in the income statement
Foreign exchange translation differences
At 31 December 2012
Insurance
contract
liabilities
£m
171,291
8,748
324
180,363
32,760
(4,539)
Unallocated
surplus of
with-profi ts
funds
£m
10,253
(1,025)
(13)
9,215
1,381
(7)
208,584
10,589
Notes B5, D2b, D3b and D4b provide further analysis of the movement in the year of the Group’s policyholder liabilities and
unallocated surplus of the with-profi ts funds.
H13: Borrowings
Core structural borrowings of shareholder-fi nanced operations
Central operations
Subordinated debt:
¤20m Medium Term Subordinated Notes 2023 note (i)
£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
Securities note (ii)
US$300m 6.5% Perpetual Subordinated Capital
Securities note (ii)
US$750m 11.75% Perpetual Subordinated Capital
Securities
US$550m 7.75% Perpetual Subordinated Capital
Securities note (ii)
Senior debt:
£300m 6.875% Bonds 2023
£250m 5.875% Bonds 2029
Total central operations
£275m bank loan note (iii)
US$250m 8.15% Surplus Notes 2027 note (iv)
Total notes (v), (vi)
2012 £m
2011 £m
Innovative
Tier 1*
Lower
Tier 2*
Senior†
Total
Total
16
429
386
615
154
185
458
334
16
429
386
615
154
185
458
334
17
428
384
644
161
193
477
348
1,746
831
–
2,577
2,652
–
1,746
1,746
–
831
153
984
300
249
549
549
275
824
300
249
549
3,126
275
153
3,554
300
249
549
3,201
250
160
3,611
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* These debt classifi cations are consistent with the treatment of capital for regulatory purposes, as defi ned in the FSA handbook. 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 (£340 million) and were
used to fi nance the repayments of the €500 million Tier 2 subordinated debt in December 2011.
The Group has designated US$2.85 billion (2011: US$2.85 billion) of its Tier 1 subordinated debt as a net investment hedge under IAS 39 to hedge the currency
risks related to the net investment in Jackson.
† The senior debt ranks above subordinated debt in the event of liquidation.
290
Financial statements Prudential plc Annual Report 2012
H: Other information on statement of fi nancial position items continued
H13: Borrowings continued
Notes
(i)
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.
(ii) The US$250 million 6.75 per cent borrowings, the US$300 million 6.5 per cent borrowings and the US$550 million 7.75 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, into one or more series of Prudential
preference shares.
(iii) The PruCap bank loan was increased from £250 million to £275 million on 20 December 2012. The loan has been made in two tranches: a £160 million loan
maturing in June 2014, currently drawn at a cost of 12 month £LIBOR plus 0.6 per cent and a £115 million loan maturing on 20 December 2017 and currently
drawn at a cost of 12 month £LIBOR plus 0.79 per cent.
(iv) The Jackson borrowings are unsecured and subordinated to all present and future indebtedness, policy claims and other creditor claims of Jackson.
(v) 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
(vi) 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 fi nancial position)
Net core structural borrowings of shareholder-fi nanced operations
2012 £m
2011 £m
115
160
–
–
–
3,279
3,554
115
–
135
–
–
3,361
3,611
2012 £m
2011 £m
3,554
(1,380)
2,174
3,611
(1,200)
2,411
(vii)
In January 2013, the Company issued core structural borrowings of US$700 million Tier 1 perpetual subordinated capital securities. The proceeds, net
of costs, were US$689 million.
Operational borrowings attributable to shareholder-fi nanced operations
Borrowings in respect of short-term fi xed income securities programmes
Commercial paper
Medium-Term Notes 2013 note (vi)
Medium-Term Notes 2015
Borrowings of US operations
Investment subsidiaries (non-recourse) note (i)
Piedmont and CDO funds (non-recourse) notes (i), (ii)
Other borrowings
Bank loans and overdrafts
Obligations under fi nance leases
Other borrowings note (iii)
2012 £m
2011 £m
1,535
250
299
2,084
19
1
20
1
1
139
141
2,706
250
–
2,956
20
1
21
13
1
349
363
Total
2,245
3,340
Notes
(i)
(ii)
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.
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.
(iii) Other borrowings mainly include amounts whose repayment to the lender is contingent upon future surplus emerging from certain contracts specifi ed
under the arrangement. If insuffi cient surplus emerges on those contracts, there is no recourse to other assets of the Group and the liability is not payable
to the degree of shortfall.
The Group has chosen to designate as a fair value hedge under IAS 39 certain fi xed to fl oating rate swaps which hedge the fair value exposures to interest
rate movements of these borrowings.
In addition, other borrowings include senior debt issued through the Federal Home Loan Bank of Indianapolis (FHLB), secured by collateral posted
(iv)
with the FHLB by Jackson.
In addition to the debt listed above, £200 million Floating Rate Notes were issued by Prudential plc in October 2012 which will mature in April 2013.
These Notes have been wholly subscribed by a Group subsidiary and accordingly have been eliminated on consolidation in the Group fi nancial statements.
These notes were originally issued in October 2008 and have been reissued upon their maturity.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
291
(v) Maturity analysis
The following table sets out the contractual maturity analysis of the Group’s operational borrowings attributable to shareholder-fi nanced 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
2012 £m
2011 £m
1,920
6
309
9
1
–
2,245
3,169
140
10
10
11
–
3,340
(vi)
In January 2013 the Company repaid on maturity, £250 million Medium-Term Notes included within borrowings in respect of short-term fi xed income
securities in the table above.
Borrowings attributable to with-profi ts 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 fi nance leases)
Total note (iii)
2012 £m
2011 £m
823
100
110
1,033
747
100
125
972
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 subordinate
In all instances the holders of the debt instruments issued by these funds do not have recourse beyond the assets of those funds.
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-profi ts 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 defi ned benefi t pension schemes:I3
(Surplus) defi cit gross of deferred tax, based on scheme assets held, including investments
in Prudential insurance policies:
Attributable to PAC with-profi ts fund
Attributable to shareholder-fi nanced operations
Add back investments in Prudential insurance policies
Provision after elimination of investments in Prudential insurance policies and matching
policyholder liabilities from Group statement of fi nancial position
Other provisions (see below)
Total provisions
2012 £m
2011 £m
288
82
124
46
61
432
1,033
297
75
30
110
31
429
972
2012 £m
2011 £m
37
(1)
36
169
205
396
601
41
23
64
165
229
300
529
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292
Financial statements Prudential plc Annual Report 2012
H: Other information on statement of fi nancial position items continued
H14: Provisions and contingencies continued
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
Note
I3
2012 £m
2011 £m
300
237
(12)
(124)
(5)
396
20
27
349
396
282
144
(29)
(97)
–
300
14
23
263
300
Other provisions
The movement in other provisions is shown in the table below:
At 1 January
Charged to income statement:
Additional provisions
Unused amounts released
Used during the year
Exchange differences
Total at 31 December
2012 £m
2011 £m
Legal
provisions
note (i)
Restructuring
provisions
note (ii)
Other
provisions
note (iii)
Legal
provisions
note (i)
Restructuring
provisions
note (ii)
Other
provisions
note (iii)
14
10
(1)
(2)
(1)
20
23
14
(4)
(6)
–
27
263
213
(7)
(116)
(4)
349
20
–
–
(6)
–
14
26
5
(5)
(3)
–
23
236
139
(24)
(88)
–
263
Notes
(i)
Total legal provisions at 31 December 2012 of £20 million related 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. Of the £20 million
legal provision as at 31 December 2012, £18 million has been established to cover this potential litigation and is expected to be utilised over the next fi ve years.
(ii) Restructuring provisions 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.
(iii) Other provisions comprise staff benefi ts provisions of £286 million, provisions for onerous contracts of £61 million and regulatory and other provisions of
£2 million. Staff benefi ts are generally expected to be paid out within the next three years.
The provision balance is expected to be paid out within the next fi ve years.
Contingencies and related obligations
In addition to the legal proceedings relating to Jackson mentioned under the legal provisions section above, the Group is involved
in other litigation and regulatory issues.
Whilst the outcome of such litigation and regulatory issues cannot be predicted with certainty, the Company believes that their
ultimate outcome will not have a material adverse effect on the Group’s fi nancial condition, results of operations, or cash fl ows.
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.
At 31 December 2012 the pension mis-selling provision was £306 million (31 December 2011: £362 million).
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 2012 of £306 million is stochastically determined on a
discounted basis. The average discount rate implied in the movement in the year is 2.3 per cent (2011: 2.6 per cent).
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.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
293
The costs associated with the pension mis-selling review have been met from the inherited estate (see below). Accordingly, these
costs have not been charged to the asset shares used in the determination of policyholder bonus rates. Hence policyholders’ pay-out
values have been unaffected by pension mis-selling.
In 1998, Prudential stated that deducting mis-selling costs from the inherited estate would not impact its bonus or investment
policy and it gave an assurance that if this unlikely event were to occur, it would make available support to the fund from shareholder
resources for as long as the situation continued, so as to ensure that policyholders were not disadvantaged. The assurance was
designed to protect both existing policyholders at the date it was announced, and policyholders who subsequently purchased policies
while the pension mis-selling review was continuing.
This review was completed on 30 June 2002. The assurance will continue to apply to any policy in force at 31 December 2003, both
for premiums paid before 1 January 2004, and for subsequent regular premiums (including future fi xed, retail prices index or salary
related increases and Department for Work and Pensions rebate business). The assurance has not applied to new business since
1 January 2004. New business in this context consists of new policies, new members to existing pension schemes plus regular and
single premium top-ups, transfers and switches to existing arrangements. The maximum amount of capital support available under
the terms of the assurance will reduce over time.
The bonus and investment policy for each type of with-profi ts 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.
Guaranteed annuities
Prudential Assurance used to sell guaranteed annuity products in the UK and at 31 December 2012 held a provision of £47 million
(2011: £90 million) within the main with-profi ts 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 2012 a provision of £371 million
(2011: £370 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-profi ts 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-profi ts business by providing the benefi ts associated with
smoothing and guarantees, by providing investment fl exibility for the fund’s assets, by meeting the regulatory capital requirements
that demonstrate solvency and by absorbing the costs of certain signifi cant events or fundamental changes in its long-term business
without affecting the bonus and investment policies. The size of the inherited estate fl uctuates from year to year depending on the
investment return and the extent to which it has been required to meet smoothing costs, guarantees and other events.
Support for long-term business funds by shareholders’ funds
As a proprietary insurance company, PAC is liable to meet its obligations to policyholders even if the assets of the long-term funds
are insuffi cient to do so. The assets, represented by the unallocated surplus of with-profi ts 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 signifi cant or sustained equity market downturn, costs of signifi cant 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 fi nancial support.
In 1997, the business of Scottish Amicable Life Assurance Society (SALAS), a mutual society, was transferred to PAC. In effecting
the transfer, a separate sub-fund, Scottish Amicable Insurance Fund (SAIF), was established within PAC’s long-term business fund.
This sub-fund contains all the with-profi ts 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-profi ts life business, all future
earnings arising in SAIF are retained for SAIF policyholders. Any excess (defi ciency) of revenue over expense within SAIF during a
period is attributable to the policyholders of the fund. Shareholders have no interest in the profi ts of SAIF but are entitled to the asset
management fees paid on this business.
SAIF with-profi ts policies contain minimum levels of guaranteed benefi t to policyholders. In addition, as mentioned earlier in this
note, certain pensions products have guaranteed annuity rates at retirement. Should the assets of SAIF be inadequate to meet the
guaranteed benefi t obligations of the policyholders of SAIF, the PAC long-term fund would be liable to cover any such defi ciency in
the fi rst instance. 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.
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294
Financial statements Prudential plc Annual Report 2012
H: Other information on statement of fi nancial position items continued
H14: Provisions and contingencies continued
Unclaimed property provision
Jackson has received regulatory enquiries on an industry-wide matter relating to claims settlement practices and compliance with
unclaimed property laws. Concurrently, some regulators and state legislatures have required and others are considering proposals
that would require life insurance companies to take additional steps to identify unreported deceased policy and contract holders.
Additionally, numerous states are contracting with independent fi rms to perform specifi c unclaimed property audits or targeted
market conduct examinations covering claims settlement practices and procedures for escheating unclaimed property. One such fi rm
has been contracted by treasury departments of 26 states to perform an examination of the Jackson’s practices for handling unclaimed
property. Any regulatory audits, related examination activity and internal reviews may result in additional payments to benefi ciaries,
escheatment of funds deemed abandoned under state laws, administrative penalties and changes in the Jackson’s procedures for the
identifi cation of unreported claims and handling of escheatable property.
In 2011, Jackson initiated a project to compare its entire policy master fi le to vendors’ databases of known deaths and accrued
a £16 million provision for potential claims at 31 December 2011. In 2012, Jackson recognised a charge of £18 million, net of policy
reserves released upon death, as a result of the project. At 31 December 2012, based on its current analysis, Jackson has accrued
£17 million for estimated remaining claims that have not yet been positively identifi ed.
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 fi nanced 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 £31 million at 31 December 2012 (2011: £17 million). Similar assessments for the UK businesses were not signifi cant.
The directors believe that the reserve is adequate for all anticipated payments for known insolvencies.
At 31 December 2012, Jackson has unfunded commitments of £325 million (2011: £341 million) related to its investments in limited
partnerships and of £86 million (2011: £77 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 2012, 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 £31 million (2011: £71 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 signifi cant.
H15: Other liabilities
Creditors arising from direct insurance and reinsurance operations
Interest payable
Other items*
Total
2012 £m
2011 £m
1,134
62
2,258
3,454
970
67
212
1,249
* Of the £2,258 million other items as at 31 December 2012, £2,021 million related to liabilities for funds withheld under reinsurance arrangement of the Group’s US
operations from the purchase of REALIC, as discussed in note I1.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
295
I: Other notes
I1: Acquisition of subsidiaries
a Acquisition of Reassure America Life Insurance Company (REALIC)
On 4 September 2012, the Group through its indirect wholly-owned subsidiary, Jackson National Life Insurance Company (JNLI)
completed the acquisition of 100 per cent issued share capital of SRLC America Holding Corp. (SRLC), and its primary operating
subsidiary, Reassure America Life Insurance Company (REALIC). The purchase consideration which remains subject to fi nal
agreement under the terms of the transaction with Swiss Re, is £370 million (US$587 million). The acquisition increases the scale of the
Group’s life business in the US, helping Jackson to diversify earnings by increasing the amount of income from underwriting activities
thereby enhancing the quality of earnings in a capital effi cient manner. Immediately prior to the acquisition, SRLC entered into a
reinsurance arrangement with Swiss Re, the former ultimate parent company facilitating Swiss Re to retain a portion of the REALIC
business. As collateral for this reinsurance arrangement, REALIC holds £2.1 billion of policy loans, bonds and short-term investments,
which are offset by a funds withheld liability.
REALIC was a US-based insurance company whose business model was to acquire, through purchase or reinsurance, closed
blocks of insurance business, primarily life assurance risks. REALIC did not write new business.
The purchase consideration paid is equivalent to the fair value of the identifi able acquired assets and liabilities assumed and
accordingly no goodwill is recognised under IFRS on the date of completion of the acquisition.
In addition to the purchase consideration, the Group incurred £9 million of acquisition related costs that have been recognised
as an expense during the year, in the consolidated income statement.
The provisional fair value of the acquired assets and liabilities are shown in the table below.
Identifi able assets
Intangible assets attributable to shareholders:
Acquired value of in-force business
Other non-investment and non-cash assets:
Reinsurers' share of insurance contract liabilities
Deferred tax
Current tax recoverable
Accrued investment income
Other debtors
Investments of long-term business and other operations:
Loans
Equity securities and portfolio holdings in unit trusts
Debt securities
Cash and cash equivalents
Total identifi able assets
Identifi able liabilities
Policyholder liabilities:
Insurance contract liabilities
Other non-insurance liabilities
Total identifi able liabilities
Net identifi able assets acquired and liabilities assumed
Purchase consideration
Fair value
recognised at
acquisition
date
£m
5
5,444
390
44
58
38
2,204
69
7,177
147
15,576
12,912
2,294
15,206
370
370
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296
Financial statements Prudential plc Annual Report 2012
I: Other notes continued
I1: Acquisition of subsidiaries continued
At the date the fi nancial statement were approved, the fair value of the identifi able acquired assets and liabilities and the consideration
were subject to fi nalisation. In accordance with accounting guidance for business combinations, the Company will continue to review
the balance sheet and record required adjustments, for up to a 12 month period following the acquisition close date, in order to refl ect
updated information on certain accruals, related expenses, or other potential valuation adjustments, if further information becomes
available about facts and circumstances that existed as of the acquisition date. Any measurement period adjustments determined to
be material will be applied retrospectively to the acquisition date in the Company’s consolidated fi nancial statements and depending
on the nature of the adjustment, the Company’s results subsequent to the acquisition period could be affected.
Reserves were initially valued consistent with existing IFRS guidance. Accordingly, as for the Group’s measurement of Jackson’s
insurance assets and liabilities, under IFRS 4, a ‘grandfathered’ US GAAP basis has been applied. For instance the traditional products
were valued using standard modeling techniques with assumptions updated to match current interest rate environment or be
consistent with Jackson’s assumptions where appropriate. Base reserves on interest sensitive products were set equal to the account
value and the reserves accounted for under FASB ASC Subtopic 944-80 Financial Services – Insurance – Separate Accounts (formerly
SOP 03-1) were adjusted to refl ect Jackson’s assumptions where appropriate. In addition, provision has been made for the effects of
fair valuing the acquired policyholder liabilities and value of in force business in accordance with IFRS 3.
Included within the identifi able assets as shown above are loans and other debtors acquired with fair values of £2,204 million and
£38 million, respectively. These values represent the gross contractual amounts all of which are expected to be collected. The majority
of the loans of £2,204 million were held to back liabilities for funds withheld under reinsurance arrangements as described above.
The consolidated statement of cash fl ows contains a £224 million net cash outfl ow in respect of this acquisition representing cash
consideration of £371 million (based on the preliminary purchase price of £417 million with a deferred consideration of £46 million)
less cash and cash equivalents acquired of £147 million.
Impact of acquisition on the results of the Group
Revenue
Operating profi t based on longer-term investment returns
Short-term fl uctuations in investment returns
Amortisation of acquisition accounting on the purchase of REALICnote (ii)
Profi t before tax
Actual £m Estimated £m
Post
acquisition
period from
4 Sept to
31 Dec 2012
Full Year
2012
note (i)
184
695
67
13
(19)
61
123
Notes
(i)
Estimation of the REALIC business’ contribution to the Group’s consolidated revenue and profi t before tax for the year if the acquisition had occurred
on 1 January 2012. In determining these amounts, it has been assumed that the fair value adjustments which arose on the date of acquisition would have
been the same if the acquisition had occurred on 1 January 2012.
(ii) The profi t of £61 million for the period has been determined aft er a charge of £(19) million for amortisation of acquisition accounting adjustments.
This charge refl ects the net eff ect of:
(a)
The diff erence between the yield on the acquired debt securities (excluding those held to back funds withheld for reinsurance contracts) determined
by reference to their market value at acquisition as required by the IFRS 3 purchase GAAP purposes and the book yield on a historic GAAP basis;
(b) Amortisation of the fair value adjustments on policyholder liabilities; and
(c) Amortisation of the acquired value of in-force business.
This charge has been shown separately within Group’s supplementary analysis of profi t, as explained in note B1.
b Acquisition of Thanachart Life Assurance Company Limited
On 5 November 2012, Prudential plc, through its subsidiary Prudential Life Assurance (Thailand) Public Company Limited (Prudential
Thailand) entered into an agreement to acquire 100 per cent of Thanachart Life Assurance Company Limited (Thanachart Life),
a wholly-owned life insurance subsidiary of Thanachart Bank Public Company limited (Thanachart Bank). The consideration for
Thanachart Life is THB 17.5 billion (£352 million at the year end exchange rate) settled in cash on completion, with a further payment
of THB 0.5 billion (£10 million) payable 12 months after completion, subject to a post-completion adjustment to refl ect the net asset
value as at the completion date. The transaction is subject to regulatory approval and is expected to close in the fi rst half of 2013.
Upon completion of the transaction, Thanachart Life will become a wholly-owned subsidiary of Prudential Thailand.
As part of the deal, Prudential Thailand and Thanachart Bank have entered into an agreement to establish an exclusive 15-year
partnership to develop jointly their bancassurance business in Thailand. This transaction builds on Prudential’s strategy of focusing
on the highly attractive markets of South-east Asia and is in line with the Group’s multichannel distribution strategy.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
297
c PAC with-profi ts funds acquisitions
2012:
The PAC with-profi ts fund, via its venture fund holdings and as part of its investment portfolio, has made an acquisition of a joint
venture, see note H8. There were no acquisitions of subsidiaries made during the year.
2011:
The PAC with-profi ts fund, via its venture fund holdings and as part of its investment portfolio, made acquisitions during the period.
These were acquisitions for a 100 per cent interest of Earth & Wind Energias Renovables SL, a company which invests in solar panel
parks, in March 2011 and a 100 per cent interest of Alticom Holdings BV, a company investing in telecommunication towers, in June
2011. The Earth & Wind portfolio of solar panel parks was further expanded with the acquisition of a 100 per cent interest in
Promociones Fotovoltaicas Betula SL, Promociones Fotovoltaicas Castanea SL, Promociones Fotovoltaicas Corylus SL and
Promociones Fotovoltaicas Fagus SL in July 2011 and a 50 per cent controlling interest in Sarinena Solar SL in October 2011.
As these transactions are within the with-profi ts fund, they have no impact on shareholders’ profi t or equity for the year ended
31 December 2011. The impact on the Group’s consolidated revenue, including investment returns, is not material. Had the
acquisitions been effected at 1 January 2011, the revenue and profi t of the Group for the year ended 31 December 2011 would not
have been materially different.
A summary of the consideration, goodwill and net assets acquired relating to these four acquisitions is provided in the table below:
Cash consideration paid
Net assets acquired:
Property, plant and equipment
Other non-investment and non-cash assets
Cash and cash equivalents
Borrowings attributable to with-profi ts funds
Derivative liabilities
Other non-insurance liabilities
Fair value of net assets acquired
Total goodwill arising on acquisition attributable to the with-profi ts fund
2011
Total
£m
67
190
16
14
(114)
(2)
(49)
55
12
I2: Changes to Group’s holdings
PPM South Africa
On 22 February 2012, M&G completed transactions to (i) exchange bonus share rights for equity holdings with the employees of
PPM South Africa and (ii) the sale of a 10 per cent holding in the majority of the business to Thesele Group, a minority shareholder,
for cash. Following these transactions M&G’s majority holding in the business reduced from 75 per cent to 49.99 per cent. Under IFRS
requirements, the divestment is accounted for as the disposal of the 75 per cent holding and an acquisition of a 49.99 per cent holding
at fair value resulting in a reclassifi cation of PPM South Africa from a subsidiary to an associate. As a consequence of the IFRS
application, the transactions gave rise to a gain on dilution of £42 million. This amount is shown separately and in the Group’s 2012
supplementary analysis of profi t excluded from the Group’s IFRS operating profi t based on longer-term investment returns. The net
cash outfl ow arising from this change to the Group’s holdings, as shown in the consolidated statement of cash fl ows, of £23 million,
comprised the net effect of cash and cash equivalents no longer consolidated and the cash proceeds received.
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Financial statements Prudential plc Annual Report 2012
I: Other notes continued
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:
Asia operations
US operations
UK operations
Total
The costs of employment were:
Business operations:
Wages and salaries
Social security costs
Other pension costs:
Defi ned benefi t schemes*:
Defi ned benefi t schemes – PSPS†
Defi ned benefi t schemes – Other schemes*
Defi ned contribution schemes:
Defi ned contribution schemes – Domestic
Defi ned contribution schemes – Overseas
Pension actuarial and other (gains) losses charged to income statement*
Total
2012
2011
18,584
4,000
5,035
27,619
17,001
3,785
4,628
25,414
2012 £m
2011 £m
2010 £m
1,204
85
1,101
75
1,052
69
17
21
12
35
(145)
(60)
22
(34)
12
29
(37)
(8)
27
31
11
26
26
121
1,229
1,168
1,242
* The derivation of these amounts is shown in note (b)(i)4(i).
† Consistent with the derecognition of the Company’s interest in the underlying IAS 19 surplus of Prudential Staff Pension Scheme (PSPS) as described in note (b)(i)1
below, the other pension costs for PSPS represents the cash cost of contributions for ongoing service of active members and the unwind of discount on the
opening provision for defi cit funding for PSPS.
b Pension plans
i Defi ned benefi t plans
1 Summary
The Group asset (liability) in respect of defi ned benefi t pension schemes is as follows:
Underlying economic surplusnote 4(i)
Less: unrecognised surplus and adjustment for obligation under IFRIC 14
2012 £m
2011 £m
PSPS
1,174
Other
schemes
(36)
Total
1,138
Total
1,543
for defi cit funding (2011 only)note 4(i)
(1,010)
–
(1,010)
(1,607)
Economic surplus (defi cit) (including investment in Prudential insurance
policies)note 4(i)
Attributable to:
PAC with-profi ts fund
Shareholder-backed operations
164
115
49
(36)
(37)
1
128
78
50
(64)
(41)
(23)
Consolidation adjustment against policyholder liabilities for investment
in Prudential insurance policies
–
(169)
(169)
(165)
IAS 19 pension asset (liability) on the Group statement of
fi nancial position*
164
(205)
(41)
(229)
* At 31 December 2012, the PSPS pension asset of £164 million and the other schemes’ pension liabilities of £205 million were included within ‘Other debtors’
and ‘Provisions’ respectively on the consolidated statement of fi nancial position. The comparative liabilities of £229 million as at 31 December 2011 were
included within ‘Provisions’.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
299
The Group’s businesses operate a number of pension schemes. The specifi c 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 defi ned
benefi t scheme is the principal UK scheme, namely the Prudential Staff Pension Scheme (PSPS), which PSPS accounts for
86 per cent (2011: 86 per cent) of the underlying scheme liabilities of the Group defi ned benefi t schemes.
The Group also operates two smaller defi ned benefi t 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 defi ned
benefi t scheme in Taiwan with a negligible defi cit.
Triennial actuarial valuations
Defi ned benefi t 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.
The last completed actuarial valuation of PSPS was as at 5 April 2011 by CG Singer, Fellow of the Institute of Actuaries, of
Towers Watson Limited. This valuation was fi nalised in the fi rst half of 2012 and demonstrated the scheme to be 111 per cent
funded by reference to the Scheme Solvency Target that forms the basis of the scheme’s funding objective. As a result of this
valuation, future contributions into the scheme have been reduced to the minimum level of contributions required under the
scheme rules effective from July 2012.
Excluding expenses, the contributions fell to approximately £6 million per annum from the £50 million per annum paid
previously. The new contributions are only for ongoing service of current employees that are active members of the scheme. No
defi cit type funding is required. Defi cit funding for PSPS, where applicable, as applied in 2011, is apportioned in the ratio of 70/30
between the PAC with-profi ts 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 2012, total contributions paid in the year including expenses were £36 million (2011: £54 million).
The market value of PSPS scheme assets as at the 5 April 2011 valuation was £5,255 million. The actuarial assumptions used
in determining benefi t obligations and the net periodic benefi t costs for the purposes of the 2011 valuation were as follows:
Rate of increase in salaries
Rate of infl ation:
Retail Prices Index (RPI)
Consumer Prices Index (CPI)
Rate of increase of pensions in payment for infl ation:
Guaranteed (maximum 5%)
Guaranteed (maximum 2.5%)
Discretionary
Expected returns on plan assets
Nil
3.7
3.0
3.0
2.5
Nil
4.2
Mortality assumptions:
The tables used for PSPS pensions in payment at 5 April 2011 were:
Base post retirement mortality
For current male (female) pensioners 113% (108%) of the mortality rates of the 2000 series mortality tables (PNMA00/PNFA00),
published by the Continuous Mortality Investigation Bureau (CMI).
For male (female) non-pensioners 107% (92%) of the 2000 series rates (PNMA00/PNFA00).
Allowance for future improvements to post retirement mortality
For males (females) 100% (75%) of Medium Cohort subject to a minimum rate of improvement of 2.00% (1.25%) up to the age of 90,
decreasing linearly to zero by age of 120 with a long-term rate of 1.75% pa (1.5% pa) but adjusted as follows:
AAAAAAAAAAAAAAAAA period improvements are blended between ages 60 to 80 to the long-term improvement rate over a 15 year period (compared
with a 20 year period in the core CMI model) and;
AAAAAAAAAAAAAAAAA cohort improvements are assumed to dissipate over a 30 year period, or by age 90 if earlier (compared with a 40 year period,
or by age 100 if earlier, in the core CMI model).
The last completed actuarial valuation of the Scottish Amicable Pension Scheme (SAPS) was as at 31 March 2011 by Jonathan
Seed, Fellow of the Institute and Faculty of Actuaries, of Xafi nity Consulting. This valuation was fi nalised in the second half of 2012
and demonstrated the scheme to be 85 per cent funded. Based on this valuation, it was agreed with the Trustees that the existing
level of defi cit funding of £13.1 million per annum continues to be paid into the scheme over the next six years, to eliminate the
actuarial defi cit.
The last completed actuarial valuation of the M&G pension scheme was as at 31 December 2011 by Paul Belok, Fellow of the
Institute and Faculty of Actuaries, of AON Hewitt Limited. This valuation was fi nalised in the second half of 2012 and demonstrated
the scheme to be 83 per cent funded. Based on this valuation, defi cit funding amounts designed to eliminate the actuarial defi cit
over a three year period are being made from January 2013 of £18.6 million per annum for the fi rst two years and £9.3 million in the
third year. This compares to the £10.5 million of defi cit funding paid by the Group in 2012.
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Financial statements Prudential plc Annual Report 2012
I: Other notes continued
I3: Staff and pension plans continued
Summary economic and IAS 19 fi nancial positions
Under the IAS 19 ‘Employee Benefi ts’ valuation basis, the Group applies IFRIC 14, ‘IAS 19 – The Limit on a Defi ned Benefi t Asset,
Minimum Funding Requirements and their Interaction’. Under IFRIC 14, a surplus is only recognised to the extent that the Company
is able to access the surplus either through an unconditional right of refund to the surplus or through reduced future contributions
relating to ongoing service, which have been substantively enacted or contractually agreed. Further, the IFRS fi nancial position
recorded, refl ects the higher of any underlying IAS 19 defi cit and any obligation for committed defi cit funding where applicable.
For PSPS, the Group does not have an unconditional right of refund to any surplus of the scheme. Accordingly, prior
to the fi nalisation of the 5 April 2011 triennial valuation, the Group had not recognised the underlying surplus of PSPS
(31 December 2011: £1,588 million gross of deferred tax) and had recognised an economic liability for defi cit funding
(31 December 2011: £19 million gross of deferred tax).
The underlying IAS 19 surplus for PSPS at 31 December 2012 was £1,174 million. The fi nalisation of the 5 April 2011 triennial
valuation was accompanied by an agreement with the Trustees that additional defi cit type funding would no longer be necessary
and furthermore, the level of contributions for ongoing service of current employees was reduced to the minimum level required
by the scheme rules. As a consequence, a portion of the surplus, being £164 million, is now recognised as recoverable. The
£164 million represents the present value of the economic benefi ts available from the reductions to future ongoing contributions to
the scheme. Accordingly, a net surplus of £164 million gross of deferred tax was recognised at 31 December 2012. Of this amount,
£115 million was allocated to the PAC with-profi ts fund and £49 million was allocated to the shareholders’ fund.
The IAS 19 defi cit of the Scottish Amicable Pension Scheme at 31 December 2012 was £74 million (31 December 2011: defi cit of
£55 million) and has been allocated approximately 50 per cent to the PAC with-profi ts fund and 50 per cent to the shareholders’ fund.
The IAS 19 surplus of the M&G pension scheme on an economic basis at 31 December 2012 was £38 million
(31 December 2011: surplus of £10 million) and is wholly attributable to shareholders. The underlying position on an
economic basis refl ects the assets (including investments in Prudential insurance policies that are offset against liabilities to
policyholders on the Group consolidation) and the liabilities of the schemes. As at 31 December 2012, the M&G pension scheme
has invested £169 million in Prudential insurance policies (31 December 2011: £165 million). After excluding these investments
that are offset against liabilities to policyholders, the IAS 19 basis position of the M&G pension scheme is a defi cit of £131 million
(31 December 2011: defi cit of £155 million).
2 Corporate governance
The rules of the Group’s largest pension arrangement, the defi ned benefi t section of PSPS, a fi nal 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 fi nancial market levels.
The Trustee sets the general investment policy and specifi es any restrictions on types of investment and the degrees of
divergence permitted from the benchmark, but delegates the responsibility for selection and realisation of specifi c 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 diversifi cation and suitability of investments. Subject to a number of restrictions contained within
the relevant asset management agreements, the Investment Managers are authorised to invest in any class of investment asset.
However, the Investment Managers will not invest in any new class of investment asset without prior consultation with the Trustee.
The Trustee consults the Principal Employer, the Prudential Assurance Company, on these investment principles, but the
ultimate responsibility for the investment of the assets of the scheme lies with the Trustee.
The investment policies and strategies for the other two UK defi ned benefi t schemes, the M&G Group Pension Scheme and
the Scottish Amicable Staff Pension Scheme, which are both fi nal salary schemes, follow similar principles, but have different target
allocations refl ecting the particular requirements of the schemes.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
301
3 Assumptions
The actuarial assumptions used in determining benefi t obligations and the net periodic benefi t costs for the years ended
31 December were as follows:
Discount rate*
Rate of increase in salaries
Rate of infl ation†
Retail prices index (RPI)
Consumer prices index (CPI)
Rate of increase of pensions in payment for infl ation:
Guaranteed (maximum 5%)
Guaranteed (maximum 2.5%)‡
Discretionary‡
Expected returns on plan assets
2012 %
2011 %
4.4
2.7
2.7
2.0
2.5
2.5
2.5
3.1
4.7
2.9
2.9
1.9
2.5
2.5
2.5
5.1
* The discount rate has been determined by reference to an ‘AA’ corporate bond index, adjusted where applicable, to allow for the diff erence in duration
between the index and the pension liabilities.
† The rate of infl ation refl ects the long-term assumption for the UK RPI or CPI depending on the tranche of the schemes.
‡ The rates of 2.5 per cent are those for PSPS. Assumed rates of increase of pensions in payments for infl ation for all other schemes are 2.7 per cent in 2012
(2011: 2.9 per cent).
The calculations are based on current actuarially calculated mortality estimates with a specifi c allowance made for future
improvements in mortality. The specifi c allowance for 2012 and 2011 is in line with a custom calibration of the 2009 mortality model
from the Continuous Mortality Investigation Bureau of the Institute and Faculty of Actuaries (CMI). The tables used for PSPS
immediate annuities in payment at 31 December 2012 and 2011 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 assumed life expectancies on retirement at age 60, based on the mortality table used was:
Retiring today
Retiring in 20 years’ time
2012 years
2011 years
Male
28.0
30.6
Female
29.1
31.2
Male
27.8
30.5
Female
29.0
31.1
The mean term of the current PSPS liabilities is around 17 years.
Using external actuarial advice provided by the scheme actuaries being Towers Watson for the valuation of PSPS, Xafi nity
Consulting for SAPS and Aon Hewitt Limited for the M&G scheme, the most recent full valuations have been updated to
31 December 2012, applying the principles prescribed by IAS 19.
4 Group economic and IAS 19 fi nancial position
This section illustrates the fi nancial position of the Group’s defi ned benefi t pension schemes on an economic basis and the IAS 19
basis. The underlying position on an economic basis refl ects 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 2012, the
investments in Prudential insurance policies comprise £123 million (2011: £112 million) for PSPS and £169 million (2011: £165 million)
for the M&G scheme.
Separately, the economic fi nancial position also includes the effect of the application of IFRIC 14, ‘IAS 19 – The Limit on a
Defi ned Benefi t 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, where
relevant (as previously described).
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Financial statements Prudential plc Annual Report 2012
I: Other notes continued
I3: Staff and pension plans continued
(i) Estimated pension scheme defi cit – economic basis
Movements on the pension scheme defi cit (determined on the economic basis) are as follows, with the effect of the application
of IFRIC 14 being shown separately:
2012 £m
(Charge) credit to income
statement
Surplus
(defi cit) in
scheme at
1 January
2012
Operating
results
(based on
longer-term
investment
returns)
Actuarial and
other gains
and losses
Contributions
paid
Surplus
(defi cit)
in scheme
at 31 Dec
2012
1,543
(1,083)
460
(117)
343
(1,607)
1,124
(483)
123
(360)
(64)
41
(23)
6
(17)
(166)
105
(61)
25
(36)
136
(93)
43
(22)
21
(30)
12
(18)
3
(15)
(311)
222
(89)
20
(69)
461
(322)
139
(32)
107
150
(100)
50
(12)
38
72
(31)
41
(9)
32
–
–
–
–
–
72
(31)
41
(9)
32
1,138
(787)
351
(81)
270
(1,010)
709
(301)
69
(232)
128
(78)
50
(12)
38
All schemes
Underlying position (without the eff ect of IFRIC 14)
Surplus
Less: amount attributable to PAC with-profi ts fund
Shareholders' share:
Gross of tax surplus
Related tax
Net of shareholders' tax
Eff ect of IFRIC 14
Derecognition of surplus and set up of additional funding
obligation (1 Jan 2012 only)
Less: amount attributable to PAC with-profi ts fund
Shareholders' share:
Gross of tax defi cit
Related tax
Net of shareholders' tax
With the eff ect of IFRIC 14
(Defi cit) surplus
Less: amount attributable to PAC with-profi ts fund
Shareholders' share:
Gross of tax (defi cit) surplus
Related tax
Net of shareholders’ tax
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
303
Underlying investments and liabilities of the schemes
On the ‘economic basis’, after including the underlying assets represented by the investments in Prudential insurance policies
as scheme assets, the plan’s net assets at 31 December comprise the following investments and liabilities:
Equities
Bonds
Properties
Other assetsnote (i)
Total value of assets
2012 £m
2011 £m
PSPS
£m
43
5,440
290
627
6,400
Other
schemes
£m
321
418
40
18
797
Total
£m
364
5,858
330
645
7,197
%
5
81
5
9
PSPS
£m
210
5,547
297
378
100
6,432
Other
schemes
£m
273
407
20
31
731
Total
£m
483
5,954
317
409
7,163
%
7
83
4
6
100
Note
(i)
The PSPS scheme has entered into a derivatives based strategy to match the duration and infl ation profi le of its liabilities. This involved a reallocation
from other investments to other assets with an interest and infl ation 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 fi xed and infl ation-linked payments which match a
proportion of its liabilities. As at 31 December 2012, the nominal value of the interest and infl ation-linked swaps amounted to £0.9 billion (2011: £0.9 billion)
and £2.0 billion (2011: £2.0 billion) respectively.
(ii) IAS 19 basis fi nancial position as consolidated
The movements in the pension schemes’ surplus and defi cit between scheme assets and liabilities as consolidated in the fi nancial
statements were:
PSPS
Other schemes
2012 £m
Asset/
(liability)
(19)
(17)
36
164
Plan
assets
731
35
(17)
36
12
Present value
of benefi t
obligations
(776)
(11)
(37)
17
(26)
Total
Economic
basis net
surplus
(defi cit)
Adjust for
investments
in Prudential
insurance
policies
(64)
(11)
(2)
(17)
72
150
(165)
(8)
(5)
9
Net defi cit, beginning of year
Current service cost
Other fi nance income
Cash costs and unwind of discount on
opening provision for defi cit funding
for PSPS
Benefi t payments
Contributions
Actuarial and other gains and losses
Transfer out of investment in Prudential
insurance policies
Net surplus (defi cit), end of year
164
797
(833)
128
(169)
Total
IAS 19
basis net
defi cit
(229)
(11)
(10)
(17)
–
72
145
9
(41)
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Financial statements Prudential plc Annual Report 2012
I: Other notes continued
I3: Staff and pension plans continued
PSPS
Other schemes
2011 £m
Provision
of defi cit
funding
(47)
Plan
assets
653
41
(15)
40
12
(22)
54
(4)
Present value
of benefi t
obligations
(826)
(13)
66
(45)
15
(1)
28
Total
Economic
basis net
surplus
(defi cit)
(220)
(13)
66
(4)
(22)
93
36
Adjust for
investments
in Prudential
insurance
policies
(227)
(15)
5
(21)
1
92
Total
IAS 19
basis net
defi cit
(447)
(13)
66
(19)
(22)
5
72
37
92
(19)
731
(776)
(64)
(165)
(229)
Net defi cit, beginning of year
Current service cost
Negative past service cost (RPI to CPI
infl ation measure change)
Other fi nance income
Cash costs and unwind of discount on
opening provision for defi cit funding
for PSPS
Benefi t payments
Contributions
Actuarial and other gains and losses
Transfer out of investment in Prudential
insurance policies
Net defi cit, end of year
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
305
The IAS 19 basis pensions defi cit can be summarised as follows:
Plan assets
(IAS 19 basis before effect of IFRIC 14):
Equities
Bonds
Properties
Other assets
Fair value of plan assets, end
of year*
Present value of benefi t obligation
Funded status (wholly or partly
funded)
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 defi cit funding
for PSPS
Adjustment in respect of investment
of PSPS in Prudential policies
Defi cit recognised in the statement
of fi nancial position
Experience adjustments:
Experience adjustments on scheme
liabilities‡
Percentage of scheme liabilities at
2012
2011
2010
2009
2008
£m
%
£m
%
£m
%
£m
%
£m
%
202
5,728
330
645
5
84
5
6
336
5,826
317
407
5
85
4
6
610
4,095
206
748
11
72
4
13
917
3,587
278
442
18
69
5
8
875
2,619
290
1,273
6,905
(6,059)
100
6,886
(5,620)
100
5,659
(5,438)
100
5,224
(4,951)
100
5,057
(4,493)
17
52
6
25
100
846
–
846
1,266
–
1,266
(1,010)
(1,588)
–
123
(41)
(19)
112
(229)
221
(254)
(33)
(485)
(47)
118
(447)
(4)
314
(4)
273
(223)
50
(513)
(75)
101
(437)
76
1.47%
100
564
(180)
384
(728)
(65)
103
(306)
145
3.10%
(277)
31 December
(0.07)%
(5.59)%
(0.07)%
Experience adjustments on scheme
assets (IAS 19 basis)
(39)
998
287
Percentage of scheme assets at
31 December
(0.57)%
14.49%
5.07%
1.91%
(5.48)%
* The IAS 19 basis plan assets at 31 December 2012 of £6,905 million is diff erent from the economic basis plan assets of £7,197 million as show in section 4(i)
above due to the exclusion of investment in Prudential insurance policies of £292 million comprising £123 million for PSPS and £169 million for the M&G
scheme.
† The M&G pension scheme invests in Prudential insurance policies. On Prudential Group consolidation these assets are eliminated against liabilities in the
statement of fi nancial position of UK insurance operations. Up until 2011 all of the M&G scheme assets were invested in this way thus giving rise to an
unfunded status on a Prudential Group consolidated basis. At 31 December 2012 and 2011, only £169 million (2011: £165 million) out of the M&G scheme assets
of £297 million (2011: £257 million) was invested in Prudential insurance policies, thereby switching its status to a partly funded scheme.
‡ The experience adjustments on scheme liabilities in 2011 of £314 million related mainly to the ‘true-up’ refl ecting improvements in data consequent upon
the ongoing 2011 triennial valuations of PSPS and the Scottish Amicable pension scheme. The experience adjustments on scheme liabilities in 2008 of a gain
of £145 million related mainly to the ‘true up’ refl ecting improvements in data consequent upon the 2008 triennial valuation of PSPS.
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Financial statements Prudential plc Annual Report 2012
I: Other notes continued
I3: Staff and pension plans continued
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 above.
Long-term expected rate of return:
Equity
Bonds
Properties
Other assets
Weighted average long-term expected rate of return
2012 %
2011 %
6.8
3.0
5.6
2.0
3.1
8.2
4.6
6.9
4.8
5.1
The expected rates of return have been determined by reference to long-term expectations, the carrying value of the assets and
equity and other market conditions at the statement of fi nancial position date.
The actual return on scheme assets was a gain of £189 million (gain of 2011: £1,290 million) on an IAS 19 basis.
None of the scheme assets included shares in Prudential plc or property occupied by the Prudential Group.
(iii) Credit (charge) to the income statement
The components of the credit (charge) for the net periodic pension cost (comprising amounts attributable to the PAC with-profi ts
fund and shareholder-backed operations) are as follows:
2012 £m
2011 £m
Pension cost
Current service cost
Past service cost:note (a)
RPI to CPI infl ation measure change in 2011
Exceptional discretionary pension increase for PSPS in 2012
Finance (expense) income:
Interest cost
Expected return on assets – IAS 19 basis
Add: expected return on investments of scheme assets in Prudential insurance policies
Expected return on assets – economic basis
Total (charge) credit without the effect of IFRIC 14
Effect of the application of IFRIC 14
Pension cost – economic basisnote (i) above and note (b)
Adjustment for investments in Prudential insurance policiesnote (d)
Pension cost – IAS 19 basis (as recognised in the income statement and referred to in note I3a)
Actuarial and other gains and losses
Actual less expected return on assets
Losses on changes of assumptions for plan liabilities
Experience (losses) gains on liabilities
Total (charge) credit without the effect of IFRIC 14
Effect of the application of IFRIC 14
Actuarial gains and losses – economic basisnote (i) above and note (c)
Adjustment for investments in Prudential insurance policiesnote (d)
Actuarial gains and losses – IAS 19 basis (as recognised in the income statement and referred to in
note I3a)
Net periodic pension cost (included within acquisition and other operating expenditure in the
income statement)
(32)
–
(106)
(263)
227
8
235
(166)
136
(30)
(8)
(38)
(34)
(273)
(4)
(311)
461
150
(5)
145
107
(35)
282
–
(299)
283
25
308
256
(229)
27
(15)
12
982
(414)
314
882
(846)
36
1
37
49
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
307
Notes
(a)
Past service cost
– RPI/CPI infl ation measure change in 2011
During 2011 the Group altered its infl ation measure basis for future statutory increases to pension payments for certain tranches of its UK defi ned benefi t
pension schemes. This refl ected the UK Government’s decision to replace the basis of indexation from RPI with CPI.
The £282 million credit in 2011 shown above comprised £216 million for PSPS and £66 million for other schemes. As noted earlier, the PSPS scheme
surplus was not recognised for accounting purposes due to the application of IFRIC 14. The £66 million for other schemes was allocated as £24 million to
PAC with-profi ts fund and £42 million to shareholders as referred to in note C.
– Exceptional discretionary pension increase for PSPS in 2012
During the fi rst half of 2012, an exceptional discretionary increase to pensions in payment of PSPS was awarded which resulted in a past service cost of
£106 million.
As the PSPS scheme surplus is substantially not recognised for accounting purposes, these two items had negligible impact on the Group’s results.
(b) Consistent with the derecognition of a substantial portion of the Company’s interest in the underlying IAS 19 surplus of PSPS, the charge to operating
profi t based on longer-term investment returns for PSPS refl ects the cash cost of contributions for ongoing service of active members (2012: £17 million;
2011: £20 million). In addition, the charge to the operating results also includes a charge for the unwind of discount on the opening provision for defi cit
funding for PSPS (2012: £nil; 2011:£2 million).
The net credit (charge) for actuarial and other gains and losses is recorded within the income statement. Within the Group’s supplementary analysis of
profi t, the shareholders’ share of actuarial and other gains and losses (ie net of allocation of the share to the PAC with-profi ts funds) of £50 million as
shown in note ii above (2011:£21 million) is excluded from operating profi t based on longer-term investment returns as shown in note B1.
(c)
The 2012 actuarial and other gains refl ects the positive impact of infl ation rate movements in the period, off set by lower discount rates as interest rate
falls, and partial recognition of actuarial surplus in PSPS described above.
(d) The adjustments for investments in Prudential insurance policies are consolidation adjustments with no net impact to the operating results.
Total employer contributions expected to be paid into the Group defi ned benefi t schemes for the year ending 31 December 2012
amounts to £56 million (2011: £94 million).
5 Sensitivity of the pension scheme liabilities to key variables
The total underlying Group pension scheme liabilities of £6,059 million (2011: £5,620 million) comprise £5,226 million
(2011: £4,844 million) for PSPS and £833 million (2011: £776 million) for the other schemes. The table below shows the sensitivity
of the underlying PSPS and the other scheme liabilities at 31 December 2012 and 2011 to changes in discount rates, infl ation rates
and mortality rates.
Assumption applied
Discount rate
2012
4.4%
2011
Sensitivity change in
assumption
4.7% Decrease by 0.2%
Discount rate
4.4%
4.7% Increase by 0.2%
Rate of infl ation
RPI: 2.7%
RPI: 2.9% RPI: Decrease by 0.2%
CPI: 2.0%
CPI: 1.9% CPI: Decrease by 0.2%
with consequent
reduction in
salary increases
Increase life expectancy
by 1 year
Mortality rate
Impact of sensitivity on
scheme liabilities on IAS 19
basis
Increase in scheme
liabilities by:
PSPS
Other schemes
Decrease in scheme
liabilities by:
PSPS
Other schemes
Decrease in scheme
liabilities by:
PSPS
Other schemes
Increase in scheme
liabilities by:
PSPS
Other schemes
2012
2011
3.3%
4.9%
3.1%
4.6%
3.3%
4.8%
3.1%
4.5%
0.6%
0.6%
4.3%
4.1%
2.6%
2.4%
2.7%
2.4%
The sensitivity of the underlying pension scheme liabilities to changes in discount, infl ation and mortality rates as shown above
does not directly equate to the impact on the profi t 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 fi nancial position of the PSPS and Scottish
Amicable schemes to the PAC with-profi ts fund as described above.
The sensitivity to the changes in the key variables as shown in the table above has no signifi cant 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 refl ected as actuarial gains and losses on defi ned benefi t
pension schemes within the supplementary analysis of profi ts.
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Financial statements Prudential plc Annual Report 2012
I: Other notes continued
I3: Staff and pension plans continued
6 Transfer value of PSPS scheme
At 31 December 2012, it is estimated that the assets of the scheme are broadly suffi cient to cover the liabilities of PSPS on a
‘buy-out’ 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 fi nancial 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 defi ned contribution pension schemes including schemes in Jackson and Asia. The cost of the Group’s
contributions for continuing operations to these schemes in 2012 was £47 million (2011: £40 million).
I4: Share-based payments
a Description of the plans
The Group maintains a number of main share award and share option plans relating to Prudential plc shares, which are described
below.
(i) Group Performance Share Plan, previously Restricted Share Plan
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 benefi t, 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 have been 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 fi nancial
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 benefi t of qualifying employees.
(ii) Business Unit Performance Plan
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 offi cers. Awards under this plan
were based on growth in shareholder capital value on the European Embedded Value basis with performance measured over three
years. All awards made are 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. The BUPP awards for the UK business unit are based on the same
relative TSR measure applied to GPSP awards. As a result, awards made under the UK BUPP refl ect those TSR conditions applied
to GPSP awards.
(iii) Savings-related options
The Group maintains four share option schemes satisfi ed by the issue of new shares: UK-based executive directors and eligible
employees are eligible to participate in the Prudential HM Revenue & Customs (HMRC) approved UK savings-related share option
scheme. Asia-based executive directors and eligible employees can participate in the equivalent 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.
The options are normally exercisable during the six month period following either the third or fi fth anniversary of the start of the
relevant savings contract. 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.
(iv) Share Incentive Plan
UK-based executive directors and employees are also eligible to participate in the Company’s HMRC-approved Share Incentive
Plan (SIP), which allows all UK-based employees to purchase shares of Prudential plc (partnership shares) on a monthly basis out
of gross salary. For every four partnership shares bought, an additional matching share is awarded, 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 fi ve years, the matching shares are forfeit, and if within three years,
dividend shares are forfeit.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
309
(v) Performance-related share awards
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.
(vi) Long-term Incentive Plan
The Prudential Corporation Asia Long-Term Incentive Plan (PCA LTIP) is an incentive plan created in 2008 for senior employees
and chief executive offi cers. Awards under this plan will vest after three years subject to the employee being in employment at
the time of vesting without any performance conditions. Awards are discretionary and on a year-by-year basis determined by
Prudential’s full year fi nancial 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.
(vii) Annual Incentive Plan
Certain senior executives have Annual Incentive Plans (AIP) 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 benefi t of award holders during the deferral period up to the release date.
(viii) Other Share awards
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.
b Outstanding options and awards
The following table shows movement in options outstanding under the Group’s share-based compensation plans at
31 December 2012 and 2011:
Options outstanding under SAYE schemes
Beginning of year:
Granted
Exercised
Forfeited
Cancelled
Lapsed
End of year
Options immediately exercisable, end of year
2012
2011
Number
of options
millions
Weighted
average
exercise
price
£
Number
of options
millions
Weighted
average
exercise
price
£
13.3
2.4
(5.7)
(0.2)
(0.2)
(0.2)
9.4
0.2
3.55
6.29
2.99
4.29
4.32
4.39
4.54
3.88
12.8
2.1
(0.6)
(0.2)
(0.4)
(0.4)
13.3
0.4
3.4
4.66
3.98
3.17
3.56
3.94
3.55
4.54
The weighted average share price of Prudential plc for the year ended 31 December 2012 was £7.69 compared to £6.86 for the
year ended 31 December 2011.
Movements in share awards outstanding under the Group’s share-based compensation plans relating to Prudential plc shares
at 31 December 2012 and 2011 were as follows:
Awards outstanding under incentive plans including conditional options
Beginning of year:
Granted
Exercised
Forfeited
Expired
End of year
2012
2011
Number
of awards
millions
Number
of awards
millions
26.7
8.8
(9.4)
(1.4)
(1.0)
23.7
23.9
10.3
(4.2)
(0.1)
(3.2)
26.7
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Financial statements Prudential plc Annual Report 2012
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 2012.
Range of exercise prices
Between £2 and £3
Between £4 and £5
Between £5 and £6
Between £6 and £7
Outstanding
Weighted
average
remaining
contractual
life
years
2.0
2.3
0.6
3.6
2.6
Number
Outstanding
millions
2.8
4.1
0.1
2.4
9.4
Exercisable
Weighted
average
exercise
prices
£
2.88
4.61
5.60
6.29
4.54
Number
exercisable
millions
0.1
0.1
–
–
0.2
Weighted
average
exercise
prices
£
2.88
4.24
5.67
–
3.88
The following table provides a summary of the range of exercise prices for Prudential plc options outstanding at 31 December 2011.
Range of exercise prices
Between £2 and £3
Between £3 and £4
Between £4 and £5
Between £5 and £6
Outstanding
Weighted
average
remaining
contractual
life
years
Exercisable
Weighted
average
exercise
prices
£
Number
exercisable
millions
Weighted
average
exercise
prices
£
1.6
0.8
3.1
0.9
2.2
2.88
3.73
4.58
5.58
3.55
–
–
0.3
0.1
0.4
–
3.43
4.40
5.53
4.54
Number
Outstanding
millions
8.2
–
5.0
0.1
13.3
The years shown above for weighted average remaining contractual life include the time period from end of vesting period to
expiration of contract.
Fair value of options and awards
c
The weighted average fair values of Prudential plc options and awards granted during the period are as follows:
2012 £
2011 £
Weighted average fair value
Weighted average fair value
GPSP
3.91
SAYE
Options
2.28
Awards
6.72
GPSP
3.88
SAYE
Options
2.63
Awards
6.28
The fair value amounts estimated on the date of grant 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 (£)
2012
2011
GPSP
–
33.03
0.31
–
–
6.78
SAYE
Options
3.63
34.33
0.39
3.24
6.29
8.26
GPSP
–
28.90
1.32
–
–
7.32
SAYE
Options
3.33
62.67
0.89
3.48
4.66
6.06
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
311
Compensation costs for all share-based compensation plans are determined using the Black-Scholes model, Monte Carlo model or
other market consistent valuation methods. 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 and
UK BUPP, 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.
For the SAYE options, the expected volatility is based on the market implied volatilities for Prudential shares as quoted on Bloomberg.
This change (from an estimate based on historic volatility) brings the methodology into line with the approach used to determine the
volatility for the GPSP and UK BUPP awards. The Prudential specifi c at-the-money implied volatilities are adjusted to allow for the
different term and discounted exercise price on SAYE options by using information on the volatility surface of the FTSE 100.
Risk-free interest rates are UK gilt rates with projections for three-year and fi ve-year terms to match corresponding vesting
periods. Dividend yield is determined as the average yield over a period of 12 months up to and including the date of grant. For the
GPSP, volatility and correlation between Prudential and an index constructed from a simple average of the TSR growth of 10 companies
is required. For grants in 2012, an average index volatility and correlation of 32 per cent and 76 per cent respectively, were used.
For the GPSP, market implied volatilities are used for both Prudential and the components of the index. Changes to the subjective
input assumptions could materially affect the fair value estimate.
d Share-based payment expense charged to the income statement
Total expense recognised in the year in the consolidated fi nancial 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
2012 £m
2011 £m
58
42
24
16
48
44
15
6
I5: Key management remuneration
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 can be broken down in the following table:
Salaries and short-term benefi ts
Post-employment benefi ts
Share-based payments
2012 £
2011 £
13,793,000 12,192,000
1,189,000
9,734,000
1,206,000
11,787,000
26,786,000 23,115,000
Post-employment benefi ts comprise the change in the transfer value of the accrued benefi t relating to directors’ defi ned benefi t
pension schemes in the year and the total contributions made to directors’ other pension arrangements.
The share-based payments charge is the sum of £7,992,000 (2011: £6,571,000), which is determined in accordance with IFRS 2,
‘Share-based payments’ (see note I4) and £3,795,000 (2011: £3,163,000) of deferred share awards.
Total key management remuneration includes total directors’ emoluments of £18,505,000 (2011: £16,212,000) 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.
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Financial statements Prudential plc Annual Report 2012
I: Other notes continued
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 pursuant to legislation
Audit-related assurance services
Tax compliance services
Other assurance services
Services relating to corporate fi nance transactions
All other services
Total
2012 £m
2011 £m
2.0
6.5
3.2
0.5
0.5
0.4
1.2
2.1
6.1
2.6
0.6
0.5
0.5
0.3
14.3
12.7
In addition, there were fees incurred of £0.1 million (2011: £0.1 million) for the audit of pension schemes.
The above audit fees for 2012 and 2011, refl ect the new disclosure requirements of SI2011/2198 – The Companies (Disclosure
of Auditor Remuneration and Liability Limitation Agreements) (Amendment) Regulations 2011.
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, Open-Ended Investment Companies
(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
fi nancial position sheet at fair value or amortised cost in accordance with their IAS 39 classifi cations. 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, profi ts or
losses and reporting dates of entities considered to be associates under IFRS are disclosed in note H8.
Executive offi cers 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.
In 2012 and 2011, other transactions with directors were not deemed to be signifi cant both by virtue of their size and in the context
of the directors’ fi nancial positions. As indicated above, all of these transactions are on terms broadly equivalent to those that prevail in
arm’s length transactions.
Apart from these transactions with directors, 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.
Notes on the Group fi nancial statements Prudential plc Annual Report 2012
313
I8: Subsidiary undertakings
i Principal subsidiaries
The principal subsidiary undertakings of the Company at 31 December 2012, 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 next Annual Returns of Prudential plc fi led
with the UK Registrar of Companies.
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 2013, the maximum amount of dividends that could be
paid by the US insurance sub-group, subject to the availability of earned surplus, without prior regulatory approval is US$352 million
(£216 million) (in 2012: US$411 million (£264 million)). The Group’s subsidiaries in Asia may remit dividends to the Group, in general,
provided the statutory insurance fund meets the capital adequacy standard required under local statutory regulations and has
suffi cient distributable reserves.
The Group capital position statement for life assurance businesses is set out in note D5, showing the available capital refl ecting
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.
I9: Commitments
i Operating leases
The Group leases various offi ces to conduct its business. Leases in which a signifi cant portion of the risks and rewards of ownership
are retained by the lessor are classifi ed 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
2012 £m
2011 £m
74
199
116
66
173
72
The total minimum future sublease rentals to be received on non-cancellable operating leases for land and buildings for the
year ended 31 December 2012 were £18 million (2011: £18 million).
Minimum lease rental payments for the year ended 31 December 2012 of £73 million (2011: £74 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 2012 were £5 million (2011: £9 million).
I
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Financial statements Prudential plc Annual Report 2012
I: Other notes continued
I10: Cash fl ows
Structural borrowings of shareholder-fi nanced operations comprise of core debt of the parent company, the PruCap bank loan and
Jackson surplus notes. Core debt excludes borrowings to support short-term fi xed income securities programmes, non-recourse
borrowings of investment subsidiaries of shareholder-fi nanced operations and other borrowings of shareholder-fi nanced operations.
Cash fl ows in respect of these borrowings are included within cash fl ows from operating activities.
Structural borrowings of with-profi ts 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-profi ts fund. Cash fl ows in respect of other borrowings of with-profi ts funds, which principally relate to consolidated investment
funds, are included within cash fl ows from operating activities.
I11: Post balance sheet events
In January 2013, the Company issued US$700 million 5.25 per cent Tier 1 perpetual subordinated capital securities. The proceeds,
net of costs, were US$689 million. The Company also repaid on maturity, the £250 million Medium-Term Notes 2013, included within
operational borrowings in note H13 in January 2013.
Parent company fi nancial statements Prudential plc Annual Report 2012
315
Balance sheet of the parent company
31 December 2012
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 (liabilities) assets
Total assets less current liabilities
Less liabilities: amounts falling due aft er 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
Profi t and loss account
Shareholders’ funds
Note
2012 £m
2011 £m
5
5
6
8
7
7
8
7
7
7
9
10
10
11
11
11,929
1,164
13,093
10,902
1,200
12,102
3,208
47
3
3
193
3,454
(1,535)
(450)
(190)
(1,705)
(103)
(19)
(46)
(4,048)
(594)
6,122
364
11
3
152
6,652
(2,706)
(200)
(207)
(1,049)
(198)
(19)
(46)
(4,425)
2,227
12,499
14,329
(2,577)
(549)
(299)
(2,576)
(6,001)
6,498
38
6,536
128
1,889
4,519
6,536
(2,652)
(549)
(250)
(3,560)
(7,011)
7,318
39
7,357
127
1,873
5,357
7,357
The fi nancial statements of the parent company on pages 315 to 323 were approved by the Board of directors on 12 March 2013 and
signed on its behalf.
Paul Manduca
Chairman
Tidjane Thiam
Group Chief Executive
Nic Nicandrou
Chief Financial Offi cer
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Financial statements Prudential plc Annual Report 2012
Notes on the parent company fi nancial 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 fi nancial services group with its principal operations in Asia, the US and the UK. In Asia, the Group has operations in
Hong Kong, Malaysia, Singapore, Indonesia and other Asian countries. In the US, the Group’s principal subsidiary is Jackson National
Life Insurance Company. In the UK, the Group operates through its subsidiaries, primarily The Prudential Assurance Company
Limited, Prudential Annuities Limited, Prudential Retirement Income Limited and M&G Investment Management Limited. The
Company is responsible for the fi nancing of each of its subsidiaries.
2 Basis of preparation
The fi nancial 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 profi t and loss account.
The fi nancial 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 fl ow statement on the basis that its cash fl ow is included within the cash fl ow statement in
the consolidated fi nancial 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 fi nancial statements of the Group that include disclosures that comply with IFRS 7, ‘Financial Instruments: Disclosures’,
which is equivalent to FRS 29.
The Company adopted the ‘Amendment to FRS 29 (IFRS 7) – Financial Instruments: Disclosures – Transfers of Financial Assets’
in 2012. The adoption of this amendment did not have an impact on the fi nancial statements of the Company.
3 Signifi cant 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 fi nancial instruments are held to manage interest rate and currency profi les. Derivative fi nancial instruments are carried
at fair value with changes in fair value included in the profi t and loss account.
Under FRS 26, ‘Financial Instruments: Recognition and Measurement’, hedge accounting is permissible only if certain criteria
are met regarding the establishment of documentation and continued measurement of hedge effectiveness. For derivative fi nancial
instruments designated as fair value hedges, the movements in the fair value are recorded in the profi t 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 profi t and loss account to the date of maturity,
or, for hybrid debt, over the expected life of the instrument.
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.
Notes on the parent company fi nancial statements Prudential plc Annual Report 2012
317
Foreign currency translation
Foreign currency borrowings that have been used to fi nance 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 profi t 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 refl ected in the profi t 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 indefi nitely to be offset against profi ts arising from the same company.
Deferred tax assets and liabilities are recognised in accordance with the provisions of FRS 19, ’Deferred tax’. The Company has
chosen not to apply the option available of recognising such assets and liabilities on a discounted basis to refl ect 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 fi le 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 profi ts 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 defi cit of the Group’s main pension scheme, the Prudential Staff Pension
Scheme (PSPS) and applied the requirements of FRS 17, ‘Retirement Benefi ts’ (as amended in December 2006) to its interest in the
PSPS surplus or defi cit. Further details are disclosed in note 9.
A pension surplus or defi cit 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 defi ned benefi t pension schemes of the Prudential Group are subject to a full triennial actuarial
valuation using the projected unit method. Estimated future cash fl ows 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 profi t 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 profi t 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.
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, ‘Share-based payment’, 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 fi nancial statements, the Company records an increase in the investment in 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.
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Financial statements Prudential plc Annual Report 2012
Notes on the parent company fi nancial statements continued
4 Reconciliation from UK GAAP to IFRS
The Company fi nancial statements are prepared in accordance with UK GAAP and the consolidated fi nancial 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.
Profi t aft er tax
(Loss) profi t for the fi nancial year of the Company in accordance with UK GAAP
IFRS adjustment*
(Loss) profi t for the fi nancial year of the Company (including dividends from subsidiaries) in accordance
with IFRS
Share in the IFRS result of the Group, net of distributions to the Company†
Profi t aft er 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
2012 £m
2011 £m
(216)
71
(145)
2,342
2,197
3,720
(5)
3,715
(2,300)
1,415
2012 £m
2011 £m
6,536
–
6,536
3,823
10,359
7,357
(44)
7,313
1,251
8,564
* ‘IFRS adjustment’ in the above tables represent the diff erence in the accounting treatment for pension schemes between UK GAAP and IFRS.
† The ‘shares in the IFRS result and net equity of the Group’ lines represent the Company’s equity in the earnings and net assets of its subsidiaries and associates.
The (loss) profi t for the fi nancial year of the Company in accordance with UK GAAP and IFRS includes dividends declared in the year
from subsidiary undertakings of £501 million and £4,002 million for the years ended 31 December 2012 and 2011, respectively.
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.
5 Investments of the Company
At 1 January
Transfer of investment in subsidiary undertaking
Investment in subsidiary undertaking
Other movements
Foreign exchange movement
At 31 December
2012 £m
Shares in
subsidiary
undertakings
Loans to
subsidiary
undertakings
10,902
(3,889)
4,930
(14)
–
11,929
1,200
–
–
–
(36)
1,164
In January 2012, as part of an internal restructuring, the Company transferred at fair value, interests of £3,889 million in shares in
a central subsidiary undertaking and £2,007 million of loans to a second such subsidiary to another central subsidiary in exchange
for shares issued by that subsidiary of £4,930 million, and settlement of an amount owed to that subsidiary of £966 million. No profi t
or loss arose on the transfer.
Other movements comprise £6 million in respect of share-based payments refl ecting the value of payments settled by the
Company for employees of its subsidiary undertakings in 2012 offset by cash of £20 million received from those subsidiaries.
The principal subsidiary undertakings of the Company at 31 December 2012 are disclosed in note I8(i) ‘Subsidiary undertakings –
Principal subsidiaries’ of the Group fi nancial statements.
Notes on the parent company fi nancial statements Prudential plc Annual Report 2012
319
6 Deferred tax asset
Short-term timing differences
Unused deferred tax losses
Total
2012 £m
2011 £m
3
44
47
6
358
364
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 profi ts from which the future reversal
of the underlying temporary differences can be deducted.
For each category of deferred tax asset recognised, its recoverability against forecast taxable profi ts is not signifi cantly impacted
by expected changes to accounting standards.
The UK government’s tax rate change to 23 per cent has had the effect of reducing the Company’s net deferred tax balance
at 31 December 2012 by £3 million. The change to 23 per cent is effective from 1 April 2013 but is substantively enacted as at
31 December 2012. The subsequent proposed rate change to 21 per cent by 1 April 2014 is not expected to have a material effect
on the deferred tax balance recognised at 31 December 2012.
7 Borrowings
Core structural borrowingsnotes (i) and (v)
Other borrowings:
Commercial paper note (ii)
Floating Rate Notes 2013note (iii)
Medium-Term Notes 2013notes (ii) and (v)
Medium-Term Notes 2015note (ii)
Total borrowings
3,126
3,201
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 (iv)
Debenture loans
–
–
3,126
3,126
2,577
549
3,126
–
–
3,201
3,201
2,652
549
3,201
Core structural borrowings
Other borrowings
Total
2012 £m
2011 £m
2012 £m
2011 £m
2012 £m
2011 £m
3,126
3,201
–
–
3,126
3,201
–
–
–
–
–
–
–
–
1,535
200
250
299
2,284
1,985
299
–
2,284
2,706
200
250
–
3,156
2,906
250
–
3,156
1,535
200
250
299
5,410
1,985
299
3,126
5,410
2,706
200
250
–
6,357
2,906
250
3,201
6,357
Notes
(i)
Further details on the core structural borrowings of the Company of £3,126 million (2011: £3,201 million) are provided in note H13 ‘Borrowings’ of the
Group fi nancial statements.
(ii) These borrowings support a short-term fi xed income securities programme.
(iii) The Company issued £200 million Floating Rate Notes in 2012 which mature in April 2013. All Notes have been subscribed to by a Group subsidiary and
accordingly have been eliminated on consolidation in the Group fi nancial statements. These Notes were originally issued in October 2008 and have been
reissued upon their maturity.
(iv) The interests of the holders of the subordinated liabilities are subordinate to the entitlements of other creditors of the Company.
(v)
In January 2013, the Company issued core structural borrowings of US$700 million 5.25 per cent Tier 1 perpetual subordinated capital securities.
The proceeds, net of costs, were US$689 million. Also in January 2013, the Company repaid the £250 million Medium-Term Notes 2013 on maturity.
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Financial statements Prudential plc Annual Report 2012
Notes on the parent company fi nancial statements continued
8 Derivative fi nancial instruments
Cross-currency swap
Infl ation-linked swap
Total
2012 £m
2011 £m
Fair value
assets
Fair value
liabilities
Fair value
assets
Fair value
liabilities
3
–
3
–
190
190
3
–
3
–
207
207
Derivative fi nancial instruments are held to manage interest rate and currency profi les. The change in fair value of the derivative
fi nancial instruments of the Company was a gain before tax of £17 million (2011: loss before tax of £75 million).
The derivative fi nancial 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 fi nancial 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 defi ned benefi t scheme.
For the purpose of preparing consolidated fi nancial statements, the Group applies IFRS basis accounting including IAS 19,
‘Employee Benefi ts’ as described further in note I3 ‘Staff and pension plans’ of the Group fi nancial statements (note I3). Although the
individual accounts of the Company continue to follow UK GAAP, the disclosures under FRS 17, ‘Retirement Benefi ts’ are aligned with
IAS 19.
At 31 December 2005, the allocation of surpluses and defi cits attaching to the Scheme between the Company and the unallocated
surplus of the The Prudential Assurance Company Limited (PAC) with-profi ts fund was apportioned in the ratio 30/70 following
detailed consideration of the sourcing of previous contributions. This ratio was applied to the base defi cit position at 1 January 2006
and for the purpose of determining the allocation of the movements in that position up to 31 December 2012. The FRS 17 service
charge and ongoing employer contributions are allocated by reference to the cost allocation for current activity.
The last completed triennial actuarial valuation of the Scheme was as at 5 April 2011. Further details on the results of this valuation
and the total employer contributions to the Scheme for the year are provided in note I3, together with the key assumptions adopted,
including mortality assumptions.
Using external actuarial advice provided by the professionally qualifi ed actuaries, Towers Watson, for the valuation of the Scheme,
the most recent full valuations have been updated to 31 December 2012 applying the principles prescribed by FRS 17. 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, and are set out below:
Equities
Bonds
Properties
Other assets
Weighted average long-term expected rate of return
Prospectively
for 2013 %
2012 %
2011 %
6.7
2.8
5.5
2.0
2.9
6.8
3.0
5.55
2.0
3.1
8.2
4.6
6.9
4.75
5.1
Notes on the parent company fi nancial statements Prudential plc Annual Report 2012
321
The assets and liabilities of the Scheme were:
Equities
Bonds
Properties
Other assets
Total value of assets
Present value of Scheme
liabilities
Underlying surplus in the
Scheme
Surplus in the Scheme
recognised by the
Company
Amounts refl ected in the
balance sheet of the
Company, net of
deferred tax
31 Dec 2012
31 Dec 2011
31 Dec 2010
31 Dec 2009
31 Dec 2008
£m
%
£m
%
£m
%
£m
%
£m
%
43
5,440
290
627
0.7
81.2
4.5
13.6
210
5,547
297
378
3.3
86.2
4.6
5.9
548
3,864
199
740
10.3
72.2
3.7
13.8
830
3,406
272
441
16.8
68.8
5.5
8.9
823
2,430
283
1,267
17.1
50.6
5.9
26.4
6,400
100.0
6,432
100.0
5,351
100.0
4,949
100.0
4,803
100.0
(5,226)
(4,844)
(4,866)
(4,436)
(4,075)
1,174
1,588
485
513
728
49
38
52
39
56
41
52
37
50
36
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-profi ts 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
Current service cost
Past service cost*
Interest cost
Employee contributions
Actuarial losses
Benefi t payments
Present value of Scheme liabilities, at 31 December
2012 £m
2011 £m
4,844
21
106
227
1
252
(225)
5,226
4,866
22
(216)
254
1
131
(214)
4,844
* The past service cost in 2012 of £106 million resulted from an exceptional discretionary increase to pensions in payment of the Scheme awarded during the year.
The negative past service cost in 2011 of £216 million related to the eff ect of the change of the basis of indexation from Retail Price Index to Consumer Price Index.
Fair value of Scheme assets, at 1 January
Expected return on Scheme assets
Employee contributions
Employer contributions†
Actuarial (losses) gains
Benefi t payments
Fair value of Scheme assets, at 31 December
† The contributions include defi cit funding, ongoing service contributions and expenses.
2012 £m
2011 £m
6,432
201
1
36
(45)
(225)
6,400
5,351
267
1
54
973
(214)
6,432
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Financial statements Prudential plc Annual Report 2012
Notes on the parent company fi nancial statements continued
9 Pension scheme fi nancial position continued
Pension (charge) credit and actuarial (losses) gains of the Scheme and attributable to the Company
The pension (charge) credit of the Scheme and the charge recognised in the Company’s profi t and loss account are as follows:
Pension (charge) credit:
Operating charge:
Current service cost
Past service cost
Finance (expense) income:
Interest on Scheme liabilities
Expected return on Scheme assets
Total pension (charge) credit of the Scheme
2012 £m
2011 £m
(21)
(106)
(227)
201
(26)
(153)
(22)
216
(254)
267
13
207
Pension charge attributable to the Company
(53)
(10)
The pension charge attributable to the Company is net of the apportionment to the PAC with-profi ts fund and is related to the surplus
recognised on the balance sheet of the Company. In 2011, an amount of £65 million was applied to extinguish the negative past service
cost attributable to the Company from the unrecognised portion of the pension surplus at 31 December 2011. No adjustment was
made to the pension charge in 2012 relating to the unrecognised portion of the Scheme’s surplus.
Actuarial (losses) gains:
2012 £m
2011 £m
2010 £m
2009 £m
2008 £m
Actual less expected return on Scheme assets (1% (2011: 15%)
(2010: 5%) (2009: 2%) (2008: 5%) of assets)
Experience (losses) gains on Scheme liabilities (0% (2011: 6%)
(2010: 0%) (2009: 1%) (2008: 3%) of liabilities)
Changes in assumptions underlying the present value of
Scheme liabilities
Total actuarial (losses) gains (6% (2011: 17%) (2010: 2%)
(2009: 5%) (2008: 2%) of the present value of
Scheme liabilities)
Actuarial gains (losses) attributable to the Company before tax
(45)
(19)
973
295
275
1
85
59
(259)
127
(233)
(426)
(370)
(374)
200
(297)
35
842
(16)
(94)
(14)
(230)
(3)
68
(143)
The total actual return on Scheme assets was a gain of £156 million (2011: £1,240 million).
The experience gains on Scheme liabilities in 2011 of £295 million related mainly to the ‘true-up’ refl ecting improvements in data
consequent upon the 2011 triennial valuation of the Scheme. Similarly, the experience gains of £127 million in 2008 were related
mainly to the improvements in the data consequent to the 2008 triennial valuation.
The actuarial gains (losses) attributable to the Company are net of the apportionment to the PAC with-profi ts fund and are related
to the surplus recognised in the balance sheet of the Company. In 2012, the actuarial losses attributable to the Company included an
amount credited of £124 million (2011: amount charged of £268 million) for the adjustment to the unrecognised portion of surplus
which has not been deducted from the pension charge.
The actuarial gains before tax of £35 million (2011: losses of £16 million) attributable to the Company are recorded in the statement
of total recognised gains and losses. Cumulative actuarial gains as at 31 December 2012 amount to £93 million (2011: £58 million).
Total employer contributions expected to be paid into the Scheme for the year ending 31 December 2013 amount to £11 million,
refl ecting the annual accrual cost and expenses.
Notes on the parent company fi nancial statements Prudential plc Annual Report 2012
323
10 Share capital and share premium
A summary of the ordinary shares in issue and the options outstanding to subscribe for the Company’s shares at 31 December 2012
is set out in note H11 ‘Shareholders’ equity: share capital, share premium and reserves’ of the Group fi nancial statements.
11 Profi t of the Company and reconciliation of the movement in shareholders’ funds
The loss after tax of the Company for the year was £216 million (2011: profi t of £3,720 million). After dividends of £655 million
(2011: £642 million), actuarial gains net of tax in respect of the pension scheme of £27 million (2011: losses of £12 million) and
share-based payment credits of £6 million (2011: £7 million), retained profi t at 31 December 2012 amounted to £4,519 million
(2011: £5,357 million). Retained profi t includes £2,734 million relating to gains made by an intermediate holding company following
the transfer at fair value of certain of its subsidiaries to other parts of the Group as part of an internal restructuring exercise in 2011.
Because the gains relate to intragroup transactions, the amount of £2,734 million is not able to be regarded as part of the distributable
reserves of the parent company. Under English company law, Prudential may pay dividends only if suffi cient distributable reserves
of the Company are available for the purpose and if the amount of its net assets is greater than the aggregate of its called up share
capital and undistributable reserves (such as for example the share premium account) and the payment of the dividend does not
reduce the amount of its net assets to less than that aggregate. At 31 December 2012, the UK GAAP retained earnings of the holding
company from which distributable reserves may be derived were £4,519 million.
A reconciliation of the movement in shareholders’ funds of the Company for the years ended 31 December 2012 and 2011
is given below:
(Loss) profi t for the year note 4
Dividends
Actuarial gains (losses) recognised in respect of the pension scheme, net of related tax note 9
Share-based paymentsnote 5
New share capital subscribed
Net (decrease) increase in shareholders' funds
Shareholders' funds at beginning of year
Shareholders' funds at end of year note 4
12 Other information
2012 £m
2011 £m
(216)
(655)
(871)
27
6
17
(821)
7,357
6,536
3,720
(642)
3,078
(12)
7
17
3,090
4,267
7,357
a
b
c
d
e
Information on directors’ remuneration is given in the directors’ remuneration report section of this Annual Report and note I5
‘Key management remuneration’ of the Group fi nancial statements.
Information on transactions of the directors with the Group is given in note I7 ‘Related party transactions’ of the Group fi nancial
statements.
The Company employs no staff.
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts were £0.1 million (2011: £0.1 million) and
for other services were £0.6 million (2011: £nil).
In certain instances the Company has guaranteed that its subsidiaries will meet their obligations when they fall due for payment.
13 Post balance sheet events
In January 2013, the Company issued US$700 million 5.25 per cent Tier 1 perpetual subordinated capital securities. The proceeds,
net of costs, were US$689 million. Also in January 2013, the Company repaid £250 million Medium-Term Notes 2013 on maturity.
Subject to shareholders’ approval, in May 2013 the Company will pay a fi nal dividend for the year ended 31 December 2012.
Further details are provided in note B3 ‘Dividends’ of the Group fi nancial statements.
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Financial statements Prudential plc Annual Report 2012
Statement of directors’ responsibilities in respect of the
annual report and the fi nancial statements
The directors are responsible for preparing the
Annual Report and the Group and parent company
fi nancial statements in accordance with applicable
law and regulations.
Company law requires the directors to prepare Group and parent
company fi nancial statements for each fi nancial year. Under that
law the directors are required to prepare the Group fi nancial
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
fi nancial statements in accordance with UK Accounting
Standards and applicable law (UK Generally Accepted
Accounting Practice).
Under company law the directors must not approve the fi nancial
statements unless they are satisfi ed that they give a true and fair
view of the state of affairs of the Group and parent company and
of their profi t or loss for that period. In preparing each of the
Group and parent company fi nancial statements, the directors
are required to:
AAAAAAAAAAAAAAAA Select suitable accounting policies and then apply them
consistently;
AAAAAAAAAAAAAAAA Make judgements and estimates that are reasonable and
prudent;
AAAAAAAAAAAAAAAA For the Group fi nancial statements, state whether they have
been prepared in accordance with IFRS as adopted by the EU;
AAAAAAAAAAAAAAAA For the parent company fi nancial statements, state whether
applicable UK Accounting Standards have been followed,
subject to any material departures disclosed and explained
in the parent company fi nancial statements; and
AAAAAAAAAAAAAAAA Prepare the fi nancial statements on the going concern basis
unless it is inappropriate to presume that the Group and the
parent company will continue in business.
The directors are responsible for keeping adequate accounting
records that are suffi cient to show and explain the parent
company’s transactions and disclose with reasonable accuracy
at any time the fi nancial position of the parent company and
enable them to ensure that its fi nancial 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 fi nancial information included on the
Company’s website. Legislation in the UK governing the
preparation and dissemination of fi nancial statements may differ
from legislation in other jurisdictions.
The directors of Prudential plc, whose names and positions
are set out on pages 88 to 92 confi rm that to the best of their
knowledge:
AAAAAAAAAAAAAAAAA The fi nancial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair
view of the assets, liabilities, fi nancial position and profi t or
loss of the Company and the undertakings included in the
consolidation taken as a whole; and
AAAAAAAAAAAAAAAAA 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.
Statement of directors’ responsibilities/Independent auditor’s report Prudential plc Annual Report 2012
325
Independent auditor’s report to the members of Prudential plc
We have audited the fi nancial statements of Prudential
plc for the year ended 31 December 2012 set out on
pages 147 to 323. The fi nancial reporting framework
that has been applied in the preparation of the Group
fi nancial statements is applicable law and
International Financial Reporting Standards (IFRSs) as
adopted by the EU. The fi nancial reporting framework
that has been applied in the preparation of the parent
company fi nancial statements is applicable law and
UK Accounting Standards (UK Generally Accepted
Accounting Practice).
This report is made solely to the Company’s members, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so that we might
state to the Company’s members those matters we are required
to state to them in an 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 324, the directors are responsible for
the preparation of the fi nancial statements and for being satisfi ed
that they give a true and fair view. Our responsibility is to audit,
and express an opinion on, the fi nancial 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 fi nancial statements
A description of the scope of an audit of fi nancial statements is
provided on the APB’s website at www.frc.org.uk/apb/scope/
private.cfm
Opinion on fi nancial statements
In our opinion:
AAAAAAAAAAAAAAAAAAA The fi nancial 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 2012 and of the Group’s profi t for the year then
ended;
AAAAAAAAAAAAAAAAAAA The Group fi nancial statements have been properly prepared
in accordance with IFRSs as adopted by the EU;
AAAAAAAAAAAAAAAAAAA The parent company fi nancial statements have been properly
prepared in accordance with UK Generally Accepted
Accounting Practice; and
AAAAAAAAAAAAAAAAAAA The fi nancial statements have been prepared in accordance
with the requirements of the Companies Act 2006; and,
as regards the Group fi nancial statements, Article 4 of the
IAS Regulation.
Opinion on other matters prescribed by the Companies
Act 2006
In our opinion:
AAAAAAAAAAAAAAAAAA The part of the Directors’ Remuneration Report to be audited
has been properly prepared in accordance with the
Companies Act 2006; and
AAAAAAAAAAAAAAAAAA The information given in the Directors’ Report for the fi nancial
year for which the fi nancial statements are prepared is
consistent with the fi nancial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report
to you if, in our opinion:
AAAAAAAAAAAAAAAAAA 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
AAAAAAAAAAAAAAAAAA The parent company fi nancial statements and the part of
the Directors’ Remuneration Report to be audited are not
in agreement with the accounting records and returns; or
AAAAAAAAAAAAAAAAAA Certain disclosures of directors’ remuneration specifi ed
by law are not made; or
AAAAAAAAAAAAAAAAAA We have not received all the information and explanations
we require for our audit.
Under the Listing Rules we are required to review:
AAAAAAAAAAAAAAAAAA The directors’ statement, set out on page 110, in relation
to going concern;
AAAAAAAAAAAAAAAAAA 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 UK Corporate Governance
Code specifi ed for our review; and
AAAAAAAAAAAAAAAAAA Certain elements of the report to shareholders by the Board
on directors’ remuneration.
Rees Aronson
Senior Statutory Auditor
for and on behalf of KPMG Audit Plc, Statutory Auditor
Chartered Accountants
London
12 March 2013
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326
Financial statements Prudential plc Annual Report 2012
European Embedded Value (EEV) basis results
Operating profi t based on longer-term investment returnsnote (i)
Results analysis by business area
Asia operations
New business
Business in force
Long-term business
Eastspring Investments
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
Unwind of expected asset management marginnote (ii)
Total
RPI to CPI infl ation measure change on defi ned benefi t pension schemesnote (iii)
Solvency II implementation costsnote (iv)
Restructuring costsnote (iv)
Operating profi t based on longer-term investment returnsnote (i)
Analysed as profi ts (losses) from:
New business
Business in force
Long-term business
Asset management
Other results
Total
Note
2012 £m
2011 £m
note (v)
2
3
2
3
2
3
2
3
1,266
694
1,960
75
(7)
2,028
873
737
1,610
39
1,649
313
553
866
33
899
371
1,076
688
1,764
80
(5)
1,839
815
616
1,431
24
1,455
260
593
853
40
893
357
1,270
1,250
13
(280)
(231)
(56)
(554)
–
(50)
(22)
22
(286)
(219)
(53)
(536)
45
(56)
(19)
4,321
3,978
2,452
1,984
4,436
485
(600)
4,321
2,151
1,897
4,048
461
(531)
3,978
European Embedded Value (EEV) basis results Prudential plc Annual Report 2012
327
Notes
(i)
EEV basis operating profi t based on longer-term investment returns excludes the recurrent items of short-term fl uctuations in investment returns, the mark
to market value movements on core borrowings, the shareholders’ share of actuarial and other gains and losses on defi ned benefi t pension schemes, and the
eff ect of changes in economic assumptions. In addition for 2012, operating profi t excludes the gain arising on the acquisition of REALIC and the dilution of
the Group’s holding in PPM South Africa. The amounts for these items are included in total EEV profi t attributable to shareholders. The Company believes
that operating profi t, as adjusted for these items, better refl ects underlying performance. Profi t before tax and basic earnings per share include these items
together with actual investment returns.
(ii) The value of future profi ts or losses from asset management and service companies that support the Group’s covered insurance businesses are included
in the profi ts 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
profi ts from the management of internal and external funds. For EEV basis reporting, Group shareholders’ other income is adjusted to deduct the unwind
of the expected margin for the year arising from the management of the assets of the covered business (as defi ned in note 1(a)) by the Group’s asset
management businesses. The deduction is on a basis consistent with that used for projecting the results for covered insurance business. Group operating
profi t accordingly includes the variance between actual and expected profi t in respect of management of the covered business assets.
(iii) During 2011, the Group altered its infl ation measure basis for future statutory increases to pension payments for certain tranches of its UK defi ned benefi t
pension schemes. This refl ected the UK Government’s decision to replace the basis of indexation from RPI with CPI. This resulted in a credit to operating
profi t for 2011 on an IFRS basis of £42 million and an additional £3 million recognised on the EEV basis.
(iv) Restructuring costs comprise the charge of £(19) million recognised on an IFRS basis and an additional £(3) million recognised on the EEV basis for the
shareholders’ share of restructuring costs incurred by the PAC with-profi ts fund. Solvency II implementation costs comprise the charge of £(48) million
recognised on an IFRS basis and an additional £(2) million recognised on the EEV basis.
The comparative results have been prepared using previously reported average exchange rates for the year.
(v)
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Financial statements Prudential plc Annual Report 2012
European Embedded Value (EEV) basis results continued
Summarised consolidated income statement
Operating profi t based on longer-term investment returns
Asia operations
US operations
UK operations:
UK insurance operations
M&G
Other income and expenditure
RPI to CPI infl ation measure change on defi ned benefi t pension schemes
Solvency II implementation costs
Restructuring costs
Operating profi t based on longer-term investment returns
Short-term fl uctuations in investment returns
Mark to market value movements on core borrowings
Shareholders’ share of actuarial and other gains and losses on defi ned benefi t
pension schemes
Effect of changes in economic assumptions
Gain on dilution of Group’s holdings
Gain on acquisition of REALIC
Profi t before tax attributable to shareholders (including actual investment returns)
Tax attributable to shareholders’ profi t
Profi t for the year
Attributable to:
Equity holders of the Company
Non-controlling interests
Profi t for the year
Earnings per share (in pence)
Note
2012 £m
2011 £m
2,028
1,649
899
371
1,270
(554)
–
(50)
(22)
4,321
538
(380)
62
(16)
42
453
5,020
(1,207)
3,813
3,813
–
3,813
1,839
1,455
893
357
1,250
(536)
45
(56)
(19)
3,978
(907)
(14)
23
(158)
–
–
2,922
(776)
2,146
2,142
4
2,146
6
10
7
8
4
5
12
Based on operating profi t including longer-term investment returns, after related tax and
non-controlling interests of £3,176 million (2011: £2,930 million)
Based on profi t after tax and non-controlling interests of £3,813 million
(2011: £2,142 million)
Note
2012
2011
13
13
125.0p
115.7p
150.1p
84.6p
Dividends per share (in pence)
Dividends relating to reporting year:
Interim dividend
Final dividend
Total
Dividends declared and paid in reporting year:
Current year interim dividend
Final dividend for prior year
Total
2012
2011
8.40p
20.79p
29.19p
8.40p
17.24p
25.64p
7.95p
17.24p
25.19p
7.95p
17.24p
25.19p
European Embedded Value (EEV) basis results Prudential plc Annual Report 2012
329
Movement in shareholders’ equity (excluding non-controlling interests)
Profi t for the year attributable to equity shareholders
Items taken directly to equity:
Exchange movements on foreign operations and net investment hedges:
Exchange movements arising during the year
Related tax
Dividends
New share capital subscribed
Reserve movements in respect of share-based payments
Treasury shares:
Movement in own shares 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:
Mark to market value movements arising during the year
Related tax
Note
2012 £m
2011 £m
3,813
2,142
(467)
(2)
(655)
17
42
(13)
36
53
(18)
(90)
(68)
(642)
17
44
(30)
(5)
96
(34)
Net increase in shareholders’ equity
Shareholders’ equity at beginning of year (excluding non-controlling interests)
Shareholders’ equity at end of year (excluding non-controlling interests)
11
11
11
2,806
19,637
22,443
1,430
18,207
19,637
Comprising:
Asia 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
Shareholders’ equity at end of year
(excluding non-controlling interests)
Representing:
Net assets (liabilities)
Acquired goodwill
31 December 2012 £m
31 December 2011 £m
Long-term
business
operations
Asset
management
and other
operations
9,462
239
9,701
6,032
–
6,032
207
61
268
108
16
124
Long-term
business
operations
Asset
management
and other
operations
8,510
235
8,745
5,082
–
5,082
211
61
272
113
16
129
Total
9,669
300
9,969
6,140
16
6,156
Total
8,721
296
9,017
5,195
16
5,211
6,772
25
6,797
6,058
29
6,087
–
–
–
6,772
392
1,153
1,545
1,570
392
1,153
1,545
8,342
–
–
–
6,058
229
1,153
1,382
1,411
229
1,153
1,382
7,469
–
–
–
(2,282)
258
(2,282)
258
(2,024)
(2,024)
–
–
–
(2,188)
128
(2,060)
(2,188)
128
(2,060)
22,505
(62)
22,443
19,885
(248)
19,637
22,266
239
22,505
(1,292)
1,230
20,974
1,469
(62)
22,443
19,650
235
19,885
(1,478)
1,230
(248)
18,172
1,465
19,637
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Financial statements Prudential plc Annual Report 2012
European Embedded Value (EEV) basis results continued
Net asset value per share (in pence)
Based on EEV basis shareholders’ equity of £22,443 million (2011: £19,637 million)
Number of issued shares at year end (millions)
Return on embedded value*
31 December
2012
31 December
2011
878p
2,557
16%
771p
2,548
16%
* Return on embedded value is based on EEV operating profi t aft er related tax and non-controlling interests, as shown in note 13, as a percentage of opening EEV
basis shareholders’ equity.
Summary statement of fi nancial position
Total assets less liabilities, before deduction for insurance funds
Less insurance funds:*
Policyholder liabilities (net of reinsurers’ share) and unallocated
surplus of with-profi ts 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 profi t
Total EEV basis shareholders’ equity (excluding non-controlling interests)
31 December
2012
£m
31 December
2011
£m†
Note
274,863
243,207
(264,504)
12,084
(234,643)
11,073
(252,420)
(223,570)
11
22,443
19,637
128
1,889
8,342
10,359
12,084
22,443
127
1,873
6,564
8,564
11,073
19,637
11
11
11
* Including liabilities in respect of insurance products classifi ed as investment contracts under IFRS 4.
† For IFRS reporting purposes, the Group has adopted updated US GAAP requirements for deferred acquisition costs as an improvement to its accounting policy
under IFRS 4 for those operations of the Group which measure insurance assets and liabilities substantially by reference to US GAAP principles. Accordingly,
the IFRS elements and additional EEV basis shareholders’ interest for the comparative results for 2011 have been adjusted from those previously published for
the retrospective application of the change as if the new accounting policy had always applied. This has resulted in a reallocation of £553 million for 2011 from
IFRS basis shareholders’ reserves to shareholders’ accrued interest in the long-term business, with no overall eff ect on the EEV basis results.
The supplementary information on pages 326 to 362 was approved by the Board of directors on 12 March 2013 and signed on its
behalf.
Paul Manduca
Chairman
Tidjane Thiam
Group Chief Executive
Nic Nicandrou
Chief Financial Offi cer
Notes on the EEV basis results
Notes on the EEV basis results Prudential plc Annual Report 2012
331
1 Basis of preparation, methodology and accounting presentation
The EEV basis results have been prepared in accordance with the EEV Principles issued by the European Insurance CFO Forum 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. Except
for the consequential effects of the change in accounting policy for deferred acquisition costs for IFRS reporting, as described in the
footnotes to the summary statement of fi nancial position, the 2011 results have been derived from the EEV basis results supplement
to the Company’s statutory accounts for 2011.
a Covered business
The EEV results for the Group are prepared for ‘covered business’, as defi ned 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. Under the EEV
Principles, the results for covered business incorporate the projected margins of attaching internal asset management.
The defi nition of long-term business operations is consistent with previous practice and comprises those contracts falling under the
defi nition 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 defi nition.
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 fi nancial position of the Group’s
principal defi ned benefi t pension scheme, the Prudential Staff Pension Scheme (PSPS), as described in note 1(c)(vi). 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.
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 suffi cient allowance has been made for the aggregate risks in that business. The shareholders’ interest in the Group’s
long-term business comprises:
AAAAAAAAAAAAAAAAA Present value of future shareholder cash fl ows 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;
AAAAAAAAAAAAAAAAA Locked-in required capital; and
AAAAAAAAAAAAAAAAA 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 1(c)(iv)) no smoothing of market or account balance
values, unrealised gains or investment return is applied in determining the embedded value or profi t before tax. Separately, the
analysis of profi t is delineated between operating profi t based on longer-term investment returns and other constituent items
(as explained in note 1(c)(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 fl ows. The
present value of the future cash fl ows is then calculated using a discount rate which refl ects both the time value of money and the
non-diversifi able risks associated with the cash fl ows that are not otherwise allowed for.
Best estimate assumptions
Best estimate assumptions are used for the cash fl ow projections, where best estimate is defi ned 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, refl ect any dynamic relationships between the assumptions and the stochastic variables.
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Financial statements Prudential plc Annual Report 2012
Notes on the EEV basis results continued
1 Basis of preparation, methodology and accounting presentation continued
Principal economic assumptions
The EEV basis results for the Group’s operations 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 year end rates of return on government
bonds.
Expected returns on equity and property asset classes and corporate bonds are derived by adding a risk premium, based on
the Group’s long-term view, to the risk-free rate.
The total profi t 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 refl ects discounted future cash fl ows, under this
methodology the profi t emergence is advanced, thus more closely aligning the timing of the recognition of profi ts with the efforts
and risks of current management actions, particularly with regard to business sold during the year.
New business
In determining the EEV basis value of new business, premiums are included in projected cash fl ows on the same basis of
distinguishing annual and single premium business as set out for statutory basis reporting.
New business premiums refl ect those premiums attaching to covered business, including premiums for contracts classifi ed as
investment products for IFRS basis reporting. New business premiums for regular premium products are shown on an annualised
basis. Internal vesting business is classifi ed as new business where the contracts include an open market option.
The contribution from new business represents profi ts determined by applying operating assumptions as at the end of the year.
For UK immediate annuity business and single premium Universal Life products in Asia, primarily Singapore, the new business
contribution is determined by applying economic assumptions refl ecting point of sale market conditions. This is consistent with
how the business is priced as crediting rates are linked to yields on specifi c assets and the yield locked-in when the assets are
purchased at the point of sale of the policy. For other business within the Group, end of period economic assumptions are used.
New business profi tability is a key metric for the Group’s management of the development of the business. In addition, new
business margins are shown 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 profi t 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.
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 profi t for the year and shareholders’ equity
as they arise.
The results for any covered business conceptually refl ect 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, refl ects 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 refl ect 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 broadly speaking, are 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 classifi ed 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.
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
profi t 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-profi ts long-term fund, the value placed on surplus assets in the fund is already
discounted to refl ect its release over time and no further adjustment is necessary in respect of required capital.
Financial options and guarantees
Nature of fi nancial options and guarantees in Prudential’s long-term business
Asia 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.
There are also various non-participating long-term products with guarantees. The principal guarantees are those for whole
of life contracts with fl oor levels of policyholder benefi ts that accrue at rates set at inception and do not vary subsequently with
market conditions.
Notes on the EEV basis results Prudential plc Annual Report 2012
333
US operations (Jackson)
The principal fi nancial options and guarantees in Jackson are associated with the fi xed 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 1.0 per cent to 5.5 per cent for 2012 and 2011, depending
on the particular product, jurisdiction where issued, and date of issue. For 2012, 86 per cent (2011: 85 per cent) of the account
values on fi xed annuities are for policies with guarantees of 3 per cent or less. The average guarantee rate is 2.8 per cent for 2012
and 2011.
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 specifi ed anniversary date adjusted for any withdrawals
following the specifi ed contract anniversary. These guarantees include benefi ts that are payable at specifi ed dates during the
accumulation period (Guaranteed Minimum Withdrawal Benefi t (GMWB)), as death benefi ts (Guaranteed Minimum Death
Benefi ts (GMDB)) or as income benefi ts (Guaranteed Minimum Income Benefi ts (GMIB)). These guarantees generally protect the
policyholder’s value in the event of poor equity market performance. Jackson hedges the GMDB and GMWB guarantees through
the use of equity options and futures contracts, and fully reinsures the GMIB guarantees.
Jackson also issues fi xed 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 fi xed
annuities.
UK insurance operations
For covered business the only signifi cant fi nancial options and guarantees in the UK insurance operations arise in the
with-profi ts fund.
With-profi ts products provide returns to policyholders through bonuses that are smoothed. There are two types of bonuses –
annual and fi nal. Annual bonuses are declared once a year and, once credited, are guaranteed in accordance with the terms of the
particular product. Unlike annual bonuses, fi nal bonuses are guaranteed only until the next bonus declaration. The with-profi ts
fund also held a provision on the Pillar I Peak 2 basis of £47 million at 31 December 2012 (31 December 2011: £90 million) to honour
guarantees on a small number of guaranteed annuity option products.
The only material guaranteed surrender values relate to investments in the PruFund range of with-profi ts funds. For these
products the policyholder can choose to pay an additional management charge. In return, at the selected guarantee date, the fund
will be increased if necessary to a guaranteed minimum value (based on the initial investment adjusted for any prior withdrawals).
The with-profi ts fund held a reserve of £52 million at 31 December 2012 (31 December 2011: £59 million) in respect of this
guarantee.
The Group’s main exposure to guaranteed annuity options in the UK is through the non-covered business of SAIF. A provision
on the Pillar I Peak 2 basis of £371 million was held in SAIF at 2012 (2011: £370 million) to honour the guarantees. As described in
note 1(a) above, the assets and liabilities are wholly attributable to the policyholders of the fund. Therefore the movement in the
provision has no direct impact on shareholders.
Time value
The value of fi nancial 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 time value of the fi nancial options and
guarantees.
The economic assumptions used for the stochastic calculations are consistent with those used for the deterministic calculations.
Assumptions specifi c to the stochastic calculations refl ect 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 notes 17(iv), (v) and (vi).
In deriving the time value of fi nancial options and guarantees, management actions in response to emerging investment and
fund solvency conditions have been modelled. Management actions encompass, but are not confi ned 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 refl ect the options actually
available to management. For the PAC with-profi ts fund, the actions assumed are consistent with those set out in the Principles and
Practices of Financial Management which explains how regular and fi nal bonus rates within the discretionary framework are
determined, subject to the general legislative requirements applicable.
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Financial statements Prudential plc Annual Report 2012
Notes on the EEV basis results continued
1 Basis of preparation, methodology and accounting presentation continued
(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 signifi cant diversifi cation benefi ts that exist within the Group. For with-profi ts
business written in a segregated life fund, as is the case in Asia and the UK, the capital available in the fund is suffi cient to meet the
required capital requirements. For shareholder-backed business the following capital requirements apply:
AAAAAAAAAAAAAAAAA Asia operations: the level of required capital has been set at the higher of local statutory requirements and the economic capital
requirement;
AAAAAAAAAAAAAAAAA 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
AAAAAAAAAAAAAAAAA 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.
(iii) Allowance for risk and risk discount rates
Overview
Under the EEV Principles, discount rates used to determine the present value of future cash fl ows are set equal to risk-free rates
plus a risk margin. The risk margin should refl ect any non-diversifi able 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 refl ect differences in market
risk inherent in each product group. The risk discount rate so derived does not refl ect an overall Group market beta but instead
refl ects the expected volatility associated with the cash fl ows for each product category in the embedded value model.
Since fi nancial 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-diversifi able non-market risk. No allowance is required for non-market risks where these are
assumed to be fully diversifi able.
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 refl ect the market risk inherent in
each product group and hence the volatility of product cash fl ows. These are determined by considering how the profi ts 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 specifi c beta.
Product level betas refl ect 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 total credit risk is to cover:
AAAAAAAAAAAAAAAAA Expected long-term defaults;
AAAAAAAAAAAAAAAAA Credit risk premium (to refl ect the volatility in downgrade and default levels); and
AAAAAAAAAAAAAAAAA Short-term downgrades and defaults.
These allowances are initially refl ected 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 suffi cient 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.
Asia operations
For Asia operations, the allowance for credit risk incorporated in the projected rates of return and the market risk allowance are
suffi cient. Accordingly, no additional allowance for credit risk is required.
In 2012, the basis of determining projected rates of return for holdings of corporate bonds was refi ned so as to comprise the
risk-free rate plus an assessment of long-term spread over the risk-free rate. Previously, market spreads at the reporting date,
rather than long-term spreads, were applied. The main effects of this change are for holdings in Hong Kong, Korea, Malaysia
and Singapore. The new basis aligns with the approach for UK with-profi t holdings of corporate bonds and, more generally, is
consistent with the use of long-term risk premiums for holdings of other categories of investments across the Group’s operations.
Notes on the EEV basis results Prudential plc Annual Report 2012
335
US operations (Jackson)
For Jackson business, the allowance for long-term defaults is refl ected in the risk margin reserve (RMR) charge which is deducted
in determining the projected spread margin between the earned rate on the investments and the policyholder crediting rate.
The risk discount rate incorporates an additional allowance for credit risk premium and short-term downgrades and defaults.
In determining this allowance a number of factors have been considered. These factors, in particular, include:
AAAAAAAAAAAAAAAAA How much of the credit spread on debt securities represents an increased credit risk not refl ected in the RMR long-term default
assumptions, and how much is liquidity premium (which is the premium required by investors to compensate for the risk of
longer-term investments which cannot be easily converted into cash, and converted at the fair market value). In assessing this
effect, consideration has been given to a number of approaches to estimating the liquidity premium by considering recent
statistical data; and
AAAAAAAAAAAAAAAAA Policyholder benefi ts for Jackson fi xed annuity business are not fi xed. It is possible in adverse economic scenarios to pass on a
component of credit losses to policyholders (subject to guarantee features) through lower investment return rates credited to
policyholders. Consequently, it is only necessary to allow for the balance of the credit risk in the risk discount rate.
After taking these and related factors into account and based on market conditions, the risk discount rate for general account
business includes an additional allowance of 150 basis points (2011: 200 basis points) for credit risk. For VA business, the additional
allowance has been set at one-fi fth (equivalent to 30 basis points (2011: 40 basis points)) of the non-VA business to refl ect the
proportion of the VA business that is allocated to holdings of general account debt securities. The level of the additional allowance
is assessed at each reporting period to take account of prevailing credit conditions and as the business in force alters over time.
The 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 operations
(1) 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 fl ows.
In the annuity MCEV calculations, the future cash fl ows 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, a credit risk premium, an allowance for a 1 notch downgrade of the portfolio subject to credit risk and
an allowance for short-term defaults. For the purposes of presentation in the EEV results, the results on this basis are reconfi gured.
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, 1 notch downgrade and the
remaining element of short-term downgrade and default allowances are incorporated into the risk margin included in the discount
rate, as shown in note 17(iii).
(2) With-profi ts fund non-profi t annuity business
For UK non-profi t annuity business including that written by Prudential Annuities Limited (PAL) the basis for determining the
aggregate allowance for credit risk is consistent with that applied for UK shareholder-backed annuity business (as described
above). The allowance for credit risk in PAL is taken into account in determining the projected cash fl ows to the with-profi ts fund,
which are in turn discounted at the risk discount rate applicable to all of the projected cash fl ows of the fund.
(3) With-profi ts fund holdings of debt securities
The UK with-profi ts fund holds debt securities as part of its investment portfolio backing policyholder liabilities and unallocated
surplus. The assumed earned rate for with-profi t holdings of corporate bonds is defi ned 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 defi ned as the risk-free rate plus a long-term risk premium.
Allowance for non-diversifi able non-market risks
The majority of non-market and non-credit risks are considered to be diversifi able. Finance theory cannot be used to determine the
appropriate component of beta for non-diversifi able 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-diversifi able non-market risks associated with the Group’s
businesses. For the Group’s US business and UK business other than shareholder-backed annuity, no additional allowance is
necessary. For UK shareholder-backed annuity business a further allowance of 50 basis points is used to refl ect the longevity risk
which is of particular relevance. For the Group’s Asia operations in China, India, Indonesia, the Philippines, Taiwan, Thailand and
Vietnam, additional allowances are applied for emerging market risk ranging from 100 to 250 basis points.
(iv) With-profi ts business and the treatment of the estate
The proportion of surplus allocated to shareholders from the PAC with-profi ts 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 fi nal bonus rates (and related
shareholder transfers) so as to exhaust the estate over the lifetime of the in-force with-profi ts business. In any scenarios where
the total assets of the life fund are insuffi cient to meet policyholder claims in full, the excess cost is fully attributed to shareholders.
Similar principles apply, where appropriate, for other with-profi ts funds of the Group’s Asia operations.
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Financial statements Prudential plc Annual Report 2012
Notes on the EEV basis results continued
1 Basis of preparation, methodology and accounting presentation continued
(v) 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.
(vi) Foreign currency translation
Foreign currency profi ts 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 profi ts and losses at average exchange
rates, notwithstanding the fact that EEV profi t represents the incremental value added on a discounted cash fl ow basis, is to
maintain consistency with the methodology applied for IFRS basis reporting.
c Accounting presentation
(i) Analysis of profi t before tax
To the extent applicable, the presentation of the EEV profi t for the year is consistent with the basis that the Group applies for
analysis of IFRS basis profi ts before shareholder taxes between operating and non-operating results. Operating results refl ect
the underlying results including longer-term investment returns (which are determined as described in note 1(c)(ii) below) and
incorporate the following:
AAAAAAAAAAAAAAAAA New business contribution, as defi ned in note 1(b)(i);
AAAAAAAAAAAAAAAAA Unwind of discount on the value of in-force business and other expected returns, as described in note 1(c)(iv) below;
AAAAAAAAAAAAAAAAA The impact of routine changes of estimates relating to non-economic assumptions, as described in note 1(c)(iii) below; and
AAAAAAAAAAAAAAAAA Non-economic experience variances, as described in note 1(c)(v) below.
Non-operating results comprise the recurrent items of short-term fl uctuations in investment returns, the shareholders’ share of
actuarial and other gains and losses on defi ned benefi t pension schemes, the mark to market value movements on core borrowings
and the effect of changes in economic assumptions.
In addition, for 2012 the gain recognised on the acquisition of REALIC and the gain on dilution of the Group holdings in PPM
South Africa have been shown separately from operating profi ts based on longer-term investment returns.
(ii) Operating profi t
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-profi ts 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 1(c)(iv) below.
For the purpose of determining the long-term returns for debt securities of US operations for fi xed annuity and other general
account business, a risk margin charge is included which refl ects 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 refl ects the aggregation
of end of year risk-free rates and equity risk premium. For US variable annuity separate account business, operating profi t includes
the unwind of discount on the opening value of in-force adjusted to refl ect end of year projected rates of return with the excess or
defi cit of the actual return recognised within non-operating profi t, 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 included
in the result for the year.
(iii) Eff ect of changes in operating assumptions
Operating profi t includes 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 refl ected
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-profi ts fund (as explained in note 1(c)(ii) above), and the expected return on shareholders’ assets held
in other UK long-term business operations. Surplus assets retained within the PAC with-profi ts fund are smoothed for this purpose
to remove the effects of short-term investment volatility from operating results. In the summary statement of fi nancial position and
for total profi t reporting, asset values and investment returns are not smoothed. At 31 December 2012, the shareholders’ interest in
the smoothed surplus assets used for this purpose only, were £121 million lower (31 December 2011: £39 million higher) than the
surplus assets carried in the statement of fi nancial position.
Notes on the EEV basis results Prudential plc Annual Report 2012
337
(v) Operating experience variances
Operating profi ts include the effect of experience variances on non-economic assumptions, which are calculated with reference
to the embedded value assumptions at the end of the reporting year, such as persistency, mortality and morbidity, expenses and
other factors. Further details of these assumptions are shown in notes 17(vii), (viii) and (ix).
(vi) Pension costs
Profi t before tax
Movements on the shareholders’ share of surpluses (to the extent not restricted by IFRIC 14) and defi cits of the Group’s defi ned
benefi t 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 notes 1(b)(i) and (iv), the shareholders’ share
incorporates 10 per cent of the proportion of the fi nancial position attributable to the PAC with-profi ts fund. The fi nancial position
is determined by applying the requirements of IAS 19.
Actuarial and other gains and losses of defi ned benefi t pension schemes
For the Group’s defi ned benefi t pension schemes the EEV results refl ect the IAS 19 position booked for IFRS reporting. Consistent
with this approach, to the extent of recognition of any surplus, the actuarial and other gains and losses include:
AAAAAAAAAAAAAAAAA The difference between actual and expected return on the scheme assets;
AAAAAAAAAAAAAAAAA Experience gains and losses on scheme liabilities;
AAAAAAAAAAAAAAAAA The impact of altered economic and other assumptions on the discounted value of scheme liabilities; and
AAAAAAAAAAAAAAAAA For pension schemes where the IAS 19 position refl ects a defi cit funding obligation, actuarial and other gains and losses
includes the movement in estimates of defi cit funding requirements.
In addition, this item includes the effect of partial recognition of the Prudential Staff Pension Scheme surplus that arose in 2012.
This partial recognition refl ects the impact of the 5 April 2011 triennial valuation that was completed in 2012. Under that valuation
there was suffi cient actuarial surplus to permit a reduction in employer contributions to the minimum level under the trust deed
rules, thereby allowing recoverability of part of the surplus in future years.
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.
(vii) Eff ect 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.
(viii) Taxation
The profi t for the year for covered business is in most cases calculated initially at the post-tax level. The post-tax profi t for covered
business is then grossed up for presentation purposes at the rates of tax applicable to the countries and periods concerned. In the
UK, the rate applied for 2012 is 23 per cent (2011: 25 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 profi ts. Tax payments and receipts included
in the projected cash fl ows to determine the value of in-force business are calculated using rates that have been substantively
enacted by the end of the reporting period. Possible future changes of rate are not anticipated. See note 17(ix) for further details.
(ix) Inter-company arrangements
The EEV results for covered business incorporate the effect of the reinsurance arrangement of non-profi t 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.
(x) Foreign exchange rates
Foreign currency results have been translated as discussed in note 1(b)(vi), for which the principal exchange rates are as follows:
Local currency: £
China
Hong Kong
India
Indonesia
Korea
Malaysia
Singapore
Taiwan
Vietnam
US
Closing rate at
31 Dec 2012
Average rate
for 2012
Closing rate at
31 Dec 2011
Average rate
for 2011
Opening rate
at 1 Jan 2011
10.13
12.60
89.06
15,665.76
1,740.22
4.97
1.99
47.20
33,875.42
1.63
10.00
12.29
84.70
14,842.01
1,785.07
4.89
1.98
46.88
33,083.59
1.58
9.78
12.07
82.53
14,091.80
1,790.32
4.93
2.02
47.06
32,688.16
1.55
10.37
12.48
74.80
14,049.41
1,775.98
4.90
2.02
47.12
33,139.22
1.60
10.32
12.17
70.01
14,106.51
1,776.86
4.83
2.01
45.65
30,526.26
1.57
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Financial statements Prudential plc Annual Report 2012
Notes on the EEV basis results continued
2 Analysis of new business contribution
New business premiums
Single
£m
1,568
14,504
6,286
22,358
Regular
£m
1,740
12
207
1,959
New business premiums
Single
£m
1,456
12,562
4,871
18,889
Regular
£m
1,514
19
259
1,792
2012
Annual
premium and
contribution
equivalents
(APE)
£m
Present value
of new
business
premiums
(PVNBP)
£m
Pre-tax new
business
contribution
£m
1,897
1,462
836
10,544
14,600
7,311
4,195
32,455
1,266
873
313
2,452
2011
Annual
premium and
contribution
equivalents
(APE)
£m
Present value
of new
business
premiums
(PVNBP)
£m
Pre-tax new
business
contribution
£m
1,660
1,275
746
3,681
8,910
12,720
6,111
27,741
1,076
815
260
2,151
New business margin
(APE)
%
(PVNBP)
%
67
60
37
58
12.0
6.0
4.3
7.6
New business margin
(APE)
%
(PVNBP)
%
65
64
35
58
12.1
6.4
4.3
7.8
New business contribution
2012 £m
2011 £m
26
210
19
476
26
48
461
27
218
20
314
43
28
426
1,266
1,076
Asia operations
US operations
UK insurance operations
Total
Asia operations
US operations
UK insurance operations
Total
Asia operations:
China
Hong Kong
India
Indonesia
Korea
Taiwan
Other
Total Asia operations
Notes on the EEV basis results Prudential plc Annual Report 2012
339
2012 £m
Asia
operations
note (ii)
US
operations
note (iii)
UK
insurance
operations
note (iv)
599
20
75
694
482
87
(16)
553
412
35
290
737
2011 £m
Asia
operations
note (ii)
US
operations
note (iii)
UK
insurance
operations
note (iv)
613
10
65
688
349
14
253
616
485
79
29
593
Total
1,493
142
349
1,984
Total
1,447
103
347
1,897
2012 £m
2011 £m
599
94
(34)
(48)
8
20
57
50
(30)
(2)
75
694
613
126
(140)
11
13
10
58
10
(31)
28
65
688
3 Operating profi t from business in force
(i) Group summary
Unwind of discount and other expected returns
Effect of changes in operating assumptions*
Experience variances and other items
Total
Unwind of discount and other expected returns
Effect of changes in operating assumptions*
Experience variances and other items
Total
* As shown below.
(ii) Asia operations
Unwind of discount and other expected returnsnote (a)
Effect of changes in operating assumptions:
Mortality and morbiditynote (b)
Persistency and withdrawalsnote (c)
Expensenote (d)
Other
Experience variance and other items:
Mortality and morbiditynote (e)
Persistency and withdrawalsnote (f)
Expensenote (g)
Other note (h)
Total Asia operations
Notes
(a)
The decrease in unwind of discount and other expected returns of £(14) million from £613 million in 2011 to £599 million in 2012 mainly refl ects the
£(43) million eff ect of lower risk discount rates driven by the reduction in interest rates, partly off set by the £29 million eff ect of the growth in the opening
in-force value (adjusted for assumption changes), on which the discount rates are applied.
(b) The credit of £94 million in 2012 for mortality and morbidity assumption changes primarily refl ects mortality improvements in Hong Kong and Singapore
and revised assumptions for critical illness business in Singapore in line with recent experience. In 2011, the £126 million refl ected £69 million arising in
Malaysia, £33 million in Indonesia and a net £24 million for other operations.
The charge of £(140) million for 2011 principally arose in Malaysia for partial withdrawals. The 2012 charge refl ects a number of off setting items including
further adjustments to partial withdrawals in Malaysia.
(c)
(d) The charge of £(48) million for expense assumption changes in 2012 principally arises in Malaysia and refl ects changes to the pension entitlements of
(e)
(f)
(g)
agents.
The favourable eff ect of mortality and morbidity experience in 2012 of £57 million (2011: £58 million) refl ects continued better than expected experience,
principally arising in Hong Kong, Indonesia, Malaysia and Singapore.
The positive persistency and withdrawals experience variance of £50 million in 2012 (2011: £10 million) refl ects a combination of favourable experience
in Hong Kong and Indonesia.
The negative expense experience variance of £(30) million in 2012 (2011: £(31) million) principally refl ects expense overruns for operations which are
currently sub-scale (China, Malaysia Takaful and Taiwan) and in India where the business model is being adapted in response to the regulatory changes
introduced in recent years.
(h) The charge of £(2) million in 2012 for other items refl ects the broadly off setting eff ects of the realised gain on the sale of the Group’s 7.74 per cent stake
in China Life of Taiwan and charges for other non-recurrent items.
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Financial statements Prudential plc Annual Report 2012
Notes on the EEV basis results continued
3 Operating profi t from business in force continued
(iii) US operations
Unwind of discount and other expected returnsnote (a)
Effect of changes in operating assumptions:
Persistencynote (b)
Variable annuity (VA) feesnote (c)
Mortalitynote (d)
Othernote (e)
Experience variances and other items:
Spread experience variancenote (f)
Amortisation of interest-related realised gains and lossesnote (g)
Other
Total US operations
2012 £m
2011 £m
412
45
(19)
33
(24)
35
205
91
(6)
290
737
349
29
24
(36)
(3)
14
152
84
17
253
616
Notes
(a)
The increase in unwind of discount and other expected returns of £63 million from £349 million for 2011 to £412 million for 2012 includes the £67 million
eff ect of the increase in opening value of in-force business (aft er economic assumption changes), an impact of £19 million relating to the post-acquisition
unwind of discount for REALIC, partly off set by the £(23) million eff ect of lower risk discount rates driven by the 0.1 per cent reduction in the 10-year
US treasury rate together with the decrease in additional allowance for credit risk as explained in note 1(b) (iii).
(b) The eff ect of changes in persistency assumptions of £45 million in 2012 primarily relate to VA business.
(c) The eff ect 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 current size and mix of VA funds.
(d) The credit of £33 million in 2012 for the eff ect of updated mortality assumptions principally relates to life business, representing a credit of £86 million for the
(e)
(f)
(g)
modelling of projected mortality improvement, partially off set by a charge of £(53) million for other regular mortality updates to refl ect recent experience.
In 2011, the charge of £(36) million for updated mortality assumptions primarily arose on variable annuity business.
The charge of £(24) million in 2012 for other operating assumption changes includes a charge of £(12) million for the impact of altered assumptions for
Guaranteed Minimum Withdrawal Benefi t utilisation and £(12) million for other items.
The spread assumption for Jackson is determined on a longer-term basis, net of provision for defaults. The spread experience variance in 2012 of
£205 million (2011: £152 million) includes the positive eff ect of transactions undertaken to more closely match the overall asset and liability duration.
The amortisation of interest-related gains and losses refl ects the fact that 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 refl ect the long-term returns included in operating profi ts.
(iv) UK insurance operations
Unwind of discount and other expected returnsnote (a)
Effect of change in UK corporate tax ratenote (b)
Other itemsnote (c)
Total UK insurance operations
2012 £m
2011 £m
482
87
(16)
553
485
79
29
593
Notes
(a)
The decrease in unwind of discount and other expected returns of £(3) million from £485 million in 2011 to £482 million for 2012 refl ects the £(17) million
eff ect of lower risk discount rates driven by the reduction in interest rates, partly off set by the £14 million eff ect of an increase in the opening in-force value
(aft er economic assumption changes) on which the discount rates are applied.
(b) The eff ect of the change in tax rate of £87 million in 2012 represents the benefi t of the reduction in tax rate from 25 per cent to 23 per cent. Consistent
with the Group’s approach of grossing up the movement in the net of tax value of in-force for shareholder tax, the £87 million benefi t is presented gross
(2011: £79 million, 27 per cent to 25 per cent).
(c) Other items in 2012 of £(16) million includes a charge of £(52) million for the strengthening of mortality assumptions, net of reserve releases and the eff ects
of portfolio rebalancing for annuity business.
Notes on the EEV basis results Prudential plc Annual Report 2012
341
4 Changes to Group’s holdings
PPM South Africa
On 22 February 2012, M&G completed transactions to (i) exchange bonus share rights for equity holdings with the employees of PPM
South Africa, and (ii) the sale of a 10 per cent holding in the majority of the business to Thesele Group, a minority shareholder, for cash.
Following these transactions M&G’s majority holding in the business reduced from 75 per cent to 49.99 per cent. Under IFRS
requirements, the divestment is accounted for as the disposal of the 75 per cent holding and an acquisition of a 49.99 per cent holding
at fair value resulting in a reclassifi cation of PPM South Africa from a subsidiary to an associate. As a consequence of the IFRS
application, the transactions gave rise to a gain on dilution of £42 million. Consistent with the Group’s treatment for IFRS reporting,
this amount has been treated as a gain on dilution of holdings which is shown separately from operating profi t based on longer-term
investment returns in the Group’s supplementary analysis of profi t.
5 Acquisition of Reassure America Life Insurance Company (REALIC)
On 4 September 2012, the Group through its indirect wholly-owned subsidiary, Jackson National Life Insurance Company, completed
the acquisition of 100 per cent issued share capital of SRLC America Holding Corp. (SRLC), and its primary operating subsidiary,
Reassure America Life Insurance Company (REALIC). The purchase consideration, which remains subject to fi nal agreement under
the terms of the transaction with Swiss Re, is £370 million (US$587 million). The Embedded value of REALIC on the date of acquisition,
calculated in accordance with the Group’s methodology and assumptions as set out in note 1 was £823 million. The acquisition
increases the scale of the Group’s life business in the US, helping Jackson to diversify earnings by increasing the amount of income
from underwriting activities thereby enhancing the quality of earnings in a capital effi cient manner. The earnings of REALIC are
derived from seasoned, long duration cash fl ows, generated principally from term life, whole life and basic universal life products.
The gain arising from the acquisition of REALIC is excluded from the Group’s EEV operating profi t based on longer-term investment
returns and is calculated as follows:
Embedded value of acquired businessnote (i)
Total purchase consideration
Gain arising on acquisition
Total EEV
2012 £m
note (ii)
823
(370)
453
Notes
(i)
The embedded value of the acquired business has been determined by applying the same methodology as applied for Jackson’s non-variable annuity
business. A risk discount rate of 4.3 per cent at the date of acquisition on 4 September 2012 has been used.
(ii) The amounts shown above have been translated at the 4 September 2012 exchange rate of US$1.59/£.
6 Short-term fl uctuations in investment returns
Short-term fl uctuations in investment returns, net of the related change in the time value of cost of options and guarantees, arise as
follows:
(i) Group summary
Insurance operations:
Asianote (ii)
USnote (iii)
UKnote (iv)
Other operations:
Economic hedge value movementnote (v)
Other note (vi)
Total
2012 £m
2011 £m
395
(254)
315
456
(32)
114
538
(155)
(491)
(141)
(787)
–
(120)
(907)
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Financial statements Prudential plc Annual Report 2012
Notes on the EEV basis results continued
6 Short-term fl uctuations in investment returns continued
(ii) Asia operations
For 2012, the positive short-term fl uctuations in investment returns of £395 million in Asia operations were driven by unrealised gains
on bonds and higher equity markets, principally arising in Hong Kong of £139 million mainly relating to positive returns on bonds
backing participating business, Singapore of £114 million, primarily relating to increasing future expected fee income for unit-linked
business and unrealised gains on bonds, Taiwan of £56 million for unrealised gains on bonds and CDOs and India of £30 million.
For 2011, short-term fl uctuations in investment returns of £(155) million were driven by lower equity markets reducing future
expected fee income, mainly arising in Singapore of £(105) million and Korea of £(22) million. The 2011 short-term fl uctuations in
investment returns also included £(28) million of adverse variance arising in other territories. This principally comprises fl uctuations
arising in India of £(53) million refl ecting lower equity market returns, in Vietnam of £(33) million for unrealised losses on bonds and
equities and Taiwan of £(30) million for losses on bonds and CDOs, partially offset by a credit in Hong Kong of £96 million primarily
relating to positive returns on bonds backing participating business.
(iii) US operations
The short-term fl uctuations in investment returns for US operations comprise the following items:
Investment return related experience on fi xed income securitiesnote (a)
Investment return related impact due primarily to changed expectation of profi ts on in-force variable
annuity business in future periods based on current period equity returns, net of related hedging
activity for equity related productsnote (b)
Actual less long-term return on equity based investments and other items
Total Jackson
2012 £m
2011 £m
(99)
(74)
(183)
28
(254)
(418)
1
(491)
Notes
(a)
The charge relating to fi xed income securities comprises the following elements:
– the excess of actual realised losses over the amortisation of interest related realised gains and losses recorded in the profi t and loss account;
– credit loss experience (versus the longer-term assumption); and
– the impact of de-risking activities within the portfolio.
(b) This item refl ects the net impact of:
– variances in projected future fees arising from the eff ect of market fl uctuations on the growth in separate account asset values in the current reporting
period; and
– related hedging activity.
In 2012, there was a 14.8 per cent rate of return for the variable annuity separate account assets compared with an assumed longer-term rate of return of
5.3 per cent. Consequently, the asset values and therefore projected future fees at 31 December 2012 were higher than assumed. However, net of the impact
of related hedging eff ects there is a short-term fl uctuation of £(183) million.
In 2011, there was a negative 0.5 per cent rate of return for the variable annuity separate account assets. This compared with an assumed longer-term rate
of return of 5.4 per cent. Consequently, the asset values and therefore projected future fees at 31 December 2011 were lower than assumed.
(iv) UK insurance operations
The short-term fl uctuations in investment returns for UK insurance operations arise from the following types of business:
With-profi tsnote (a)
Shareholder-backed annuitynote (b)
Unit-linked and other
2012 £m
2011 £m
285
(3)
33
315
(201)
56
4
(141)
Notes
(a)
For with-profi ts business the amounts refl ect the excess (defi cit) of the actual investment return on the investments of the PAC with-profi ts fund (covering
policyholder liabilities and unallocated surplus) against the assumed long-term rate for the year. For 2012, the credit of £285 million refl ects the actual
investment return of 9.8 per cent against the assumed long-term rate of 5.0 per cent for the year.
For 2011, the charge of £(201) million refl ects the actual investment return of 3.2 per cent against the assumed long-term rate of 5.1 per cent, primarily
refl ecting the fall in equity markets and widening of corporate bond credit spreads, partially off set by the increase in asset values as a result of the reduction
in bond yields.
Short-term fl uctuations in investment returns for shareholder-backed annuity business comprise: (1) gains on surplus assets refl ecting reductions in
corporate bond and gilt yields; (2) the diff erence between actual and expected default experience; and (3) the eff ect of mismatching for assets and liabilities
of diff erent durations and other short-term fl uctuations in investment returns.
(b)
(v) Economic hedge value movements
This item represents the costs on short-dated hedge contracts taken out in the fi rst half of 2012 to provide downside protection
against severe equity market falls through a period of particular uncertainty with respect to the Eurozone. The hedge contracts were
terminated in the second half of 2012.
(vi) Other
Short-term fl uctuations of Other operations in 2012 of £114 million primarily represent unrealised fair value movements on Prudential
Capital’s bond portfolio. Short-term fl uctuations of Other operations in 2011 of £(120) million represent unrealised value movements
on investments, including centrally held swaps to manage foreign exchange and certain macroeconomic exposures of the Group.
Notes on the EEV basis results Prudential plc Annual Report 2012
343
7 Shareholders’ share of actuarial and other gains and losses on defi ned benefi t pension schemes
The credit for the shareholders’ share of actuarial and other gains and losses comprises:
IFRS basis
Additional shareholders’ interest note (1(c)(vi))
EEV basis total
8 Eff ect of changes in economic assumptions
2012 £m
2011 £m
50
12
62
21
2
23
The effect 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 profi t before tax (including actual investment returns) arise as follows:
(i) Group summary
Asia operationsnote (ii)
US operationsnote (iii)
UK insurance operationsnote (iv)
Total
2012 £m
2011 £m
(149)
85
48
(16)
279
(144)
(293)
(158)
(ii) Asia operations
The effect of changes in economic assumptions for Asia operations in 2012 of £(149) million principally arises in Hong Kong of
£(320) million, primarily refl ecting the effect on projected cash fl ows of de-risking the asset portfolio and the reduction in fund earned
rates on participating business, driven by the very low interest rate environment, and in Vietnam of £(47) million, following the fall in
bond yields. There are partial offsets which in total are £218 million, principally arising in Malaysia and Indonesia, mainly refl ecting
the positive impact of discounting projected health and protection profi ts at lower rates, driven by the decrease in risk discount rates.
The effect of changes in economic assumptions for 2011 of a credit of £279 million principally arose in Singapore of £160 million,
Malaysia of £97 million and Indonesia of £94 million, primarily refl ecting the positive impact of discounting projected health and
protection profi ts at lower rates, driven by the decrease in risk-free rates. There is a partial offset arising in Hong Kong of £(57) million,
primarily refl ecting the reduction in fund earned rates for participating business.
(iii) US operations
The effect of changes in economic assumptions for US operations refl ects the following:
Effect of changes in 10-year treasury rates, beta and equity risk premium:note (a)
Fixed annuity and other general account business
Variable annuity (VA) business
Decrease (increase) in additional allowance for credit risk note (b)
2012 £m
2011 £m
20
(83)
148
85
282
(333)
(93)
(144)
Notes
(a)
For Jackson, the eff ect of changes in economic assumptions represents the aggregate of the eff ects of changes to projected returns and the risk discount rate.
The risk discount rate, as discussed in note 1(b)(iii), represents the aggregate of the risk-free rate and margin for market risk, credit risk and non-diversifi able
non-market risk.
For fi xed annuity and other general account business the eff ect of changes to the risk-free rate, which is defi ned as the 10-year treasury rate, is refl ected
in the risk discount rate. This discount rate is in turn applied to projected cash fl ows which principally refl ect projected spread, which is largely insensitive
to changes in the risk-free rate. Secondary eff ects on the cash fl ows also result from changes to assumed future yield and resulting policyholder behaviour.
For VA business, changes to the risk-free rate are also refl ected in determining the risk discount rate. However, the projected cash fl ows are also reassessed
for altered investment returns on the underlying separate account assets on which fees are charged. In 2012, for fi xed annuity and other general account
business the credit of £20 million principally arises from the eff ect of a lower discount rate on the opening value of the in-force book, driven by the
10 basis points reduction in the risk-free rate (as shown in note 17(ii)), partially off set by the eff ect for the acquired REALIC book, refl ecting the 20 basis point
increase in the risk-free rate from the 4 September acquisition date.
For 2011, the credit of £282 million refl ected the 140 basis points reduction in the risk-free rate. For VA business, the charge of £(83) million
(b)
(2011: £(333) million) refl ects the 10 basis points reduction (2011: a reduction of 140 basis points) in the risk-free rate (as shown in note 17(ii)).
For 2012, the £148 million eff ect of the decrease in the additional allowance within the risk discount rate for credit risk refl ects the reduction in credit spreads
and represents a 50 basis points decrease for spread business, including the acquired REALIC business (from 200 basis points in 2011 to 150 basis points in
2012), and 10 basis points decrease for VA business (from 40 basis points in 2011 to 30 basis points in 2012), representing the proportion of business invested
in the general account (as described in note 1(b)(iii)).
For 2011, the eff ect of £(93) million for the increase in the risk margin allowance within the risk discount rate for credit risk represented a 50 basis points
increase for spread business and 10 basis points increase for VA business.
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Financial statements Prudential plc Annual Report 2012
Notes on the EEV basis results continued
8 Eff ect of changes in economic assumptions continued
(iv) UK insurance operations
The effect of changes in economic assumptions of a credit of £48 million for UK insurance operations for 2012 comprises the effect of:
Shareholder-backed annuity businessnote (a)
Effect of change in:
Expected long-term rates of return, risk discount rates and other changes
Tax regimenote (b)
With-profi ts and other businessnote (c)
Effect of changes in expected long-term rates of return
Effect of changes in risk discount rates
Other changes
2012 £m
2011 £m
140
(46)
94
(62)
24
(8)
(46)
48
278
–
278
(1,113)
627
(84)
(570)
(292)
Notes
(a)
For shareholder-backed annuity business the overall eff ect of changes in expected long-term rates of return and risk discount rates for the years shown
above refl ect the combined eff ects of the changes in economic assumptions, which incorporate a default allowance for both best estimate defaults and in
respect of the additional credit risk provisions (as shown in note 17(iii)).
(b) The change in the insurance tax regime was enacted on 17 July 2012. The eff ect of £(46) million refl ects the change in pattern of taxable profi ts for
(c)
shareholder-backed annuity business arising from the acceleration of tax payments due to the altered timing of relief on regulatory basis provisions.
For with-profi ts and other business the total charge in 2012 of £(46) million refl ects the changes in fund earned rates and risk discount rate (as shown in
note 17(iii)), driven by the 20 basis points decrease in the gilt rate.
For 2011, the charge of £(1,113) million for the eff ect of changes in expected long-term rates of return arises from the reduction in fund earned rates, driven
by the 1.5 per cent decrease in gilt rates and reduction in additional returns assumed on corporate bonds, refl ecting changes in asset mix. The credit of
£627 million for the eff ect of changes in risk discount rates refl ects the 1.35 per cent reduction in the risk discount rate, driven by the 1.5 per cent decrease
in gilt rates, partly off set by the impact of an increase in beta for with-profi ts business. Beta allowances are explained in note 1(b)(iii).
Notes on the EEV basis results Prudential plc Annual Report 2012
345
9 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.
Long-term business and asset management operationsnote (i)
Underlying movement:
Investment in new businessnote (ii)
Business in force:
Expected in-force cash fl ows (including expected return on net assets)
Effects of changes in operating assumptions, operating experience variances and
other operating items
Changes in non-operating itemsnote (iv)
Gain on dilution of Group’s holdingsnote 4
Effect of acquisition of REALICnotes 5 and (v)
Net cash fl ows to parent companynote (vi)
Exchange movements, timing differences and other itemsnote (vii)
Net movement in free surplus
Balance at 1 January 2012
Balance at 31 December 2012
Representing:
Asia operations
US operations
UK operations
Balance at 1 January 2012
Representing:
Asia operations
US operations
UK operations
2012 £m
Asset
management
and UK
general
insurance
commission
note (iii)
Free surplus
of long-term
business, asset
management
and UK
general
insurance
commission
–
(618)
386
–
386
84
42
–
512
(279)
(83)
150
582
732
207
108
417
732
211
113
258
582
2,405
295
2,082
(79)
42
(169)
1,876
(1,200)
(408)
268
3,421
3,689
1,181
1,319
1,189
3,689
1,278
1,333
810
3,421
Long-term
business
note 14
(618)
2,019
295
1,696
(163)
–
(169)
1,364
(921)
(325)
118
2,839
2,957
974
1,211
772
2,957
1,067
1,220
552
2,839
Notes
(i)
(ii)
(iii) For the purposes of this analysis, free surplus for asset management operations and the UK general insurance commission is taken to be IFRS basis
All fi gures are shown net of tax.
Free surplus invested in new business is for the eff ects of setting aside required capital and incurring acquisition costs.
shareholders’ equity.
(iv) Changes in non-operating items
This represents short-term fl uctuations in investment returns, the shareholders’ share of actuarial and other gains and losses on defi ned benefi t pension
schemes and the eff ect of changes in economic assumptions for long-term business operations.
Short-term fl uctuations in investment returns primarily refl ect temporary market movements on the portfolio of investments held by the Group’s
(v)
shareholder-backed operations.
The eff ect on free surplus of the purchase of REALIC refl ects the diff erence between the consideration of £370 million and the free surplus of REALIC
at the acquisition date.
(vi) Net cash fl ows to parent company for long-term business operations refl ect the fl ows as included in the holding company cash fl ow at transaction rates.
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Financial statements Prudential plc Annual Report 2012
Notes on the EEV basis results continued
9 Analysis of movement in free surplus continued
(vii) Exchange movements, timing diff erences and other items represent:
Exchange movementsnote 14
Mark to market value movements on Jackson assets backing surplus and required capitalnote 14
Othernote (viii)
2012 £m
Asset
management
and UK
general
insurance
commission
(13)
–
(70)
(83)
Long-term
business
(92)
35
(268)
(325)
Total
(105)
35
(338)
(408)
(viii) Other primarily refl ects the eff ect of repayment of contingent loan funding, as shown in note 14(ii), together with intra-group loans, timing diff erences and
other non-cash items.
10 Net core structural borrowings of shareholder-fi nanced operations
31 December 2012 £m
31 December 2011 £m
Mark to
market
value
adjustment
note
–
536
536
–
43
IFRS basis
(1,380)
3,126
1,746
275
153
EEV
basis at
market
value
(1,380)
3,662
2,282
275
196
Mark to
market
value
adjustment
note
–
187
187
–
17
IFRS basis
(1,200)
3,201
2,001
250
160
EEV
basis at
market
value
(1,200)
3,388
2,188
250
177
Holding company*cash and short-term
investments
Core structural borrowings – central funds
Holding company net borrowings
Core structural borrowings –
Prudential Capital
Core structural borrowings – Jackson
Net core structural borrowings of shareholder-
fi nanced operations
2,174
579
2,753
2,411
204
2,615
* Including central fi nance subsidiaries.
Note
The movement in the mark to market value adjustment represents:
Mark to market movement in balance sheet:
Beginning of year
Change refl ected in:
Income statement
Foreign exchange effects
End of year
31 December
2012 £m
31 December
2011 £m
204
380
(5)
579
190
14
–
204
Notes on the EEV basis results Prudential plc Annual Report 2012
347
11 Reconciliation of movement in shareholders’ equity (excluding non-controlling interests)
Long-term business operations
2012 £m
Asia
operations
note (i)
US
operations
UK
insurance
operations
Total
long-term
business
operations
Other
operations
note (i)
Group
total
1,266
694
1,960
–
(7)
1,953
395
873
737
1,610
–
(2)
1,608
(254)
–
(28)
–
(149)
–
–
–
85
–
453
313
553
866
–
(29)
837
315
–
(16)
48
–
–
2,452
1,984
4,436
–
(38)
4,398
456
–
–
–
485
(562)
(77)
82
2,452
1,984
4,436
485
(600)
4,321
538
(28)
(352)
(380)
(16)
(16)
–
453
78
–
42
–
62
(16)
42
453
Operating profi t (based on longer-term
investment returns)
Long-term business:
New businessnote 2
Business in forcenote 3
Asset management
Other results
Operating profi t based on longer-term
investment returns
Short-term fl uctuations in investment returnsnote 6
Mark to market value movements on core
borrowingsnote 10
Shareholders’ share of actuarial and other gains
and losses on defi ned benefi t pension
schemesnote 7
Effect of changes in economic assumptionsnote 8
Gain on dilution of Group’s holdingsnote 4
Gain on acquisition of REALICnote 5
Profi t before tax (including actual investment
returns)
2,199
1,864
1,184
5,247
(227)
5,020
Tax (charge) credit attributable to shareholders’
profi t:note 12
Tax on operating profi t
Tax on short-term fl uctuations in investment
returns
Tax on shareholders’ share of actuarial and
other gains and losses on defi ned benefi t
pension schemes
Tax on effect of changes in economic
assumptions
Total tax charge
Profi t (loss) for the year
Other movements
Exchange movements on foreign operations and
net investment hedges, net of tax
Intra-group dividends (including statutory
transfers)note (ii)
Investment in operationsnote (ii)
External dividends
Reserve movements in respect of share-based
payments
Other transfers
Treasury shares movements
New share capital subscribed
Mark to market value movements on Jackson
assets backing surplus and required capital
net of tax
Net increase in shareholders’ equity
Shareholders’ equity at 1 January 2012note (i)
Shareholders’ equity at 31 December 2012note (i)
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o
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a
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i
o
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F
i
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a
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c
i
a
l
s
t
a
t
e
m
e
n
t
s
(420)
(513)
(168)
(1,101)
(44)
(1,145)
(60)
–
36
(444)
1,755
(271)
(544)
4
–
–
8
–
–
–
952
8,510
9,462
91
–
(29)
(451)
1,413
(252)
(252)
–
–
–
6
–
–
35
950
5,082
6,032
(72)
(41)
(3)
(44)
4
(11)
(247)
937
4
(4)
(1,142)
4,105
(18)
–
(65)
(14)
(4)
(1,207)
(292)
3,813
–
(523)
54
(207)
–
–
–
(16)
–
–
–
714
6,058
6,772
(1,003)
4
–
1,003
(4)
(655)
–
(2)
–
–
35
2,616
19,650
22,266
42
2
23
17
–
190
(13)
177
(469)
–
–
(655)
42
–
23
17
35
2,806
19,637
22,443
348
Financial statements Prudential plc Annual Report 2012
Notes on the EEV basis results continued
11 Reconciliation of movement in shareholders’ equity (excluding non-controlling interests) continued
Long-term business operations
2012 £m
Asia
operations
note (i)
US
operations
UK
insurance
operations
Total
long-term
business
operations
Other
operations
note (i)
Group
total
2,290
4,343
3,008
9,641
718
10,359
7,172
9,462
1,689
6,032
3,764
6,772
12,625
22,266
(541)
177
12,084
22,443
2,071
3,761
2,552
8,384
180
8,564
6,439
8,510
1,321
5,082
3,506
6,058
11,266
19,650
(193)
11,073
(13)
19,637
Representing:
Statutory IFRS basis shareholders’ equity
Additional retained profi t (loss) on an EEV
basisnote (iii)
EEV basis shareholders’ equity
Balance at 1 January 2012
Representing:
Statutory IFRS basis shareholders’ equity
Additional retained profi t (loss) on an EEV
basisnote (iii)
EEV basis shareholders’ equity
Notes
(i)
(ii)
For the purposes of the table above, goodwill related to Asia long-term operations is included in Other operations.
Intra-group dividends (including statutory transfers) represent dividends that have been declared in the year and amounts accrued in respect of statutory
transfers. For long-term business operations, the diff erence between the net amount of £999 million for intra-group dividends (including statutory transfers)
and investment in operations shown above and the net cash fl ows to parent company of £921 million (as shown in note 9) primarily relates to intra-group
loans, timing diff erences arising on statutory transfers and other non-cash items.
(iii) The additional retained profi t on an EEV basis for Other operations primarily represents the mark to market value adjustment for holding company net
borrowings of a charge of £(536) million (2011: £(187) million) (as shown in note 10).
Notes on the EEV basis results Prudential plc Annual Report 2012
349
12 Tax attributable to shareholders’ profi t
The tax charge comprises:
Tax charge on operating profi t based on longer-term investment returns:
Long-term business:
Asia operations
US operations
UK insurance operations
Other operations
Total tax charge on operating profi t based on longer-term investment returns
Tax charge (credit) on items not included in operating profi t:
Tax charge (credit) on short-term fl uctuations in investment returns
Tax charge on shareholders’ share of actuarial and other gains and losses on defi ned benefi t
pension schemes
Tax charge (credit) on effect of changes in economic assumptions
Total tax charge (credit) on items not included in operating profi t
Tax charge on profi t attributable to shareholders (including tax on actual investment returns)
13 Earnings per share (EPS)
Profi t before tax
Tax
Non-controlling interests
Profi t after tax and non-controlling interests
EPS (pence)
Average number of shares (millions)
2012 £m
2011 £m
Operating
Total*
Operating
4,321
(1,145)
–
3,176
125.0p
5,020
(1,207)
–
3,813
150.1p
2,541
2,541
3,978
(1,044)
(4)
2,930
115.7p
2,533
* Total profi t in 2012 includes a gain of £453 million relating to the acquisition of REALIC – see note 5.
2012 £m
2011 £m
420
513
168
1,101
44
1,145
44
14
4
62
1,207
402
487
221
1,110
(66)
1,044
(210)
6
(64)
(268)
776
Total
2,922
(776)
(4)
2,142
84.6p
2,533
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Financial statements Prudential plc Annual Report 2012
Notes on the EEV basis results continued
14 Reconciliation of net worth and value of in-force for long-term businessnote(i)
2012 £m
Required
capital
Total net
worth
Group
Shareholders’ equity at 1 January 2012
New business contributionnotes (iii), (iv)
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
Gain on acquisition of REALICnotes 5 and (v)
Profi t aft er tax from long-term business
Exchange movements on foreign operations and net
investment hedges
Intra-group dividends (including statutory transfers) and
investment in operationsnote (ii)
Mark to market value movements on Jackson assets backing
surplus and required capital
Other transfers from net worth
Free
surplus
note 9
2,839
(618)
1,923
96
295
(163)
(169)
1,364
(92)
(1,187)
35
(2)
3,447
454
(324)
85
50
109
169
543
(92)
–
–
–
Value of
in-force
business
note (vi)
13,364
1,955
(1,599)
929
51
409
453
Total
long-term
business
operations
19,650
1,791
–
1,110
396
355
453
6,286
(164)
1,599
181
345
(54)
–
1,907
2,198
4,105
(184)
(339)
(1,187)
188
35
(2)
–
–
(523)
(999)
35
(2)
Shareholders’ equity at 31 December 2012
2,957
3,898
6,855
15,411
22,266
Representing:
Asia operations
Shareholders’ equity at 1 January 2012
New business contributionnote (iv)
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
Profi t aft er tax from long-term business
Exchange movements on foreign operations and net
investment hedges
Intra-group dividends (including statutory transfers)
and investment in operationsnote (ii)
Other transfers to net worth
Shareholders’ equity at 31 December 2012
1,067
(292)
635
56
80
114
593
(38)
(656)
8
974
860
97
(3)
–
25
16
135
(25)
–
–
1,927
(195)
632
56
105
130
728
(63)
(656)
8
6,583
1,177
(632)
413
(23)
8,510
982
–
469
82
92
222
1,027
1,755
(208)
116
–
(271)
(540)
8
970
1,944
7,518
9,462
Notes on the EEV basis results Prudential plc Annual Report 2012
351
US operations
Shareholders’ equity at 1 January 2012
New business contributionnote (iv)
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
Gain on acquisition of REALICnotes 5 and (v)
Profi t aft er tax from long-term business
Exchange movements on foreign operations and net
investment hedges
Intra-group dividends (including statutory transfers)
Mark to market value movements on Jackson assets backing
surplus and required capital
Other transfers to net worth
2012 £m
Required
capital
Total net
worth
Value of
in-force
business
note (vi)
Total
long-term
business
operations
1,371
271
(242)
48
19
31
169
296
(67)
–
–
–
2,591
(10)
535
88
238
(299)
–
552
(121)
(252)
35
6
2,491
578
(535)
180
21
164
453
861
(131)
–
–
–
5,082
568
–
268
259
(135)
453
1,413
(252)
(252)
35
6
Free
surplus
note 9
1,220
(281)
777
40
219
(330)
(169)
256
(54)
(252)
35
6
Shareholders’ equity at 31 December 2012
1,211
1,600
2,811
3,221
6,032
UK insurance operations
Shareholders’ equity at 1 January 2012
New business contributionnote (iv)
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
Profi t aft er tax from long-term business
Intra-group dividends (including statutory transfers)note (ii)
Other transfers from net worth
Shareholders’ equity at 31 December 2012
552
(45)
511
–
(4)
53
515
(279)
(16)
772
1,216
86
(79)
37
6
62
112
–
–
1,768
41
432
37
2
115
627
(279)
(16)
4,290
200
(432)
336
53
153
310
72
–
6,058
241
–
373
55
268
937
(207)
(16)
1,328
2,100
4,672
6,772
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Financial statements Prudential plc Annual Report 2012
Notes on the EEV basis results continued
14 Reconciliation of net worth and value of in-force for long-term businessnote(i) continued
All fi gures are shown net of tax.
Notes
(i)
(ii) The amounts shown in respect of free surplus and the value of in-force business for Asia and UK insurance operations for intra-group dividends (including
statutory transfers) and investment in operations include the repayment of contingent loan funding. Contingent loan funding represents amounts whose
repayment to the lender is contingent upon future surpluses emerging from certain contracts specifi ed under the arrangement. If insuffi cient surplus
emerges on those contracts, there is no recourse to other assets of the Group and the liability is not payable to the degree of shortfall.
(iii) The movements arising from new business contribution are as follows:
Free surplus invested in new business
Increase in required capital
Reduction in total net worth
Increase in the value associated with new business
Total post-tax new business contribution
(iv) Free surplus invested in new business is as follows:
2012 £m
2011 £m
(618)
454
(164)
1,955
1,791
(553)
406
(147)
1,683
1,536
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
2012 £m
2011 £m
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
1,266
(284)
982
(292)
873
(305)
568
(281)
313
(72)
241
(45)
2,452
(661)
1,791
(618)
1,076
(265)
811
(297)
815
(285)
530
(202)
260
(65)
195
(54)
2,151
(615)
1,536
(553)
3.4
2.0
5.4
2.9
2.7
2.6
3.6
2.8
(v)
The eff ect on free surplus of the purchase of REALIC refl ects the diff erence between the consideration of £370 million and the free surplus of REALIC at the
acquisition date. The REALIC free surplus represents the excess of net worth over required capital. The incremental value of in-force of £453 million
represents the amount which is recognised on the EEV reporting basis over and above the net worth.
(vi) 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:
31 December 2012 £m
31 December 2011 £m
Asia
operations
US
operations
Total
long-term
business
operations
UK
insurance
operations
note
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Value of in-force business before deduction of
cost of capital and time value of guarantees
Cost of capital
Cost of time value of guarantees
Net value of in-force business
7,903
(352)
(33)
7,518
3,992
(121)
(650)
3,221
4,916
(244)
–
16,811
(717)
(683)
4,672
15,411
6,922
(317)
(22)
6,583
3,222
(135)
(596)
2,491
4,598
(241)
(67)
4,290
14,742
(693)
(685)
13,364
Note
A provision for the cost of time value of options and guarantees for UK insurance operations is no longer required.
Notes on the EEV basis results Prudential plc Annual Report 2012
353
15 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 2012 and 2011 totals in the tables below for the
emergence of free surplus as follows:
Required capitalnote 14
Value of in-force (VIF)note 14
Add back: deduction for cost of time value of guaranteesnote 14
Other itemsnote
2012 £m
2011 £m
3,898
15,411
683
(1,401)
18,591
3,447
13,364
685
(1,214)
16,282
Note
‘Other items’ represent amounts incorporated into VIF where there is no defi nitive timeframe for when the payments will be made or receipts received.
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 fi nal bonus
rates so as to exhaust the estate over the lifetime of the in-force with-profi ts business. This is an assumption to give an appropriate valuation. To be conservative
this item is excluded from the expected free surplus generation profi le below.
Cash fl ows are projected on a deterministic basis and are discounted at the appropriate risk discount rate. The modelled cash fl ows
use the same methodology underpinning the Group’s embedded value reporting and so is subject to the same assumptions and
sensitivities.
The table below shows how the VIF generated by the in-force business and the associated required capital is modelled as emerging
into free surplus over future years.
Asia operations
US operations
UK insurance operations
Total
Asia operations
US operations
UK insurance operations
Total
2012 £m
Expected period of conversion of future post-tax distributable earnings and
required capital fl ows to free surplus
1-5 years
6 -10 years
11-15 years
16 -20 years
21-40 years
40+ years
2,987
2,723
1,890
7,600
41%
1,873
1,607
1,185
4,665
25%
840
301
456
1,597
9%
1,181
698
756
2,635
14%
2011 £m
1,297
110
445
1,852
10%
232
–
10
242
1%
Expected period of conversion of future post-tax distributable earnings and
required capital fl ows to free surplus
1-5 years
6 -10 years
11-15 years
16 -20 years
21-40 years
40+ years
2,582
2,241
1,864
6,687
41%
1,596
1,287
1,166
4,049
25%
1,012
490
743
2,245
14%
732
173
453
1,358
8%
1,262
76
394
1,732
11%
203
–
8
211
1%
2012 total as
shown above
8,410
5,439
4,742
18,591
100%
2011 total as
shown above
7,387
4,267
4,628
16,282
100%
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Financial statements Prudential plc Annual Report 2012
Notes on the EEV basis results continued
16 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 2012 (31 December 2011) and the new business
contribution after the effect of required capital for 2012 and 2011 to:
AAAAAAAAAAAAAAAA 1 per cent increase in the discount rates;
AAAAAAAAAAAAAAAA 1 per cent increase and decrease in interest rates, including all consequential changes (assumed investment returns for all asset
classes, market values of fi xed interest assets, risk discount rates);
AAAAAAAAAAAAAAAA 1 per cent rise in equity and property yields;
AAAAAAAAAAAAAAAA 10 per cent fall in market value of equity and property assets (embedded value only);
AAAAAAAAAAAAAAAA Holding company statutory minimum capital (by contrast to required capital), (embedded value only);
AAAAAAAAAAAAAAAA 5 basis point increase in UK long-term expected defaults; and
AAAAAAAAAAAAAAAA 10 basis point increase in the liquidity premium for UK annuities.
In each sensitivity calculation, all other assumptions remain unchanged except where they are directly affected by the revised
economic conditions.
New business contribution
2012 £m
2011 £m
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Asia
operations
US
operations
New business contributionnote 2
1,266
873
313
2,452
1,076
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
(163)
33
(106)
48
–
–
(40)
104
(161)
97
–
–
(38)
6
(11)
13
(10)
20
(241)
143
(278)
158
(10)
20
(139)
2
(72)
50
–
–
815
(45)
81
(117)
92
–
–
UK
insurance
operations
Total
long-term
business
operations
260
2,151
(36)
5
(6)
11
(8)
16
(220)
88
(195)
153
(8)
16
Embedded value of long-term business operations
31 December 2012 £m
31 December 2011 £m
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Shareholders’ equitynote 11
9,462
6,032
6,772 22,266
8,510
5,082
6,058
19,650
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
(879)
(218)
85
328
(159)
108
–
–
(209)
(124)
49
230
(69)
89
–
–
(482)
(328)
399
202
(309)
4
(112)
224
(1,570)
(670)
533
760
(537)
201
(112)
224
(771)
(376)
253
329
(159)
114
–
–
(147)
(106)
58
185
16
92
–
–
(443)
(343)
400
205
(326)
4
(98)
196
(1,361)
(825)
711
719
(469)
210
(98)
196
The sensitivities shown above are for the impact of instantaneous changes on the embedded value of long-term business operations
and include the combined effect on the value of in-force business and net assets at the balance sheet dates indicated. If the change
in assumption shown in the sensitivities were to occur, then the effect shown above would be recorded within two components of the
profi t analysis for the following year. These are for the effect of economic assumption changes and, to the extent that asset value
changes are included in the sensitivities, within short-term fl uctuations in investment returns. In addition to the sensitivity effects
shown above, the other components of the profi t for the following year would be calculated by reference to the altered assumptions,
for example new business contribution and unwind of discount, together with the effect of other changes such as altered corporate
bond spreads. In addition for Jackson, the fair value movements on assets backing surplus and required capital which are taken
directly to shareholders’ equity would also be affected by changes in interest rates.
Notes on the EEV basis results Prudential plc Annual Report 2012
355
(b) Sensitivity analysis – non-economic assumptions
The tables below show the sensitivity of the embedded value as at 31 December 2012 (31 December 2011) and the new business
contribution after the effect of required capital for 2012 and 2011 to:
AAAAAAAAAAAAAAAAAAA 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);
AAAAAAAAAAAAAAAAAAA 10 per cent proportionate decrease in lapse rates (a 10 per cent sensitivity on a base assumption of 5 per cent would represent a
lapse rate of 4.5 per cent per annum); and
AAAAAAAAAAAAAAAAAAA 5 per cent proportionate decrease in base mortality and morbidity rates (ie increased longevity).
New business contribution
2012 £m
2011 £m
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
New business contributionnote 2
1,266
873
313
2,452
1,076
815
260
2,151
Maintenance expenses – 10% decrease
Lapse rates – 10% decrease
Mortality and morbidity – 5% decrease
Change representing effect on:
Life business
UK annuities
32
95
76
76
–
13
26
5
5
–
4
7
(11)
3
(14)
49
128
70
84
(14)
26
92
60
60
–
11
24
9
9
–
7
10
(9)
3
(12)
44
126
60
72
(12)
Embedded value of long-term business operations
31 December 2012 £m
31 December 2011 £m
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Asia
operations
US
operations
UK
insurance
operations
Total
long-term
business
operations
Shareholders’ equitynote 11
9,462
6,032
6,772 22,266
8,510
5,082
6,058
19,650
Maintenance expenses – 10% decrease
Lapse rates – 10% decrease
Mortality and morbidity – 5% decrease
Change representing effect on:
Life business
UK annuities
137
333
387
387
–
50
225
178
178
–
56
66
(273)
13
(286)
243
624
292
578
(286)
117
342
289
289
–
44
157
92
92
–
52
65
(227)
12
(239)
213
564
154
393
(239)
(c) Eff ect of proposed change in UK corporation tax rate
The proposed rate change from 23 per cent to 22 per cent announced in the 2012 Budget on 21 March 2012 has been reduced by
a further 1 per cent to 21 per cent in the Autumn Statement on 5 December 2012. The change from 23 per cent to 21 per cent is
expected to be effective 1 April 2014 and when substantively enacted it would have the impact of increasing the net of tax value
of in-force business of UK insurance operations at 31 December 2012 by around £65 million.
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Financial statements Prudential plc Annual Report 2012
Notes on the EEV basis results continued
17 Assumptions
Deterministic assumptions
The tables below summarise the principal fi nancial assumptions:
Assumed investment returns refl ect the expected future returns on the assets held and allocated to the covered business at the
valuation date.
(i) Asia operationsnotes (a),(b),(d)
China Hong Kong
notes (b),(d)
India
Indonesia
Japan
Korea
Malaysia
notes (c),(d)
Philippines Singapore
note (d)
Taiwan
Thailand
Vietnam
31 December 2012 %
10.1
10.1
3.8
3.5
13.2
13.2
9.4
9.4
–
4.5
2.5
2.25
4.0
5.0
0.0
7.4
7.2
3.0
5.8
5.8
2.5
11.1
11.1
3.6
4.3
3.25
3.4
10.3
10.3
17.2
17.2
4.0
2.0
1.0
3.0
5.5
Risk discount rate:
New business
In force
Expected long-term
rate of infl ation
Government bond
yield
3.6
1.8
8.2
5.3
0.8
3.2
3.5
4.35
1.3
1.2
3.5
10.5
China Hong Kong
notes (b),(d)
India
Indonesia
Japan
Korea
Malaysia
notes (c),(d)
Philippines Singapore
note (d)
Taiwan
Thailand
Vietnam
31 December 2011 %
Risk discount rate:
New business
In force
Expected long-term
rate of infl ation
Government bond
10.0
10.0
3.85
3.7
13.75
13.75
11.15
11.15
–
4.7
2.5
2.25
4.0
5.0
0.0
yield
3.5
1.9
8.75
6.1
1.0
7.1
7.1
3.0
3.8
6.4
6.5
2.5
3.7
12.2
12.2
3.9
4.65
4.0
5.4
2.0
1.6
5.0
5.0
1.0
1.3
10.1
10.1
19.6
19.6
3.0
6.5
3.3
12.9
Weighted risk discount rate:note (a)
New business
In force
Asia total %
31 Dec 2012
31 Dec 2011
6.8
6.1
7.4
6.9
Equity risk premiums in Asia range from 3.25 per cent to 8.8 per cent for 2012 (2011: 3.25 per cent to 8.7 per cent).
Notes
(a)
The weighted risk discount rates for Asia operations shown above have been determined by weighting each country’s risk discount rates by reference to
the EEV basis new business result and the closing value of in-force business. The changes in the risk discount rates for individual Asia territories refl ect
the movements in government bond yields, together with the eff ects of movements in the allowance for market risk and changes in product mix.
For Hong Kong the assumptions shown are for US dollar denominated business. For other territories, the assumptions are for local currency denominated
business.
The risk discount rate for Malaysia refl ects both the Malaysia life and Takaful operations.
(c)
(d) The mean equity return assumptions for the most signifi cant equity holdings in the Asia operations were:
(b)
Hong Kong
Malaysia
Singapore
31 Dec 2012 %
31 Dec 2011 %
5.8
9.5
7.35
5.9
9.7
7.7
Notes on the EEV basis results Prudential plc Annual Report 2012
357
(ii) US operations
Assumed new business spread margins:notes (a), (c)
Fixed annuity business*:
January to June issues
July to December issues
Fixed index annuity business:
January to June issues
July to December issues
Institutional business
Risk discount rate:note (d)
Variable annuity
Non-variable annuity
Weighted average total:note (b)
New business
In force
US 10-year treasury bond rate at end of year
Pre-tax expected long-term nominal rate of return for US equities
Equity risk premium
Expected long-term rate of infl ation
* Including the proportion of variable annuity business invested in the general account.
† Grading up linearly by 25 basis points to a long-term assumption over fi ve years.
31 Dec 2012 %
31 Dec 2011 %
1.4†
1.1†
1.75†
1.35†
1.25
6.5
4.0
6.3
5.6
1.8
5.8
4.0
2.5
1.75†
1.75†
2.25
2.25
1.0
6.7
4.6
6.5
6.0
1.9
5.9
4.0
2.0
Notes
(a)
The assumed new business spread margins shown above are the rates at inception. For fi xed annuity business (including the proportion of variable annuity
business invested in the general account) in both years the assumed spread margin grades up linearly by 25 basis points to the long-term assumption over
fi ve years. In 2012, for fi xed index annuity business the assumed spread margin also grades up linearly by 25 basis points to the long-term assumption over
fi ve years. For fi xed index annuity business in 2011 and institutional business in both years the assumption applies from inception (ie no grading).
(b) The weighted average risk discount rates refl ect the mix of business between variable annuity and non-variable annuity business. The decrease in the
(c)
weighted average risk discount rates from 2011 to 2012 primarily refl ects the decrease in the US 10-year treasury bond rate of 10 basis points together with
the eff ect of the decrease in additional allowance for credit risk (as described in note (d) below).
Credit risk treatment
The projected cash fl ows incorporate the expected long-term spread between the earned rate and the rate credited to policyholders. The projected earned
rates refl ect book value yields which are adjusted over time to refl ect projected reinvestment rates. Positive net cash fl ows 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 yield also refl ects an allowance for a risk margin
reserve which for 2012 is 28 basis points (2011: 27 basis points) for long-term defaults (as described in note 1(b)(iii)), which represents the allowance as at the
valuation date applied in the cash fl ow projections of the value of the in-force business.
In the event that long-term default levels are higher, then unlike for UK annuity business where policyholder benefi ts are not changeable, Jackson has
(d)
some discretion to adjust crediting rates, subject to contract guarantee levels and general market competition considerations.
For US operations, the risk discount rates shown above include an additional allowance for a combination of credit risk premium and short-term downgrade
and default allowance for general account business of 150 basis points (2011: 200 basis points) and for variable annuity business of 30 basis points
(2011: 40 basis points) to refl ect the fact that a proportion of the variable annuity business is allocated to the general account (as described in note 1(b)(iii)).
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358
Financial statements Prudential plc Annual Report 2012
Notes on the EEV basis results continued
17 Assumptions continued
(iii) UK insurance operations
Shareholder-backed annuity business:note (d)
Risk discount rate:
New businessnote (a)
In forcenote (b)
Pre-tax expected long-term nominal rate of return for shareholder-backed annuity business:
New business
In forcenote (b)
Other business:note (d)
Risk discount rate:note (c)
New business
In force
Equity risk premium
Pre-tax expected long-term nominal rates of investment return:
UK equities
Overseas equities
Property
Gilts
Corporate bonds
Expected long-term rate of infl ation
Post-tax expected long-term nominal rate of return for the PAC with-profi ts fund:
Pension business (where no tax applies)
Life business
31 Dec 2012 %
31 Dec 2011 %
6.9
7.95
4.2
3.9
5.2
5.6
4.0
7.7
8.6
4.85
4.4
5.3
5.65
4.0
6.3
5.8 to 9.6
5.1
2.3
3.9
2.9
6.5
5.9 to 9.9
5.2
2.5
4.0
3.0
5.0
4.35
5.1
4.4
Notes
(a)
(b)
(c)
The new business risk discount rate for shareholder-backed annuity business incorporates an allowance for best estimate defaults and additional credit risk
provisions, appropriate to the new business assets, over the projected lifetime of this business. These additional provisions comprise of a credit risk
premium, which is derived from Moody’s data from 1970 to 2009, an allowance for a 1 notch downgrade of the portfolio subject to credit risk and an
allowance for short-term defaults.
For shareholder-backed annuity business, the movements in the pre-tax long-term nominal rates of return and the risk discount rates for in-force business
mainly refl ect the eff ect of changes in asset yields.
The risk discount rates for new business and business in force for UK insurance operations other than shareholder-backed annuities refl ect weighted rates
based on the type of business.
(d) Credit spread treatment
For with-profi ts business, the embedded value refl ects the discounted value of future shareholder transfers. These transfers are directly aff ected by the level
of projected rates of return on investments, including debt securities. The assumed earned rate for with-profi t holdings of corporate bonds is defi ned 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 defi ned as the risk-free rate plus a long-term risk premium.
For UK shareholder-backed annuity business, diff erent 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 aft er deducting an appropriate allowance for credit risk. For Prudential Retirement Income Limited, which has approximately 90 per cent of UK
shareholder-backed annuity business, the allowance for credit risk for the in-force business at 31 December 2012 is made up of:
(1)
15 basis points in respect of long-term expected defaults derived by applying Moody’s data from 1970 to 2009 and the defi nition of the credit rating used
is the second highest credit rating published by Moody’s, Standard and Poor’s and Fitch; and
50 basis points in respect of additional provisions which comprise a credit risk premium, which is derived from Moody’s data from 1970 to 2009, an
allowance for a 1 notch downgrade of the portfolio subject to credit risk and an allowance for short-term defaults.
The credit assumptions used and the residual liquidity premium element of the bond spread over swap rates is as follows:
(2)
New business*
Bond spread over swap rates
Total credit risk allowance†
Liquidity premium
In-force business
Bond spread over swap rates
Total credit risk allowance
Liquidity premium
31 December
2012
(bps)
31 December
2011
(bps)
150
35
115
161
65
96
139
35
104
201
66
135
* The new business liquidity premium is based on the weighted average of the point of sale liquidity premia.
† Specifi c assets are allocated to the new business for the period with the appropriate allowance for credit risk which was 35 basis points for 2012 and 2011.
The overall allowance for credit risk is prudent by comparison with historic rates of default and would be suffi cient to withstand a wide
range of extreme credit events over the expected lifetime of the annuity business.
Notes on the EEV basis results Prudential plc Annual Report 2012
359
Stochastic assumptions
The economic assumptions used for the stochastic calculations are consistent with those used for the deterministic calculations
described above. Assumptions specifi c to the stochastic calculations, such as the volatilities of asset returns, refl ect 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.
(iv) Asia operations
AAAAAAAAAAAAAAAAAAA The same asset return models as described for UK insurance operations below, appropriately calibrated, have been used for Asia
operations. 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 signifi cant investment asset;
AAAAAAAAAAAAAAAAAAA The stochastic cost of guarantees is primarily only of signifi cance for the Hong Kong, Korea, Malaysia and Singapore operations;
and
AAAAAAAAAAAAAAAAAAA The mean stochastic returns are consistent with the mean deterministic returns for each country. The expected volatility of equity
returns ranges from 18 per cent to 35 per cent, and the volatility of government bond yields ranges from 0.9 per cent to 2.3 per cent
(2011: 0.9 per cent to 2.4 per cent).
(v) US operations (Jackson)
AAAAAAAAAAAAAAAAAAA Interest rates are projected using a log-normal generator calibrated to historical US treasury yield curves;
AAAAAAAAAAAAAAAAAAA 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
AAAAAAAAAAAAAAAAAAA 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 ranges from 19 per cent to 32 per cent
for all periods throughout these results, depending on the risk class and the class of equity, and the standard deviation of interest
rates ranges from 2.2 per cent to 2.5 per cent (2011: 2.1 per cent to 2.4 per cent).
(vi) UK insurance operations
AAAAAAAAAAAAAAAAAAA Interest rates are projected using a two-factor model calibrated to the initial market yield curve;
AAAAAAAAAAAAAAAAAAA The risk premium on equity assets is assumed to follow a log-normal distribution;
AAAAAAAAAAAAAAAAAAA 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
AAAAAAAAAAAAAAAAAAA Property returns are modelled in a similar fashion to corporate bonds, namely as the return on a risk-free bond, plus a risk premium,
plus a process representative of the change in residual values and the change in value of the call option on rents.
Mean returns have been derived as the annualised arithmetic average return across all simulations and durations.
For each projection year, standard deviations have been calculated by taking the square root of the annualised variance of the
returns over all the simulations. These have been averaged over all durations in the projection. For equity and property, the standard
deviations relate to the total return on these assets. The standard deviations applied for both years are as follows:
Equities:
UK
Overseas
Property
31 Dec 2012 %
31 Dec 2011 %
20
18
15
20
18
15
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Financial statements Prudential plc Annual Report 2012
Notes on the EEV basis results continued
17 Assumptions continued
(vii) Demographic assumptions
Persistency, mortality and morbidity assumptions are based on an analysis of recent experience but also refl ect expected future
experience. Where relevant, when calculating the time value of fi nancial options and guarantees, policyholder withdrawal rates vary
in line with the emerging investment conditions according to management’s expectations.
(viii) 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 identifi ed and reported separately. For mature business, it is Prudential’s policy not to take credit for future
cost reduction programmes until the savings have been delivered. For businesses which are currently sub-scale (China, Malaysia
Takaful and Taiwan) and India (where the business model is being adapted in response to the regulatory changes introduced in recent
years), expense overruns are permitted provided these are short-lived.
For Asia operations, the expenses comprise costs borne directly and recharged costs from the Asia regional head offi ce, that are
attributable to covered business. The assumed future expenses for these operations also include projections of these future
recharges. Development expenses are charged as incurred.
Corporate expenditure comprises:
AAAAAAAAAAAAAAAA Expenditure for Group head offi ce, to the extent not allocated to the PAC with-profi ts funds, together with Solvency II
implementation and restructuring costs, which are charged to the EEV basis results as incurred; and
AAAAAAAAAAAAAAAA Expenditure of the Asia regional head offi ce that is not allocated to the covered business or asset management operations, and is
charged as incurred. These costs are primarily for corporate related activities and included within corporate expenditure.
(ix) Taxation and other legislation
Current taxation and other legislation have been assumed to continue unaltered except where changes have been announced and
substantively enacted in the year.
The sensitivity of the embedded value as at 31 December 2012 to the effect of the forthcoming change in the UK corporate tax
rates is shown in note 16(c).
Notes on the EEV basis results Prudential plc Annual Report 2012
361
18 New business premiums and contributionsnote (i)
Group insurance operations
Asia
US
UK
Group total
Asia insurance operations
Hong Kong
Indonesia
Malaysia
Philippines
Singapore
Thailand
Vietnam
SE Asia operations including Hong Kong
Chinanote (ii)
Korea
Taiwan
India note (iii)
Total Asia operations
US insurance operations
Fixed annuities
Fixed index annuities
Life
Variable annuities
Wholesale
Total US insurance operations
UK and Europe insurance operations
Direct and partnership annuities
Intermediated annuities
Internal vesting annuities
Total individual annuities
Corporate pensions
Onshore bonds
Other products
Wholesale
Single
Regular
Annual premium and
contribution
equivalents (APE)
Present value of new
business premiums
(PVNBP)
2012 £m 2011 £m 2012 £m 2011 £m 2012 £m 2011 £m 2012 £m 2011 £m
1,568
14,504
6,286
1,456
12,562
4,871
1,740
12
207
1,514
19
259
1,897
1,462
836
1,660
1,275
746
10,544
14,600
7,311
8,910
12,720
6,111
22,358
18,889
1,959
1,792
4,195
3,681
32,455
27,741
157
359
98
172
399
12
1
1,198
37
94
172
67
180
250
79
95
371
11
1
987
46
71
217
135
380
410
208
28
261
36
44
313
338
215
20
198
26
42
396
446
218
45
301
37
45
331
363
223
30
235
27
42
1,367
53
86
138
96
1,152
54
94
126
88
1,488
56
95
156
102
1,251
59
101
148
101
2,316
2,097
1,388
254
2,314
140
159
8,668
277
438
723
438
2,023
1,435
1,225
153
1,855
102
143
6,936
294
542
672
466
1,568
1,456
1,740
1,514
1,897
1,660
10,544
8,910
581
1,094
6
12,445
378
472
934
10
10,909
237
14,504
12,562
297
653
1,456
2,406
303
2,275
894
408
328
241
1,223
1,792
184
1,779
780
336
–
–
12
–
–
12
–
–
–
–
159
–
48
–
207
–
–
19
–
–
19
–
–
–
–
215
–
44
–
259
58
109
12
1,245
38
47
93
20
1,091
24
581
1,094
102
12,445
378
472
934
168
10,909
237
1,462
1,275
14,600
12,720
30
65
146
241
189
228
137
41
836
33
24
122
179
233
178
122
34
297
653
1,456
2,406
1,045
2,277
1,175
408
328
241
1,223
1,792
1,224
1,781
978
336
746
7,311
6,111
Total UK and Europe insurance operations
6,286
4,871
Group total
22,358
18,889
1,959
1,792
4,195
3,681
32,455
27,741
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 profi ts for shareholders. The amounts shown are not, and not intended to be, refl ective of premium income recorded in the IFRS income statement.
(ii) New business in China is included at Prudential’s 50 per cent interest in the China life operation.
(iii) New business in India is included at Prudential’s 26 per cent interest in the India life operation.
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Financial statements Prudential plc Annual Report 2012
Notes on the EEV basis results continued
19 Other developments
Acquisition of Thanachart Life Assurance Company Limited
On 5 November 2012, Prudential plc, through its subsidiary Prudential Life Assurance (Thailand) Public Company Limited (Prudential
Thailand) entered into an agreement to acquire 100 per cent of Thanachart Life Assurance Company Limited (Thanachart Life),
a wholly-owned life insurance subsidiary of Thanachart Bank Public Company limited (Thanachart Bank). The consideration for
Thanachart Life is THB 17.5 billion (£352 million at the year end exchange rate) settled in cash on completion, with a further payment
of THB 0.5 billion (£10 million) payable 12 months after completion, subject to a post-completion adjustment to refl ect the net asset
value as at the completion date. The transaction is subject to regulatory approval and is expected to close in the fi rst half of 2013.
Upon completion of the transaction, Thanachart Life will become a wholly-owned subsidiary of Prudential Thailand.
As part of the deal, Prudential Thailand and Thanachart Bank have entered into an agreement to establish an exclusive 15-year
partnership to develop jointly their bancassurance business in Thailand. This transaction builds on Prudential’s strategy of focusing
on the highly attractive markets of South-east Asia and is in line with the Group’s multichannel distribution strategy.
Notes on the EEV basis results/Statement of directors’ responsibilities Prudential plc Annual Report 2012
363
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:
AAAAAAAAAAAAAAAAAAA Prepared the supplementary information in accordance with
the EEV Principles;
AAAAAAAAAAAAAAAAAAA Identifi ed and described the business covered by the EVM;
AAAAAAAAAAAAAAAAAAA Applied the EVM consistently to the covered business;
AAAAAAAAAAAAAAAAAAA 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;
AAAAAAAAAAAAAAAAAAA Made estimates that are reasonable and consistent; and
AAAAAAAAAAAAAAAAAAA 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 fi nancial statements.
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Financial statements Prudential plc Annual Report 2012
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 2012 set out on pages 326 to 362.
The fi nancial 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 331 to 336 and 356 to 360
respectively. The supplementary information should be read
in conjunction with the Group fi nancial statements which are
on pages 147 to 314.
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 363, 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 in accordance with International Standards on
Auditing (UK and Ireland). Those standards require us to comply
with the Auditing Practices Board’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 suffi cient 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; the
reasonableness of signifi cant accounting estimates made by
the directors; and the overall presentation of the supplementary
information. In addition, we read all the fi nancial and non-
fi nancial information in the annual report and accounts to identify
material inconsistencies with the audited supplementary
information. If we become aware of any apparent material
misstatements or inconsistencies we consider the implications
for our report.
Opinion on supplementary information
In our opinion, the EEV basis supplementary information of the
Company for the year ended 31 December 2012 has been
properly prepared, in all material respects, in accordance with the
EEV Principles using the methodology and assumptions set out
on pages 331 to 336 and 356 to 360 respectively.
Rees Aronson
for and on behalf of KPMG Audit Plc
Chartered Accountants
London
12 March 2013
Independent auditor’s report/ Additional unaudited fi nancial information Prudential plc Annual Report 2012
365
Index to the additional unaudited fi nancial information
I.
366
II.
369
374
375
I II.
376
378
Selected historical fi nancial information of Prudential
Selected historical fi nancial information of Prudential
IFRS profi t and loss information
a
Analysis of long-term insurance business pre-tax IFRS
operating profi t based on longer -term investment returns
by driver
Asia operations – analysis of IFRS operating profi t by
territory
Analysis of asset management operating profi t based on
longer-term investment return
b
c
Other information
a
b
Funds under management
Reconciliation of expected transfer of value of in-force
(VIF) and required capital business to free surplus
Option schemes
382
c
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366
Financial statements Prudential plc Annual Report 2012
Additional unaudited fi nancial information
I: Selected historical fi nancial information of Prudential
The following table sets forth Prudential’s selected consolidated fi nancial data for the periods indicated. Certain data is derived from
Prudential’s audited consolidated fi nancial 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 fi nancial 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
Benefi ts and claims and movement in unallocated surplus
of with-profi ts funds, net of reinsurance
Acquisition costs and other expenditure
Finance costs: interest on core structural borrowings
of shareholder-fi nanced operations
Loss on sale of Taiwan agency business
Year ended 31 December*
2012 £m
2011 £m
2010 £m
2009 £m
2008 £m
29,910
(506)
29,404
24,051
2,021
55,476
25,706
(429)
25,277
9,360
1,869
36,506
24,568
(357)
24,211
21,769
1,666
47,646
20,299
(323)
19,976
26,889
1,234
18,993
(204)
18,789
(30,202)
1,146
48,099
(10,267)
(45,953)
(6,055)
(29,289)
(5,120)
(40,518)
(4,989)
(41,195)
(4,756)
10,824
(2,457)
(280)
–
(286)
–
(257)
–
(209)
(559)
(172)
–
Total charges, net of reinsurance
(52,288)
(34,695)
(45,764)
(46,719)
8,195
Profi t (loss) before tax (being tax attributable to
shareholders’ and policyholders’ returns) note (1)
Tax (charge) credit attributable to policyholders’ returns
Profi t (loss) before tax attributable to shareholders
Tax (charge) credit attributable to shareholders’ returns
Profi t (loss) from continuing operations after tax
Discontinued operations (net of tax)
Profi t (loss) for the year
Based on profi t (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
3,188
(378)
2,810
(613)
2,197
–
2,197
1,811
17
1,828
(409)
1,419
–
1,419
1,882
(611)
1,271
40
1,311
–
1,311
1,380
(818)
(2,072)
1,624
562
10
572
(14)
558
(448)
58
(390)
–
(390)
86.5p
86.4p
55.8p
55.7p
51.8p
51.7p
22.3p
22.2p
(16.0)p
(16.0)p
(in pence) note (6)
25.64p
25.19p
20.17p
19.20p
18.29p
* The Group has adopted updated US GAAP requirements for deferred acquisition costs as an improvement to its accounting policy under IFRS 4 for those
operations of the Group which measure insurance assets and liabilities substantially by reference to US GAAP principles. Accordingly, the 2008 to 2011
comparative results have been adjusted from those previously published for the retrospective application of the improvement as if the new accounting policy
had always applied.
Additional unaudited fi nancial information Prudential plc Annual Report 2012
367
Supplementary IFRS income statement data
Operating profi t based on longer-term investment returns note (2)
Short-term fl uctuations in investment returns
Year ended 31 December*
2012 £m
2011 £m
2010 £m
2009 £m
2008 £m
2,533
2,027
1,826
1,428
1,248
on shareholder-backed business
204
(220)
Shareholders’ share of actuarial and other gains and losses
on defi ned benefi t pension schemes
Costs of terminated AIA transaction
Gain on dilution of Group's holdings
Amortisation of acquisition accounting adjustments arising on
the purchase of REALIC
Loss on sale and results of Taiwan agency business
50
–
42
(19)
–
21
–
–
–
–
(198)
(10)
(377)
30
–
–
(171)
(1,684)
(74)
–
–
–
(621)
(13)
–
–
–
1
Profi t (loss) from continuing operations before tax
attributable to shareholders note (2)
Operating earnings per share (refl ecting operating profi t
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 (refl ecting operating profi t
based on longer-term investment returns after related
tax and non-controlling interests and including 2010
exceptional tax credit) (in pence)
2,810
1,828
1,271
562
(448)
76.8p
62.8p
59.0p
44.0p
39.0p
76.8p
62.8p
65.3p
44.0p
39.0p
* The Group has adopted updated US GAAP requirements for deferred acquisition costs as an improvement to its accounting policy under IFRS 4 for those
operations of the Group which measure insurance assets and liabilities substantially by reference to US GAAP principles. Accordingly, the 2008 to 2011
comparative results have been adjusted from those previously published for the retrospective application of the improvement as if the new accounting policy
had always applied.
Supplementary EEV income statement data
Operating profi t based on longer-term investment returns note (2)
Short-term fl uctuations 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 defi ned benefi t pension schemes
Effect of changes in economic assumptions
Costs of terminated AIA transaction
Gain on dilution of Group's holdings
Gain on acquisition of REALIC
Profi t on sale and results of Taiwan agency business
Profi t (loss) from continuing operations before tax
attributable to shareholders
Operating earnings per share (refl ecting operating profi t
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 (refl ecting operating profi t
based on longer-term investment returns after related
tax and non-controlling interests and including 2010
exceptional tax credit) (in pence)
Year ended 31 December
2012 £m
2011 £m
2010 £m
2009 £m
2008 £m
4,321
3,978
3,696
3,090
2,865
538
(380)
62
(16)
–
42
453
–
(907)
(14)
23
(158)
–
–
–
–
(30)
(164)
(11)
(10)
(377)
3
–
–
351
(795)
(84)
(910)
–
–
–
91
(4,967)
656
(14)
(398)
–
–
–
(248)
5,020
2,922
3,107
1,743
(2,106)
125.0p
115.7p
106.9p
88.8p
85.1p
125.0p
115.7p
113.2p
88.8p
85.1p
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368
Financial statements Prudential plc Annual Report 2012
Additional unaudited fi nancial information continued
I: Selected historical fi nancial information of Prudential continued
New business data
New business excluding Japan note (3)
Annual premium equivalent (APE) sales:
Asia note (3)
US
UK
Total APE sales
EEV new business profi t (NBP)
NBP margin (% APE)
Statement of fi nancial position data
Year ended 31 December
2012 £m
2011 £m
2010 £m
2009 £m
2008 £m
1,897
1,462
836
4,195
2,452
58%
1,660
1,275
746
3,681
2,151
58%
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%
As of and for the year ended 31 December*
2012 £m
2011 £m
2010 £m
2009 £m
2008 £m
Total assets
Total policyholder liabilities and unallocated surplus
of with-profi ts funds
Core structural borrowings of shareholder-fi nanced
operations
Total liabilities
Total equity
310,253
272,745
260,040
227,103
214,858
271,363
236,290
224,980
196,417
182,391
3,554
299,889
10,364
3,611
264,138
8,607
3,676
252,475
7,565
3,394
221,230
5,873
2,958
210,193
4,665
* The Group has adopted updated US GAAP requirements for deferred acquisition costs as an improvement to its accounting policy under IFRS 4 for those
operations of the Group which measure insurance assets and liabilities substantially by reference to US GAAP principles. Accordingly, the 2008 to 2011
comparative results have been adjusted from those previously published for the retrospective application of the improvement as if the new accounting policy
had always applied.
Other data
As of and for the year ended 31 December
2012 £bn
2011 £bn
2010 £bn
2009 £bn
2008 £bn
Funds under management note (4)
EEV shareholders’ equity, excluding non-controlling interests
Insurance Groups Directive capital surplus (as adjusted) note (5)
405
22.4
5.1
351
19.6
4.0
340
18.2
4.3
290
15.3
3.4
249
15.0
1.5
Notes
1
2
3
4
5
This measure is the formal profi t (loss) before tax measure under IFRS but is not the result attributable to shareholders.
Operating profi ts are determined on the basis of including longer-term investment returns. EEV and IFRS operating profi ts are stated aft er excluding the
eff ect of short-term fl uctuations in investment returns against long-term assumptions, the shareholders’ share of actuarial and other gains and losses on
defi ned benefi t pension schemes, gain on dilution of the Group’s holdings and in 2010 costs associated with the terminated AIA transaction. In addition, for
EEV basis results, operating profi t excludes the eff ect of changes in economic assumptions, the market value movement on core borrowings and in 2012, the
gain arising on the acquisition of REALIC. Separately, on the IFRS basis, operating profi t also excludes amortisation of accounting adjustments on the
acquisition of REALIC.
Asia comparative APE new business sales prior to 2011 exclude the Japanese insurance operations, which ceased writing new business from 15 February 2010.
Funds under management comprise funds of the Group held in the statement of fi nancial position and external funds that are managed by Prudential asset
management operations.
The surpluses shown are before allowing for the fi nal dividends for each year, which are paid in the following year. The 2012 surplus is estimated.
Additional unaudited fi nancial information Prudential plc Annual Report 2012
369
II(a): Analysis of long-term insurance business pre-tax IFRS operating profi t based on longer-term investment returns
by driver
This classifi es the Group’s pre-tax operating earnings from long-term insurance operations into the underlying drivers of those profi ts,
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 operating investment return on shareholder net assets,
which has been separately disclosed as expected return on shareholder assets ;
ii
Fee income represents profi ts 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-profi ts results represents the shareholders’ transfer from the with-profi ts fund in the period ;
iv Insurance margin primarily represents profi ts derived from the insurance risks of mortality, morbidity and persistency ;
v
Margin on revenues primarily represents amounts deducted from premiums to cover acquisition costs and administration
expenses ;
vi 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 profi t for insurance
as well as items that are more appropriately included in other source of earnings lines (eg investment expenses are netted against
investment income as part of spread income or fee income as appropriate) ; and
vii DAC adjustments comprises DAC amortisation for the period, excluding amounts related to short-term fl uctuations, net of costs
deferred in respect of new business.
Analysis of pre-tax IFRS operating profi t by source
Spread income
Fee income
With-profi ts result
Insurance margin
Margin on revenues
Expenses:
Acquisition costs
Administration expenses
DAC adjustments
Expected return on shareholder assets
Gain on China Life (Taiwan) shares
Long-term business operating profi t
Asset management operating profi t
GI commission
Other income and expenditu re*
Total operating profi t based on longer-term investment returns
* Including restructuring and Solvency II implementation costs.
Asia
106
141
39
594
1,453
(903)
(583)
(28)
43
51
913
75
–
–
988
2012 £m
UK
Unallocated
US
702
875
–
399
–
(972)
(537)
442
55
–
964
39
–
–
266
61
272
39
216
(122)
(128)
(8)
107
–
703
371
33
–
1,003
1,107
–
–
–
–
–
–
–
–
–
–
–
–
–
(565)
(565)
Total
1,074
1,077
311
1,032
1,669
(1,997)
(1,248)
406
205
51
2,580
485
33
(565)
2,533
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370
Financial statements Prudential plc Annual Report 2012
Additional unaudited fi nancial information continued
II(a): Analysis of long-term insurance business pre-tax IFRS operating profi t based on longer-term investment returns
by driver continued
Spread income
Fee income
With-profi ts result
Insurance margin
Margin on revenues
Expenses:
Acquisition costs
Administration expenses
DAC adjustment s*
Expected return on shareholder assets
Long-term business operating profi t
Asset management operating profi t
GI commission
RPI to CPI infl ation measure change on defi ned benefi t schemes
Other income and expenditur e†
Total operating profi t based on longer-term investment returns
Asia
88
131
38
477
1,199
(766)
(503)
14
26
704
80
–
–
–
784
2011 £m
UK
Unallocated
247
59
293
27
226
(127)
(128)
(5)
91
683
357
40
–
–
1,080
–
–
–
–
–
–
–
–
–
–
–
–
42
(554)
(512)
US
730
680
–
232
–
(890)
(412)
228
83
651
24
–
–
–
675
Total
1,065
870
331
736
1,425
(1,783)
(1,043)
237
200
2,038
461
40
42
(554)
2,027
* DAC adjustments have been adjusted for the retrospective application of the accounting policy change described in note A5 of the IFRS fi nancial statements.
† Including restructuring and Solvency II implementation costs.
Margin analysis of long-term insurance business
The following analysis expresses certain of the Group’s sources of operating profi t as a margin of policyholder liabilities or other
suitable driver. Details of the Group’s average policyholder liability balances are given in D2(b), D3(b), D4(b).
Long-term business
Spread income
Fee income
With-profi ts result
Insurance margin
Margin on revenues
Expenses:
Acquisition costs note (i)
Administration expenses
DAC adjustments note (ii)
Expected return on shareholder assets
Gain on China Life (Taiwan) shares
Operating profi t
2012
Average
liability
note (iv)
£m
62,174
78,807
95,681
Margin
note (iii)
bps
173
137
33
4,195
143,321
(48)%
(87)
Profi t
£m
1,074
1,077
311
1,032
1,669
(1,997)
(1,248)
406
205
51
2,580
Profi t
£m
1,065
870
331
736
1,425
(1,783)
(1,043)
237
200
–
2,038
2011
Average
liability
note (iv)
£m
57,417
68,298
93,056
Margin
note (iii)
bps
185
127
36
3,681
125,715
(48)%
(83)
Additional unaudited fi nancial information Prudential plc Annual Report 2012
371
Long-term business
Spread income
Fee income
With-profi ts result
Insurance margin
Margin on revenues
Expenses:
Acquisition costs note (i)
Administration expenses
DAC adjustments note (ii)
Expected return on shareholder assets
Gain on China Life (Taiwan) shares
Operating profi t
2012
Average
liability
£m
6,720
13,022
12,990
Asia
Margin
note (iii)
bps
158
108
30
1,897
19,742
(48)%
(295)
Profi t
£m
106
141
39
594
1,453
(903)
(583)
(28)
43
51
913
2011
Average
liability
£m
5,623
12,370
11,775
Margin
note (iii)
bps
157
106
32
1,660
17,993
(46)%
(280)
Profi t
£m
88
131
38
477
1,199
(766)
(503)
14
26
–
704
Notes
(i)
The ratio for acquisition costs is calculated as a percentage of APE including with-profi ts sales. Acquisition costs include only those relating to shareholders.
(ii) DAC adjustments have been adjusted for the retrospective application of the accounting policy change described in note A5 of the IFRS fi nancial statements.
(iii) Margin represents the operating return earned in the year as a proportion of the relevant class of policyholder liabilities excluding unallocated surplus.
(iv) For UK and Asia, opening and closing policyholder liabilities have been used to derive an average balance for the year, as this is seen as a good proxy for
average balances throughout the year. The calculation of average liabilities for Jackson is derived from month-end balances throughout the year as
opposed to opening and closing balances only. Liabilities held in the general account for variable annuity living and death guaranteed benefi ts together
with other amounts on which no spread income is earned (eg REALIC liabilities) are excluded from the calculation of the average. In addition for REALIC,
which are included in the average liability to calculate the administration expense margin, the calculation excludes the liabilities reinsured to (and in
essence retained by) Swiss Re immediately prior to the acquisition by Jackson.
Analysis of Asia IFRS operating profi t drivers
AAAAAAAAAAAAAAAAAAA Spread income has increased by £18 million from £88 million in 2011 to £106 million in 2012, an increase of 20 per cent that
predominantly refl ects the growth of the Asian non-linked policyholder liabilities.
AAAAAAAAAAAAAAAAAAA Fee income has increased from £131 million in 2011 to £141 million in 2012, broadly in line with the increase in movement in
average unit-linked liabilities, following the recovery in equity markets in 2012.
AAAAAAAAAAAAAAAAAAA Insurance margin has increased by £117 million from £477 million in 2011 to £594 million in 2012 predominantly refl ecting
the continued growth of the in-force book, which contains a relatively high proportion of risk-based products. Insurance margin
includes non-recurring items of £48 million (2011: £38 million), refl ecting assumption changes and other items that are not
expected to reoccur in the future.
AAAAAAAAAAAAAAAAAAA Margin on revenues has increased by £254 million from £1,199 million in 2011 to £1,453 million in 2012 primarily refl ecting
the on-going growth in the size of the portfolio and higher premium income recognised in the year.
AAAAAAAAAAAAAAAAAAA Acquisition costs have increased by 18 per cent from £766 million in 2011 to £903 million in 2012, compared to the 14 per cent
increase in sales, resulting in a marginal increase in the acquisition cost ratio. The analysis above has been prepared applying
shareholder acquisition costs as a proportion of total APE. If with-profi ts sales were excluded from the denominator the acquisition
cost ratio would become 63 per cent (2011: 59 per cent) refl ecting changes to product and country mix.
AAAAAAAAAAAAAAAAAAA Administration expenses have increased from £503 million in 2011 to £583 million in 2012 as the business continues to expand.
Expressed as a ratio of policyholder liabilities, administration costs have increased from 280 basis points to 295 basis points due
to changes in business mix.
AAAAAAAAAAAAAAAAAAA Expected return on shareholder assets has increased from £26 million in 2011 to £43 million in 2012 primarily due to higher
income from increased shareholder assets.
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372
Financial statements Prudential plc Annual Report 2012
Additional unaudited fi nancial information continued
II(a): Analysis of long-term insurance business pre-tax IFRS operating profi t based on longer-term investment returns
by driver continued
Long-term business
Spread income
Fee income
Insurance margin
Expenses:
Acquisition costs note (i)
Administration expenses
DAC adjustments note (ii)
Expected return on shareholder assets
Operating profi t
Profi t
£m
702
875
399
(972)
(537)
442
55
964
2012
Average
liability
note (iii)
£m
29,416
44,046
US
Margin
Profi t
bps
239
199
1,462
75,802
(66)%
(71)
£m
730
680
232
(890)
(412)
228
83
651
2011
Average
liability
note (iii)
£m
28,274
34,452
Margin
bps
258
197
1,275
62,726
(70)%
(66)
Notes
(i)
(ii) DAC adjustments have been adjusted for the retrospective application of the accounting policy change described in note A5 of the IFRS fi nancial
The ratio for acquisition costs is calculated as a percentage of APE.
statements.
(iii) The calculation of average liabilities for Jackson is derived from month-end balances throughout the year as opposed to opening and closing balances only.
Liabilities held in the general account for variable annuity living and death guaranteed benefi ts together with other amounts on which no spread income is
earned (eg REALIC liabilities) are excluded from the calculation of the average. In addition for REALIC, which is included in the average liability to calculate
the administration expense margin, the calculation excludes the liabilities reinsured to (and in essence retained by) Swiss Re immediately prior to the
acquisition by Jackson.
The 2010 balances have been amended for consistency albeit impacts are minimal.
Analysis of US operating profi t drivers
AAAAAAAAAAAAAAAA Spread income was £702 million in 2012, down £28 million from the £730 million earned in 2011. 2012 benefi ted by £156 million
from the effect of transactions entered into during 2011 and 2010 to more closely match the overall asset and liability duration
(2011: £113 million). Excluding this effect, the spread margin would have been 186 basis points (2011: 218 basis points).
The reported spread margin decreased as a result of downward pressure on yields caused by the low interest rate environment,
the effect of which was only partly mitigated by reductions in crediting rates.
AAAAAAAAAAAAAAAA Fee income has increased by 29 per cent to £875 million in 2012, compared to £680 million in 2011 as a result of the growth in
separate account balances primarily due to positive net fl ows from variable annuity business. Fee income margin has increased
slightly to 199 basis points (2011: 197 basis points) primarily refl ecting changes to business mix.
AAAAAAAAAAAAAAAA Insurance margin represents operating profi ts from insurance risks, including variable annuity guarantees and other sundry items.
Positive net fl ows into variable annuity business with life contingent and other guarantee fees, coupled with the benefi t in the
period of repricing actions, have increased the insurance margin from £232 million in 2011 to £399 million in 2012. This includes
the benefi ts of four months’ profi ts amounting to £87 million from the life business of REALIC, following its acquisition by Jackson
in September 2012.
AAAAAAAAAAAAAAAA Acquisition costs, which are commissions and general expenses incurred to acquire new business, have increased in absolute
terms compared to 2011 due largely to an increase in sales volumes. However, acquisition costs as a percentage of APE have
decreased to 66 per cent for 2012, compared to 70 per cent in 2011, due to the continued increase in producers selecting asset
based commission which is treated as an administrative expense in this analysis, rather than front end commissions.
AAAAAAAAAAAAAAAA Administration expenses increased to £537 million in 2012 compared to £412 million in 2011, primarily as a result of higher asset
based commissions paid on the larger 2012 separate account balance. Asset based commissions are paid upon policy anniversary
dates and are treated as an administration expense in this analysis as opposed to a cost of acquisition and are offset by higher fee
income. The administration expense margin was higher at 71 basis points (2011: 66 basis points). Excluding these trail commission
amounts, the resulting administration expense margin would be 48 basis points (2011: 46 basis points ). The increase arises
as a result of the effect of the REALIC acquisition on the administration expense margin together with the impact in 2012 of
non -recurring expenditures.
AAAAAAAAAAAAAAAA DAC adjustments increased to £442 million in 2012 compared to £228 in 2011. 2011 was lowered by £190 million of accelerated
DAC amortisation as a result of the reversal of the benefi t received in 2008 from the mean reversion formula. Market movements in
2012 resulted in deceleration of DAC amortisation of £56 million which was offset by higher amortisation as a result of higher gross
profi ts. Following the adoption of the updated US GAAP principles for deferred acquisition costs, as described in note A5 of the
IFRS fi nancial statements, certain acquisition costs are no longer fully deferrable resulting in new business strain of £174 million for
2012 (2011: £156 million).
Additional unaudited fi nancial information Prudential plc Annual Report 2012
373
Analysis of pre-tax operating profi t before and aft er acquisition costs and DAC adjustments
Total operating profi t before acquisition costs
and DAC adjustments
Less new business strain
Other DAC adjustments – amortisation of
previously deferred acquisition costs
Normal note
Decelerated (accelerated)
Total
Long-term business
Spread income
Fee income
With-profi ts result
Insurance margin
Margin on revenues
Expenses:
Acquisition costs note
Administration expenses
DAC adjustments
Expected return on shareholder assets
Operating profi t
Other
operating
profi ts
1,494
2012 £m
Acquisition costs
Incurred
Deferred
Total
Other
operating
profi ts
2011 £m
Acquisition costs
Incurred
Deferred
Total
(972)
798
1,494
(174)
1,313
(890)
734
(412)
56
(412)
56
1,494
(972)
442
964
1,313
(890)
(316)
(190)
228
1,313
(156)
(316)
(190)
651
Margin
bps
105
27
36
2011
Average
liability
£m
23,520
21,476
81,281
746
44,996
(17)%
(28)
2012
Average
liability
£m
26,038
21,739
82,691
UK
Margin
bps
102
28
33
836
47,777
(15)%
(27)
Profi t
£m
266
61
272
39
216
(122)
(128)
(8)
107
703
Profi t
£m
247
59
293
27
226
(127)
(128)
(5)
91
683
Note
The ratio for acquisition costs is calculated as a percentage of APE including with-profi ts sales. Acquisition costs include only those relating to shareholders.
Analysis of UK IFRS operating profi t drivers
AAAAAAAAAAAAAAAAAAA Spread income has increased from £247 million in 2011 to £266 million in 2012 principally due to increased new business profi ts
from higher annuity sales. The margin has fallen slightly from 105 basis points to 102 basis points.
AAAAAAAAAAAAAAAAAAA Fee income has increased in line with the growth in unit-linked liabilities. Expressed as an asset management charge it is equivalent
to 28 basis points (2011: 27 basis points).
AAAAAAAAAAAAAAAAAAA With-profi ts income has decreased by £21 million from £293 million in 2011 to £272 million in 2012 principally due to a 50 basis point
reduction in annual bonus rates. This has contributed to the reduction in the with-profi ts margin from 36 basis points in 2011 to
33 basis points in 2012.
AAAAAAAAAAAAAAAAAAA Insurance margin has increased by £12 million from £27 million in 2011 to £39 million in 2012, mainly due to increased profi ts from
our protection business.
AAAAAAAAAAAAAAAAAAA Margin on revenues represents premiums charges for expenses and other sundry net income received by the UK. 2012 income
was £216 million (2011: £226 million).
AAAAAAAAAAAAAAAAAAA Acquisition costs as a percentage of new business sales have improved from 17 per cent in 2011 to 15 per cent in 2012.
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-profi t sales in the year. Acquisition costs as a percentage of shareholder -backed new business sales
were 33 per cent for 2012 (2011: 33 per cent).
AAAAAAAAAAAAAAAAAAA Expected return on shareholder has increased from £91 million in 2011 to £107 million in 2012 principally due to higher IFRS
shareholders’ funds.
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374
Financial statements Prudential plc Annual Report 2012
Additional unaudited fi nancial information continued
II(b): Asia operations – analysis of IFRS operating profi t by territory
China
Hong Kong
India
Indonesia
Japan
Korea
Malaysia
Philippines
Singapore
Taiwan bancassurance business
Thailand
Vietnam
Other
Non-recurrent items: note (ii)
Gain on China Life (Taiwan) shares
Other non-recurrent items
Total insurance operations note (i)
Development expenses
Total long-term business operating profi t
Eastspring Investments
Total Asia operations
Notes
(i)
Analysis of operating profi t 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
Business in force
Non-recurrent items: note (ii)
Gain on China Life (Taiwan) shares
Other non-recurrent items
Total
2012 £m
2011* £m
19
88
54
260
(2)
16
120
15
206
18
7
25
(5)
51
48
920
(7)
913
75
988
11
69
47
212
2
17
104
5
167
2
4
30
1
–
38
709
(5)
704
80
784
2012 £m
2011* £m
(51)
872
51
48
920
(70)
741
–
38
709
The IFRS new business strain corresponds to approximately 3 per cent of new business APE premiums for 2012 (2011: approximately 4 per cent of new
business APE). The improvement is driven by a shift in overall sales mix to lower strain products and countries.
The strain refl ects the aggregate of the pre-tax regulatory basis strain to net worth aft er IFRS adjustments for deferral of acquisition costs and deferred
income where appropriate.
(ii) During 2012, the Group sold its 7.74 per cent stake in China Life (Taiwan) for £97 million crystallising a gain of £51 million. Other non-recurrent items of
£48 million in 2012 (2011: £38 million) represent a small number of items that are not anticipated to re occur in subsequent periods.
* The 2011 comparative results have been adjusted from those previously published for the retrospective application of the change in accounting policy described
in note A5.
Additional unaudited fi nancial information Prudential plc Annual Report 2012
375
II(c): Analysis of asset management operating profi t based on longer-term investment returns
Operating income before performance-related fees
Performance-related fees
Operating income*
Operating expense
Share of associate’s results
Operating profi t based on longer-term investment returns
2012 £m
M&G
note (i),(ii)
Eastspring
Investments
note (ii)
PruCap
US
Total
734
9
743
(436)
13
320
201
2
203
(128)
–
75
120
–
120
(69)
–
51
296
–
296
(257)
–
39
1,351
11
1,362
(890)
13
485
Average funds under management (FUM), including 49.99%
proportional share of PPM South Africa†
Average funds under management (FUM), excluding PPM
South Africa†
Margin based on operating income†
Cost/income ratio‡
£209.0 bn
£205.1 bn
36 bps
59%
£55.0 bn
37 bps
64%
Operating income before performance-related fees
Performance-related fees
Operating income*
Operating expense
Share of associate’s results
Operating profi t based on longer-term investment returns
2011 £m
M&G
note (i),(ii)
Eastspring
Investments
note (ii)
PruCap
US
Total
666
13
679
(404)
26
301
196
6
202
(122)
–
80
122
–
122
(66)
–
56
249
–
249
(225)
–
24
1,233
19
1,252
(817)
26
461
Average funds under management (FUM), including 49.99%
proportional share of PPM South Africa†
Average funds under management (FUM), excluding PPM
South Africa†
Margin based on operating income†
Cost/income ratio‡
£195.1 bn
£190.9 bn
35 bps
61%
£51.4 bn
38 bps
62%
Notes
(i)
Following the divestment in the fi rst half of 2012 of M&G’s holding in PPM South Africa from 75 per cent to 49.99 per cent and its treatment from 2012 as an
associate, M&G’s operating income and expense no longer includes any element from PPM South Africa. In order to avoid period on period distortion, in the
table above the 2011 operating income, margin and cost/income ratio refl ect the retrospective application of this basis of presentation for the 2011 results.
(ii) M&G and Eastspring Investments can be further analysed as follows:
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376
Financial statements Prudential plc Annual Report 2012
Additional unaudited fi nancial information continued
II(c): Analysis of asset management operating profi t based on longer-term investment returns continued
2012
2011
2012
2011
M&G
Operating income*
Margin
of FUM†
bps
91
97
Institutional§
£m
297
270
Margin
of FUM†
bps
19
18
Eastspring Investments
Operating income*
Margin
of FUM†
bps
64
62
Institutional§
£m
83
76
Margin
of FUM†
bps
24
24
Retail
£m
438
396
Retail
£m
118
120
Total
£m
734
666
Total
£m
201
196
Margin
of FUM†
bps
36
35
Margin
of FUM†
bps
37
38
* Operating income is net of commissions. M&G’s operating income excludes any contribution from M&G’s associate, PPM South Africa.
† Margin represents operating income before performance related fees as a proportion of the related funds under management (FUM), excluding PPM South Africa.
2011 comparatives have been amended to be on a comparable basis. Monthly 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 represents cost as a percentage of operating income before performance related fees. In order to avoid period -on -period distortion, M&G’s
operating income and expense excludes any contribution from M&G’s associate, PPM South Africa.
§ Institutional includes internal funds.
III(a): Funds under management
i Summary
Business area:
Asia operations
US operations
UK operations
Internal funds under management
External funds note
Total funds under management
2012 £bn
2011 £bn
38.9
91.4
153.3
283.6
121.4
405.0
32.6
71.9
146.3
250.8
99.8
350.6
Note
External funds shown above for 2012 of £121.4 billion (2011: £99.8 billion) comprise £133.5 billion (2011: £111.2 billion) of funds managed by Eastspring Investments
and M&G (as shown in note (iii) below) less £12.1 billion (2011: £11.4 billion) that are classifi ed within internal funds .
Additional unaudited fi nancial information Prudential plc Annual Report 2012
377
ii Internal funds under management – analysis by business area
Investment propertiesnote
Equity securities
Debt securities
Loans and receivables
Other investments and deposits
Asia operations
US operations
UK operations
Total
2012
£bn
–
14.3
21.4
1.0
2.2
2011
£bn
–
12.0
17.7
1.2
1.7
2012
£bn
0.1
49.6
33.0
6.2
2.5
2011
£bn
0.1
38.1
27.0
4.1
2.6
2012
£bn
11.0
36.1
85.7
4.6
15.9
2011
£bn
10.9
37.3
79.8
4.4
13.9
2012
£bn
11.1
100.0
140.1
11.8
20.6
2011
£bn
11.0
87.4
124.5
9.7
18.2
Total
38.9
32.6
91.4
71.9
153.3
146.3
283.6
250.8
Note
As included in the investments section of the consolidated statement of fi nancial position at 31 December 2012 except for £0.2 billion (2011: £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 fi nancial
position captions.
iii Investment products – funds under management
Eastspring Investments
M&G
Group total
Eastspring Investments
M&G
Group total
1 Jan
2012
19,221
91,948
Market
gross
infl ows
60,498
36,463
2012 £m
Redemptions
Market
exchange
translation
and other
movements
31 Dec
2012
(59,098)
(19,582)
1,013
3,039
21,634
111,868
111,169
96,961
(78,680)
4,052
133,502
1 Jan
2011
22,048
89,326
Market
gross
infl ows
63,726
25,981
2011 £m
Redemptions
Market
exchange
translation
and other
movements
(63,605)
(21,596)
(2,948)
(1,763)
31 Dec
2011
19,221
91,948
111,374
89,707
(85,201)
(4,711)
111,169
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378
Financial statements Prudential plc Annual Report 2012
Additional unaudited fi nancial information continued
III(b): Reconciliation of expected transfer of value of in-force (VIF) and required capital business to free surplus
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 the next 40 years. Although a small amount (less than 2 per cent) of the Group’s embedded value
emerges after this date, analysis of cash fl ows emerging in the years shown in the tables is considered most meaningful. The modelled
cash fl ows 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 2012, the tables also present the expected future free surplus to be generated from the investment made in new
business during 2012 over the same 40 year period.
Expected transfer of value of in-force (VIF) and required capital business to free surplus
Undiscounted expected generation from
all in-force business at 31 December*
Undiscounted expected generation from
2012 long-term new business written*
2012 £m
Expected period of emergence
Asia
US
UK
Total
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033 to 2037
2038 to 2042
2043 to 2047
2048 to 2052
719
761
724
686
654
628
617
610
598
585
557
538
525
521
510
506
492
478
453
437
1,911
1,554
1,251
926
785
572
600
557
587
551
514
524
445
390
353
298
229
204
179
154
134
126
106
117
145
(21)
–
–
446
483
464
444
430
415
401
389
380
372
365
356
349
343
330
317
309
299
289
281
1,170
916
514
300
1,950
1,816
1,788
1,687
1,671
1,594
1,532
1,523
1,423
1,347
1,275
1,192
1,103
1,068
1,019
977
935
903
848
835
3,226
2,449
1,765
1,226
Asia
105
129
129
99
98
86
91
94
89
95
85
85
80
82
107
80
77
76
71
82
307
234
187
141
US
269
108
113
37
115
77
64
115
95
78
73
56
45
39
33
27
22
18
14
14
19
(25)
–
–
UK
27
23
23
20
23
22
18
18
18
18
17
17
17
17
17
17
17
17
17
17
77
78
51
36
Total
401
260
265
156
236
185
173
227
202
191
175
158
142
138
157
124
116
111
102
113
403
287
238
177
Total free surplus expected to emerge
in the next 40 years
17,241
7,549 10,362 35,152
2,709
1,406
622
4,737
* The analysis excludes amounts incorporated into VIF at 31 December 2012 where there is no defi nitive timeframe for when the payments will be made or receipts
received. In particular, it excludes the value of the shareholders’ interest in the estate. It also excludes any free surplus emerging aft er 2052.
The above amounts can be reconciled to the new business amounts as follows:
New business
Undiscounted expected free surplus generation for years 2013 to 2052
Less: discount effect
Discounted expected free surplus generation for years 2013 to 2052
Discounted expected free surplus generation for years 2052+
Less: free surplus investment in new business
Other items*
Post-tax EEV new business profi t
Tax
Pre-tax EEV new business profi t
2012 £m
Asia
US
2,709
(1,499)
1,210
41
(292)
23
982
284
1,266
1,406
(406)
1,000
–
(281)
(151)
568
305
873
UK
622
(348)
274
3
(45)
9
241
72
313
Total
4,737
(2,253)
2,484
44
(618)
(119)
1,791
661
2,452
* Other items represent the impact of the time value of options and guarantees on new business, foreign exchange eff ects and other non-modelled items. Foreign
exchange eff ects arise as EEV new business profi t amounts are translated at average exchange rates and the expected free surplus generation uses year end
closing rates.
Additional unaudited fi nancial information Prudential plc Annual Report 2012
379
The undiscounted expected free surplus generation from all in-force business at 31 December 2012 shown below can be reconciled to
the amount that was expected to be generated as at 31 December 2011 as follows:
Group
2011 expected free surplus generation for years
2012
£m
2013
£m
2014
£m
2015
£m
2016
£m
2017
£m
Other
£m
Total
£m
2012 to 2051
1,777
1,634
1,556
1,512
1,502
1,414
24,667
34,062
Less: amounts expected to be realised in the
current year
(1,777)
–
–
–
–
–
–
(1,777)
Add: expected free surplus to be generated in
year 2052*
Foreign exchange differences
New business
Acquisition of REALIC
Operating movements
Non-operating and other movements†
2012 expected free surplus generation for years
–
–
–
–
–
–
–
(45)
401
45
(2)
(83)
–
(42)
260
35
28
(21)
–
(41)
265
44
32
(24)
–
(42)
156
38
24
9
–
(38)
236
41
17
1
175
(594)
3,419
738
175
(802)
4,737
941
(2,165)
(2,184)
2013 to 2052
–
1,950
1,816
1,788
1,687
1,671
26,240
35,152
Asia
2011 expected free surplus generation for years
2012
£m
2013
£m
2014
£m
2015
£m
2016
£m
2017
£m
Other
£m
Total
£m
2012 to 2051
674
647
634
595
590
564
13,998
17,702
Less: amounts expected to be realised in the
current year
Add: expected free surplus to be generated in
year 2052*
Foreign exchange differences
New business
Operating movements
Non-operating and other movements
2012 expected free surplus generation for years
2013 to 2052
US
2011 expected free surplus generation for years
Less: amounts expected to be realised in the
current year
Add: expected free surplus to be generated in
year 2052*
Foreign exchange differences
New business
Acquisition of REALIC
Operating movements
Non-operating and other movements
2012 expected free surplus generation for years
2013 to 2052
(674)
–
–
–
–
(24)
105
(21)
12
–
(22)
129
–
20
–
(20)
129
9
11
–
–
(20)
99
–
17
–
–
(18)
98
(6)
16
–
(674)
135
(460)
2,149
135
(564)
2,709
(2,125)
(2,067)
719
761
724
686
654
13,697
17,241
2012
£m
2013
£m
2014
£m
2015
£m
2016
£m
2017
£m
Other
£m
Total
£m
(680)
–
–
–
–
(21)
269
45
(4)
11
–
(20)
108
35
7
(8)
–
(21)
113
44
14
(30)
–
–
(22)
37
38
20
–
–
–
(680)
–
(20)
115
41
18
(5)
–
(134)
764
738
–
(238)
1,406
941
84
107
785
572
600
557
587
4,448
7,549
–
–
–
–
–
–
–
–
–
–
–
–
–
2012 to 2051
680
485
450
480
484
438
2,996
6,013
* Excluding 2012 new business.
† Includes an adjustment of £102 million to the cashfl ows for which there is no defi nitive timeframe for their emergence and therefore which have been removed
from the cashfl ows presented at 31 December 2012.
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380
Financial statements Prudential plc Annual Report 2012
Additional unaudited fi nancial information continued
III(b): Reconciliation of expected transfer of value of in-force (VIF) and required capital business to free surplus continued
UK
2011 expected free surplus generation for years
2012
£m
2013
£m
2014
£m
2015
£m
2016
£m
2017
£m
Other
£m
Total
£m
2012 to 2051
423
502
472
437
428
412
7,673
10,347
Less: amounts expected to be realised in the
current year
Add: expected free surplus to be generated in
year 2052*
New business
Operating movements
Non-operating and other movements†
2012 expected free surplus generation for years
2013 to 2052
(423)
–
–
27
23
(106)
–
–
–
–
–
–
–
23
21
(33)
–
–
23
9
(5)
–
–
20
4
(8)
–
–
23
5
(10)
–
(423)
40
506
40
622
(124)
(224)
446
483
464
444
430
8,095
10,362
* Excluding 2012 new business.
† Includes an adjustment of £102 million to the cash fl ows for which there is no defi nitive timeframe for their emergence and therefore which have been removed
from the cash fl ows presented at 31 December 2012.
At 31 December 2012, the total free surplus expected to be generated over the next fi ve years (years 2013 to 2017 inclusive), using the
same assumptions and methodology as underpin our embedded value reporting was £8.9 billion, an increase of £1.3 billion from the
£7.6 billion expected over the same period at the end of 2011.
This increase primarily refl ects the new business written in 2012, which is expected to generate £1,318 million of free surplus over
the next fi ve years. Operating movements contributed positive £99 million. The acquisition of REALIC contributed positive expected
cash fl ows of £203 million over the next fi ve years. Non-operating and other items, including foreign exchange movements, reduced
expected free surplus generation for the next fi ve years by £326 million.
At 31 December 2012, the total free surplus expected to be generated on an undiscounted basis in the next 40 years is £35 billion,
up from the £34 billion expected at end of 2011. This is after allowing for adverse market movements in the period, with a £0.8 billion
reduction due to foreign exchange and negative market movements in Asia as a result of lower fund earned rates. A signifi cant
proportion of these market movements arise in Hong Kong refl ecting both the projected derisking of the asset portfolio for
participating business and lower local government bond yields (fall of 90 basis points) and Singapore where government bond yields
have fallen by 30 basis points. The overall growth in the undiscounted value of free surplus, notwithstanding these impacts, refl ects
both our ability to write new business on attractive economics and to manage the in-force book for value.
Actual underlying free surplus generated in 2012 from life business in-force at the end of 2011 was £2.3 billion inclusive of
£0.3 billion of changes in operating assumptions and experience variances. This compares with the expected 2012 realisation
at the end of 2011 of £1.8 million. This can be analysed further as follows:
Transfer to free surplus in 2012
Expected return on free assets
Changes in operating assumptions and experience variances
Underlying free surplus generated from in-force life business in 2012
2012 free surplus expected to be generated at 31 December 2011
Asia
£m
635
56
80
771
674
US
£m
777
40
219
1,036
680
UK
£m
511
–
(4)
507
423
Total
£m
1,923
96
295
2,314
1,777
Additional unaudited fi nancial information Prudential plc Annual Report 2012
381
The equivalent discounted amounts of the undiscounted totals shown previously are outlined below:
Expected period of emergence
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033 to 2037
2038 to 2042
2043 to 2047
2048 to 2052
Discounted expected generation from
all in-force business at 31 December
Discounted expected generation from
long-term 2012 new business written
2012 £m
Asia
687
679
604
537
480
434
401
375
345
318
282
255
232
215
197
198
181
167
153
141
545
359
240
153
US
766
526
520
455
456
404
352
344
277
230
210
168
124
106
90
75
64
59
50
53
77
33
–
–
UK
Total
418
426
385
346
315
284
258
234
213
196
180
164
150
138
124
110
100
91
81
74
246
133
47
19
1,871
1,631
1,509
1,338
1,251
1,122
1,011
953
835
744
672
587
506
459
411
383
345
317
284
268
868
525
287
172
Asia
101
113
106
76
69
57
56
55
48
48
40
37
32
30
36
28
26
23
21
22
77
49
33
27
US
260
98
96
30
87
55
44
74
58
45
39
27
21
17
14
10
8
6
5
5
5
(4)
–
–
UK
26
21
19
16
17
15
12
11
11
10
9
8
8
8
7
7
6
6
6
5
20
15
7
4
Total
387
232
221
122
173
127
112
140
117
103
88
72
61
55
57
45
40
35
32
32
102
60
40
31
Total discounted free surplus expected to emerge
in the next 40 years
8,178
5,439
4,732
18,349
1,210
1,000
274
2,484
The above amounts can be reconciled to the Group’s fi nancial statements as follows:
Discounted expected generation from all in-force business for years 2013 to 2052
Discounted expected generation from all in-force business for years after 2052
Discounted expected generation from all in-force business at 31 December 2012
Add: Free surplus of life operations held at 31 December 2012
Less: Time value of guarantees
Other non-modelled items* note 15
Total EEV for life operations
Total £m
18,349
242
18,591
2,957
(683)
1,401
22,266
* These relate to items where there is no defi nitive timeframe for when the payments will be made or receipts received 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 2012. In particular it excludes
the value of the shareholders’ interest in the estate.
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382
Financial statements Prudential plc Annual Report 2012
Additional unaudited fi nancial information continued
III(c): Option schemes
The Group maintains four share option schemes satisfi ed by the issue of new shares. UK-based executive directors are eligible
to participate in the UK savings-related share option scheme, and executives based in Asia 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 consolidated fi nancial 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:
AAAAAAAAAAAAAAAA UK savings-related share option scheme: 8 May 2013;
AAAAAAAAAAAAAAAA International savings-related share option scheme: 31 May 2021;
AAAAAAAAAAAAAAAA Prudential International Assurance sharesave plan: 3 August 2019; and
AAAAAAAAAAAAAAAA Prudential International savings-related share option scheme for non-employees 2012: 17 May 2022.
The weighted average share price of Prudential plc for the year ended 31 December 2012 was £7.69 (2011: £6.86).
Particulars of options granted to directors are included in the Directors’ Remuneration Report on page 113.
The closing price of the shares immediately before the date on which the options were granted during the current period was £8.22.
The following analyses show the movement in options for each of the option schemes for the year ended 31 December 2012.
UK Savings Related Share Option Scheme
Exercise period
Number of options
Exercise
price £
Beginning
End
Beginning
of period
Granted
Exercised
Cancelled
Forfeited
Lapsed
End of
period
3,852
3.43 01 Dec 2011 31 May 2012
8,528
3.87
01 Jun 2012 30 Nov 2012
9,072
4.07 01 Dec 2012 31 May 2013
7,322
01 Jun 2013 30 Nov 2013
5.65
11,029
4.75 01 Dec 2011 31 May 2012
13,325
4.75 01 Dec 2013 31 May 2014
2,865
01 Jun 2010 30 Nov 2010
5.72
7,191
01 Jun 2012 30 Nov 2012
5.72
503
5.72
01 Jun 2014 30 Nov 2014
17,264
5.52 01 Dec 2012 31 May 2013
1,668
5.52 01 Dec 2014 31 May 2015
27,099
01 Jun 2013 30 Nov 2013
5.51
1,544
01 Jun 2015 30 Nov 2015
5.51
40,617
4.38 01 Dec 2011 31 May 2012
47,353
4.38 01 Dec 2013 31 May 2014
11,371
4.38 01 Dec 2015 31 May 2016
01 Jun 2012 30 Nov 2012 2,767,654
2.88
01 Jun 2014 30 Nov 2014 1,789,848
2.88
178,968
2.88
01 Jun 2016 30 Nov 2016
224,295
4.25 01 Dec 2012 31 May 2013
90,865
4.25 01 Dec 2014 31 May 2015
271,969
4.61 01 Dec 2013 31 May 2014
134,304
4.61 01 Dec 2015 31 May 2016
485,420
4.66 01 Dec 2014 31 May 2015
197,637
4.66 01 Dec 2016 31 May 2017
6.29 01 Dec 2015 31 May 2016
6.29 01 Dec 2017 31 May 2018
(3,852)
–
(8,528)
–
(5,292)
–
–
–
(11,029)
–
–
–
–
–
(7,191)
–
–
–
(12,156)
–
–
–
(453)
–
–
–
(38,162)
–
(2,674)
–
–
(90)
– (2,738,947)
(27,164)
–
(352)
–
(173,784)
–
(2,027)
–
(1,408)
–
(1,569)
–
(2,373)
–
(15)
–
–
– 995,343
–
– 152,281
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(4,694)
(6,944)
(795)
(5,721)
–
(7,644)
(1,339)
(12,818)
(5,357)
(3,148)
(4,772)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(10,783)
(16,820)
–
(2,433)
(117)
(4,875)
(5,021)
(4,516)
(7,580)
(5,294)
–
–
–
–
–
–
–
(2,865)
–
–
–
–
(137)
–
(2,455)
(1,305)
(76)
(7,521)
–
–
3,780
7,322
–
13,325
–
–
503
5,108
1,668
26,509
1,544
–
43,374
11,205
5,709
(19,715) 1,719,205
177,492
40,985
86,651
256,720
123,861
458,199
184,570
986,901
147,509
(329)
(1,372)
(2,070)
(1,322)
(2,514)
(7,514)
(115)
–
–
Date of grant
30 Sep 2004
12 Apr 2005
29 Sep 2005
20 Apr 2006
28 Sep 2006
28 Sep 2006
26 Apr 2007
26 Apr 2007
26 Apr 2007
27 Sep 2007
27 Sep 2007
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
16 Sep 2011
16 Sep 2011
21 Sep 2012
21 Sep 2012
6,351,563 1,147,624 (3,037,066)
(53,232)
(57,439)
(49,310) 4,302,140
The total number of securities available for issue under the scheme is 4,302,140 which represents 0.168 per cent of the issued share
capital at 31 December 2012.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the
current period was £7.13.
The weighted average fair value of options granted under the plan in the period was £2.28.
Additional unaudited fi nancial information Prudential plc Annual Report 2012
383
International Savings Related Share Option Scheme
Exercise period
Number of options
Exercise
price £
Beginning
End
Beginning
of period
Granted
Exercised
Cancelled
Forfeited
Lapsed
820
01 Jun 2011 30 Nov 2011
5.65
709
4.75 01 Dec 2011 31 May 2012
17,847
5.72
01 Jun 2012 30 Nov 2012
22,185
5.52 01 Dec 2010 31 May 2011
8,928
5.51
01 Jun 2011 30 Nov 2011
4,192
01 Jun 2013 30 Nov 2013
5.51
195,889
4.38 01 Dec 2011 31 May 2012
6,951
4.38 01 Dec 2013 31 May 2014
01 Jun 2012 30 Nov 2012 1,740,780
2.88
81,218
01 Jun 2014 30 Nov 2014
2.88
110,422
4.25 01 Dec 2012 31 May 2013
2,682
4.25 01 Dec 2014 31 May 2015
157,107
4.61 01 Dec 2013 31 May 2014
6,130
4.61 01 Dec 2015 31 May 2016
410,756
4.66 01 Dec 2014 31 May 2015
25,739
4.66 01 Dec 2016 31 May 2017
6.29 01 Dec 2015 31 May 2016
6.29 01 Dec 2017 31 May 2018
–
–
–
–
(2,778)
–
–
–
–
–
–
–
(28,952)
–
–
–
– (1,652,468)
–
–
(59,246)
–
–
–
(699)
–
–
–
(52)
–
–
–
–
– 691,531
–
34,701
–
–
–
–
–
–
–
(418)
–
(20,966)
(1,748)
(5,541)
–
(17,743)
–
(20,880)
–
(3,228)
–
–
–
(580)
–
–
–
(820)
(709)
–
(22,185)
(8,928)
–
(85) (166,434)
–
(418)
–
(149)
–
–
–
–
–
–
–
–
(3,454)
(1,337)
(3,945)
–
(19,502)
–
(36,983)
–
(6,935)
–
Date of grant
20 Apr 2006
28 Sep 2006
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
16 Sep 2011
16 Sep 2011
21 Sep 2012
21 Sep 2012
End of
period
–
–
14,489
–
–
4,192
–
6,951
63,474
78,133
41,541
2,682
119,163
6,130
352,841
25,739
681,368
34,701
2,792,355 726,232 (1,744,195)
(70,524)
(72,821) (199,643) 1,431,404
The total number of securities available for issue under the scheme is 1,431,404 which represents 0.056 per cent of the issued share
capital at 31 December 2012.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the
current period was £7.01.
The weighted average fair value of options granted under the plan in the period was £2.28.
Prudential International Assurance Sharesave Plan
Exercise period
Number of options
Date of grant
25 Sep 2008
27 Apr 2009
27 Apr 2009
25 Sep 2009
Exercise
price £
Beginning
End
4.38 01 Dec 2011 31 May 2012
01 Jun 2012 30 Nov 2012
2.88
2.88
01 Jun 2014 30 Nov 2014
4.25 01 Dec 2012 31 May 2013
Beginning
of period
691
30,320
6,567
2,426
40,004
Granted
Exercised
Cancelled
Forfeited
Lapsed
–
–
–
–
–
(691)
(26,516)
–
(1,627)
(28,834)
–
–
–
–
–
–
–
–
–
–
–
(158)
–
(160)
(318)
10,852
End of
period
–
3,646
6,567
639
The total number of securities available for issue under the scheme is 10,852 which represents 0.001 per cent of the issued share
capital at 31 December 2012.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the
current period was £7.00.
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Financial statements Prudential plc Annual Report 2012
Additional unaudited fi nancial information continued
III(c): Option schemes continued
Non-employee Savings Related Share Option Scheme
Date of grant
28 Sep 2006
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
16 Sep 2011
16 Sep 2011
21 Sep 2012
21 Sep 2012
Exercise period
Number of options
Exercise
price £
Beginning
End
Beginning
of period
Granted
Exercised
Cancelled
Forfeited
Lapsed
End of
period
5,386
4.75 01 Dec 2011 31 May 2012
15,557
5.72
01 Jun 2012 30 Nov 2012
7,607
5.52 01 Dec 2010 31 May 2011
2,970
5.52 01 Dec 2012 31 May 2013
4,589
01 Jun 2011 30 Nov 2011
5.51
3,834
5.51
01 Jun 2013 30 Nov 2013
40,488
4.38 01 Dec 2011 31 May 2012
13,708
4.38 01 Dec 2013 31 May 2014
874,201
01 Jun 2012 30 Nov 2012
2.88
714,326
2.88
01 Jun 2014 30 Nov 2014
46,446
4.25 01 Dec 2012 31 May 2013
11,717
4.25 01 Dec 2014 31 May 2015
4.61 01 Dec 2013 31 May 2014 1,118,575
375,352
4.61 01 Dec 2015 31 May 2016
644,407
4.66 01 Dec 2014 31 May 2015
266,624
4.66 01 Dec 2016 31 May 2017
6.29 01 Dec 2015 31 May 2016
6.29 01 Dec 2017 31 May 2018
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– 443,315
97,731
–
(3,366)
(2,778)
–
–
–
–
(37,857)
–
(846,669)
–
(29,770)
–
–
–
–
–
–
–
–
–
(7,607)
–
(4,589)
–
(2,631)
–
–
(14,564)
–
–
(10,141)
(6,502)
(14,491)
(3,942)
–
(1,431)
–
–
–
–
–
–
–
–
–
(13,396)
–
–
(11,692)
–
(20,973)
–
–
–
–
(2,020)
12,779
–
–
–
2,970
–
–
–
3,834
–
–
–
13,708
–
27,532
–
686,366
–
16,676
–
–
11,717
– 1,096,742
368,850
–
608,943
–
262,682
–
443,315
–
96,300
–
4,145,787 541,046
(920,440)
(65,898)
(46,061)
(2,020) 3,652,414
The total number of securities available for issue under the scheme is 3,652,414 which represents 0.143 per cent of the issued share
capital at 31 December 2012.
The weighted average closing price of the shares immediately before the dates on which the options were exercised during the
current period was £7.11.
The weighted average fair value of options granted under the plan in the period was £2.28.
Prudential plc Annual Report 2012
385
Section 6
Additional
information
386
392
396
398
Risk factors
Glossary
Shareholder information
How to contact us
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Additional information Prudential plc Annual Report 2012
Risk factors
A number of factors (risk factors) affect Prudential’s operating
results and fi nancial 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 document, is not updated, and any forward-
looking statements are made subject to the reservations specifi ed
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 fl uctuations and general economic conditions
Prudential’s businesses are inherently subject to market
fl uctuations and general economic conditions. Uncertainty
or negative trends in international economic and investment
climates could adversely affect Prudential’s business and
profi tability. Since 2008, Prudential has had to operate against
a challenging background of periods of signifi cant volatility in
global capital and equity markets, interest rates and liquidity, and
widespread economic uncertainty. Government interest rates
have also fallen to historic lows in the US and UK and some
Asia countries in which Prudential operates. These factors have,
at times during this period, had a material adverse effect on
Prudential’s business and profi tability.
In the future, the adverse effects of such factors would be felt
principally through the following items:
AAAAAAAAAAAAA investment impairments or reduced investment returns,
which could impair Prudential’s ability to write signifi cant
volumes of new business and would have a negative impact
on its assets under management and profi t;
AAAAAAAAAAAAA higher credit defaults and wider credit and liquidity spreads
resulting in realised and unrealised credit losses;
AAAAAAAAAAAAA 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
AAAAAAAAAAAAA estimates of the value of fi nancial instruments being diffi cult
because in certain illiquid or closed markets, determining the
value at which fi nancial instruments can be realised is highly
subjective. Processes to ascertain value and estimates of
value require substantial elements of judgment, assumptions
and estimates (which may change over time). Increased
illiquidity also adds to uncertainty over the accessibility
of fi nancial resources and may reduce capital resources
as valuations decline.
Global fi nancial markets have experienced, and continue to
experience, signifi cant uncertainty brought on, in particular,
by concerns over European and US sovereign debt, as well as
concerns about a general slowing of global demand refl ecting an
increasing lack of confi dence among consumers, companies and
governments. Upheavals in the fi nancial markets may affect
general levels of economic activity, employment and customer
behaviour. For example, insurers may experience an elevated
incidence of claims, lapses, or surrenders of policies, and some
policyholders may choose to defer or stop paying insurance
premiums. The demand for insurance products may also be
adversely affected. If sustained, this environment is likely to have
a negative impact on the insurance sector over time and may
consequently have a negative impact on Prudential’s business
and profi tability. New challenges related to market fl uctuations
and general economic conditions may continue to emerge.
For some non-unit-linked investment products, in particular
those written in some of the Group’s Asia operations, it may not
be possible to hold assets which will provide cash fl ows 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 fl ows and the lack
of suffi cient 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 profi t.
In the US, fl uctuations in prevailing interest rates can affect
results from Jackson, which has a signifi cant spread-based
business, with the majority of its assets invested in fi xed income
securities. In particular, fi xed annuities and stable value products
written by Jackson expose Prudential to the risk that changes in
interest rates, which are not fully refl ected 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 benefi t 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 signifi cant amount of variable annuities that offer capital
or income protection guarantees. There could be 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 signifi cant part of the profi t from Prudential’s UK insurance
operations is related to bonuses for policyholders declared on
with-profi ts products, which are broadly based on historical and
current rates of return on equity, real estate and fi xed income
securities, as well as Prudential’s expectations of future
investment returns. This profi t could be lower in a sustained low
interest rate environment.
Risk factors
Prudential plc Annual Report 2012
387
Prudential conducts its businesses subject to
regulation and associated regulatory risks, including
the eff ects 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 fi nancial
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, profi tability, capital
requirements and, consequently, reported results and fi nancing
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 fi nancial 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 fi nancial 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 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 regulatory framework for insurance companies,
referred to as ‘Solvency II’. The approach is based on the concept
of three pillars. Pillar 1 consists of the quantitative requirements,
for example, the amount of capital an insurer should hold. Pillar 2
sets out requirements for the governance and risk management
of insurers, as well as for the effective supervision of insurers.
Pillar 3 focuses on disclosure and transparency requirements.
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 on the amounts of sovereign debt obligations,
principally for UK, other European, US and Asia countries held
in its investment portfolio. In recent years, rating agencies have
downgraded the sovereign debt of some Continental European
countries, the UK and the US. There is a risk of further
downgrades for these countries. In addition, for some European
countries the risk of default has also increased. 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. Investment in sovereign debt
obligations involves risks not present in debt obligations of
corporate issuers. 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 cashfl ow situation, its relations with
its central bank, the extent of its foreign currency reserves, the
availability of suffi cient 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 issuers. If a sovereign were to default
on its obligations, this could have a material adverse effect
on Prudential’s fi nancial condition and results of operations.
Prudential is subject to the risk of exchange rate
fl uctuations owing to the geographical diversity
of its businesses
Due to their geographical diversity, Prudential’s businesses are
subject to the risk of exchange rate fl uctuations. Prudential’s
operations in the US and Asia, which represent a signifi cant
proportion of operating profi t based on longer-term investment
returns and shareholders’ funds, generally write policies and
invest in assets denominated in local currency. Although this
practice limits the effect of exchange rate fl uctuations on local
operating results, it can lead to signifi cant fl uctuations in
Prudential’s consolidated fi nancial 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 (defi ned as debt over debt plus
shareholders’ funds).
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388
Additional information Prudential plc Annual Report 2012
Risk factors continued
The Solvency II Directive covers valuations, the treatment of
insurance groups, the defi nition of capital and the overall level
of capital requirements. A key aspect of Solvency II is that the
assessment of risks and capital requirements are intended to 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 the Economic and Financial Affairs
Council in November 2009. Representatives from the European
Parliament, the European Commission and the Council of the
European Union are currently discussing the Omnibus II Directive
which, once approved, will amend certain aspects of the original
Solvency II Directive. In addition, the European Commission is
continuing to develop the detailed rules that will complement the
high-level principles of the Directive, referred to as ‘implementing
measures’. The Omnibus II Directive is not currently scheduled
to be fi nalised until late 2013, while the implementing measures
cannot be fi nalised until after Omnibus II. There is a signifi cant
uncertainty regarding the fi nal outcome of this process. In
particular, the Solvency II rules relating to the determination of
the liability discount rate and to the treatment of the US business
remain unclear. As a result there is a risk that the effect of the
measures fi nally adopted could be adverse for Prudential,
including potentially a signifi cant increase in capital required to
support its business and that Prudential may be placed at a
competitive disadvantage to other European and non-European
fi nancial services groups.
Currently there are also a number of other prospective global
regulatory developments which could impact the way in which
Prudential is supervised in its many jurisdictions. These include
the Dodd-Frank Act in the US, the work of the Financial Stability
Board (FSB) on Globally Systemically Important Financial
Institutions (G-SIFIs) and the Common Framework for the
Supervision of Internationally Active Insurance Groups
(ComFrame) being developed by the International Association
of Insurance Supervisors (IAIS).
The Dodd-Frank Act represents a comprehensive overhaul of the
fi nancial services industry within the United States that, among
other reforms to fi nancial services entities, products and markets,
may subject fi nancial institutions designated as systematically
important to heightened prudential and other requirements
intended to prevent or mitigate the impact of future disruptions
in the US fi nancial system. The full impact of the Dodd-Frank Act
on Prudential’s businesses is not currently clear, as many of its
provisions have a delayed effectiveness and/or require
rulemaking or other actions by various US regulators over
the coming years.
As part of a global initiative to identify G-SIFIs, in May 2012,
the IAIS published proposed assessment methodology for
designating Globally Systemically Important Insurers (G-SIIs).
For those groups that are designated by the FSB as G-SII,
additional policy measures including enhanced supervision
and higher loss absorbency requirements could be proposed.
Further detail of the proposals is expected during 2013 and
implementation is likely to be over a period of years.
Furthermore, the FSA is considering the designation of a
Domestically Systemically Important Insurer (D-SII) for those
UK insurers that are signifi cant in UK terms. It is not yet clear
what the impact of this designation may be.
ComFrame is also being developed by the IAIS to provide
common global requirements for the supervision of insurance
groups. The framework is designed to develop common
principles for supervision and so may increase the focus of
regulators in some jurisdictions. It is also possible that some
prescriptive requirements, including regarding group capital,
could be proposed. Further clarity on ComFrame is expected
during the second half of 2013.
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
published an Exposure Draft for its Phase II on insurance
accounting, which would introduce signifi cant changes to the
statutory reporting of insurance entities that prepare accounts
according to IFRS. The IASB continues its deliberation on the
exposure draft principles but it remains uncertain whether the
proposals in the Exposure Draft will become the fi nal IASB
standard. The timing of the changes taking effect is uncertain
but not expected to be before 2017.
Any changes or modifi cation of IFRS accounting policies may
require a change in the future results or a restatement of reported
results.
Risk factors
Prudential plc Annual Report 2012
389
Prudential’s businesses are conducted in highly
competitive environments with developing
demographic trends and continued profi tability
depends on management’s ability to respond to
these pressures and trends
The markets for fi nancial services in the UK, US and Asia are
highly competitive, with several factors affecting Prudential’s
ability to sell its products and continued profi tability, including
price and yields offered, fi nancial 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 fi nancial
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 competitors in the region are
international fi nancial companies, including Allianz, AXA, ING,
AIA and Manulife. In a number of markets, local companies have
a very signifi cant market presence.
Within the UK, Prudential’s principal competitors in the life
market include many of the major retail fi nancial 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 fi nancial services companies such as AIG, AXA Financial
Inc., Hartford Life Inc., Prudential Financial, 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
signifi cantly upon its capacity to anticipate and respond
appropriately to these competitive pressures.
The resolution of several issues aff ecting the fi nancial
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 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
defi ciencies of third-party distributors.
In the US, federal and state regulators have focused on, and
continue to devote substantial attention to, the mutual fund,
fi xed 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 aff ect Prudential’s profi tability and
fi nancial condition
Prudential is, and may be in the future, subject to legal actions,
disputes and regulatory investigations in various contexts,
including 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 specifi c 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 suffi cient. Given the large or
indeterminate amounts of damages sometimes sought, other
sanctions that might be applicable 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 reputation, results of operations or cash fl ows.
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390 Additional information Prudential plc Annual Report 2012
Risk factors continued
Although Prudential’s systems and processes incorporate
controls designed to manage and mitigate the operational risks
associated with its activities, there can be no assurance that such
controls will always be effective. For example, although the
business has not experienced a material failure or breach in
relation to IT systems and processes to date, failures or breaches
of this sort, including a cyber-security attack, could harm its
ability to perform necessary business functions and hurt its
relationships with its business partners and customers. Similarly,
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
identifi ed any operational risks in its systems or processes during
2012, which have subsequently caused, or are expected to
cause, a signifi cant negative impact on its results of operations.
Adverse experience relative to the assumptions used in
pricing products and reporting business results could
signifi cantly aff ect Prudential’s results of operations
Prudential needs to make assumptions about a number of factors
in determining the pricing of its products, setting reserves, 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 and models from the Continuous
Mortality Investigations (CMI) as published by the Institute and
Faculty of Actuaries. If mortality improvement rates signifi cantly
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 refl ect recent
past experience for each relevant line of business. Any expected
deterioration in future persistency is also refl ected in the
assumption. If actual levels of future persistency are signifi cantly
lower than assumed (that is, policy termination rates are
signifi cantly higher than assumed), the Group’s results of
operations could be adversely affected.
Downgrades in Prudential’s fi nancial strength and
credit ratings could signifi cantly impact its competitive
position and hurt its relationships with creditors or
trading counterparties
Prudential’s fi nancial strength and credit ratings, which are used
by the market to measure its ability to meet policyholder
obligations, are an important factor affecting public confi dence in
most of Prudential’s products, and as a result its competitiveness.
Downgrades in Prudential’s ratings, as a result of, for example,
decreased profi tability, increased costs, increased indebtedness
or other concerns, could have an adverse effect on its ability
to market products; retain current policyholders; and on the
Group’s fi nancial fl exibility. 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 by Moody’s,
A+ by Standard & Poor’s and A by Fitch. The Moody’s and Fitch
ratings are on stable outlook and the Standard & Poor’s rating is
on negative outlook.
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’s fi nancial strength
is rated Aa2 by Moody’s, AA by Standard & Poor’s and AA by
Fitch. The Moody’s and Fitch ratings are on stable outlook and
the Standard & Poor’s rating is on negative outlook.
Jackson’s fi nancial strength is rated AA by Standard & Poor’s and
Fitch, A1 by Moody’s, and A+ by AM Best. The Moody’s, Fitch
and AM Best ratings are on stable outlook and the Standard &
Poor’s rating is on negative outlook.
In addition, changes in methodologies and criteria used by
rating agencies could result in downgrades that do not refl ect
changes in the general economic conditions or Prudential’s
fi nancial 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. Further,
because of the long-term nature of much of the Group’s business,
accurate records have to be maintained for signifi cant periods.
These factors, among others, result in signifi cant reliance on
and require signifi cant investment in information technology,
compliance and other systems, personnel and processes.
In addition, Prudential outsources several operations, including
a signifi cant part of its UK back offi ce and customer-facing
functions as well as a number of IT functions, resulting in
reliance upon the operational processing performance of
its outsourcing partners.
Risk factors
Prudential plc Annual Report 2012
391
Another example is the impact of epidemics and other effects
that cause a large number of deaths. Signifi cant infl uenza
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 life insurers, the profi tability 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.
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 diffi cult 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.
Signifi cant tax disputes with tax authorities, and any change in
the tax status of any member of the Group or in taxation
legislation or its scope or interpretation could affect Prudential’s
fi nancial condition and results of operations.
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 cooperation between, the joint
venture participants. Prudential may also face fi nancial or other
exposure in the event that any of its joint venture partners fails
to meet its obligations under the joint venture or encounters
fi nancial diffi culty. In addition, a signifi cant 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.
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Additional information Prudential plc Annual Report 2012
Glossary
AER
Actual Exchange Rates are actual historical exchange rates for
the specifi c accounting period, being the average rates over the
period for the income statement and the closing rates for the
balance sheet at the balance sheet date.
Annual premium equivalent or APE
A measure of new business activity that is calculated as the
sum of annualised regular premiums from new business plus
10 per cent of single premiums on new business written during
the period.
Asset backed security
A security whose value and income payments are derived from
and collateralised (or ‘backed’) by a specifi ed pool of underlying
assets. The pool of assets is typically a group of small and illiquid
assets that are unable to be sold individually.
Available for sale (AFS)
Securities that have been acquired neither for short-term sale nor
to be held to maturity. Shown at fair value on the statement of
fi nancial position and changes in value are taken straight to equity
instead of the income statement.
Bonuses
Bonuses refer to the non-guaranteed benefi t added to
participating life insurance policies and are the way in which
policyholders receive their share of the profi ts of the policies.
There are normally two types of bonus:
AAAAAAAAAAAAA Regular bonus – expected to be added every year during the
term of the policy. It is not guaranteed that a regular bonus will
be added each year, but once it is added, it cannot be
reversed, also known as annual or reversionary bonus; and
AAAAAAAAAAAAA Final bonus – an additional bonus expected to be paid when
policyholders take money from the policies. If investment
return has been low over the lifetime of the policy, a fi nal
bonus may not be paid. Final bonuses may vary and are
not guaranteed.
Cash surrender value
The amount of cash available to a policyholder on the surrender
of or withdrawal from a life insurance policy or annuity contract.
CER
Constant Exchange Rate – Prudential plc reports its results at
both actual exchange rates (AER) to refl ect actual results and
also constant exchange rates so as to eliminate the impact
from exchange translation.
Core structural borrowings
Borrowings which Prudential considers to form part of its core
capital structure and exclude operational borrowings.
Credit risk
The risk of loss if another party fails to meet its obligations, or fails
to do so in a timely fashion.
Currency risk
The risk that asset or liability values, cash fl ows, income or
expenses will be affected by changes in exchange rates.
Also referred to as foreign exchange risk.
Deferred acquisition costs or DAC
Acquisition costs are expenses of an insurer which are incurred in
connection with the acquisition of new insurance contracts or the
renewal of existing insurance policies. They include commissions
and other variable sales inducements and the direct costs of
issuing the policy, such as underwriting and other policy issue
expenses. Typically, under IFRS, an element of acquisition costs
are deferred, ie not expensed in the year incurred, and instead
amortised in the income statement in line with the emergence
of surpluses on the related contracts.
Deferred annuities
Annuities or pensions due to be paid from a future date or when
the policyholder reaches a specifi ed age.
Discretionary participation features or DPF
A contractual right to receive, as a supplement to guaranteed
benefi ts, additional benefi ts:
AAAAAAAAAAAAA That are likely to be a signifi cant portion of the total
contractual benefi ts;
AAAAAAAAAAAAA Whose amount or timing is contractually at the discretion of
the issuer; and
AAAAAAAAAAAAA That are contractually based on asset, fund, company or other
entity performance as discussed in IFRS 4.
Dividend cover
Dividend cover is calculated as operating profi t after tax on an
IFRS basis, divided by the current year interim dividend plus the
proposed fi nal dividend.
Endowment product
An ordinary individual life insurance product that provides the
insured party with various guaranteed benefi ts if it survives
specifi c maturity dates or periods stated in the policy. Upon
the death of the insured party within the coverage period,
a designated benefi ciary receives the face value of the policy.
European Embedded Value or EEV
Financial results prepared in accordance with a set of Principles
issued by the Chief Financial Offi cers Forum of European
Insurance Companies in May 2004 and expanded by the
Additional Guidance of EEV Disclosures published in
October 2005.
Glossary
Prudential plc Annual Report 2012
393
Fixed annuities
Fixed annuity contracts written in the US which allow for
tax-deferred accumulation of funds, are used for asset
accumulation in retirement planning and for providing income in
retirement and offer fl exible payout options. The contract holder
pays the insurer 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, as
appropriate.
Fixed indexed annuities
These are similar to fi xed annuities in that the contract holder
pays the insurer a premium, which is credited to the contract
holder’s account, and periodically, interest is credited to the
contract holder’s account and administrative charges are
deducted, as appropriate. An annual minimum interest rate may
be guaranteed, although actual interest credited may be higher
and is linked to an equity index over its indexed option period.
Funds under management
These comprise funds of the Group held in the statement
of fi nancial position and external funds that are managed
by Prudential asset management operations.
Guaranteed annuities
Policies that pay out a fi xed amount of benefi t for a defi ned
period.
Guaranteed investment contract (GIC) (US)
An investment contract between an insurance company and an
institutional investor, which provides a stated rate of return on
deposits over a specifi ed period of time. They typically provide
for partial or total withdrawals at book value if needed for certain
liquidity needs of the plan.
Guaranteed minimum accumulation benefi t
(GMAB) (US)
A guarantee that ensures that the contract value of a variable
annuity contract will be at least equal to a certain minimum
amount after a specifi ed number of years.
Guaranteed minimum death benefi t (GMDB) (US)
The basic death benefi t offered under variable annuity contracts,
which specifi es that if the owner dies before annuity income
payments begin, the benefi ciary will receive a payment equal
to the greater of the contract value or purchase payments less
withdrawals.
Guaranteed minimum income benefi t (GMIB) (US)
A guarantee that ensures, under certain conditions, that the
owner may annuitise the variable annuity contract based on the
greater of (a) the actual account value or (b) a payout base equal
to premiums credited with some interest rate, or the maximum
anniversary value of the account prior to annuitisation.
Guaranteed minimum withdrawal benefi t (GMWB) (US)
A guarantee in a variable annuity that promises that the owner
may make annual withdrawals of a defi ned amount for the life
of the owner or until the total guaranteed amount is recovered,
regardless of market performance or the actual account balance.
Group free surplus
Group free surplus at the end of the period comprises free
surplus for the insurance businesses, representing the excess
of the net worth over the required capital included in the EEV
results, and IFRS net assets for the asset management businesses
excluding goodwill. The free surplus generated during the period
comprises the movement in this balance excluding foreign
exchange, capital movements, and other reserve movements.
Specifi cally, 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.
Health and protection
These comprise health and personal accident insurance
products, which provide morbidity or sickness benefi ts and
include health, disability, critical illness and accident coverage.
Health and protection products are sold both as standalone
policies and as riders that can be attached to life insurance
products. Health and Protection riders are presented together
with ordinary individual life insurance products for purposes
of disclosure of fi nancial information.
IGD surplus
The Prudential Group’s solvency surplus measured in accordance
with the EU Insurance Groups Directive.
Immediate annuity
An annuity in which payments to the annuitant or benefi ciary
start at once upon establishment of the annuity plan or scheme.
Such annuities are almost always purchased with a single (lump
sum) payment.
In-force
An insurance policy or contract refl ected on records that has not
expired, matured or otherwise been surrendered or terminated.
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Additional information Prudential plc Annual Report 2012
Glossary continued
Inherited estate
For life insurance proprietary companies, surplus capital available
on top of what is necessary to cover policyholders’ reasonable
expectations. An inherited (orphan) estate is effectively surplus
capital on a realistic basis built over time and not allocated to
policyholders or shareholders.
Internal rate of return (IRR)
The IRR is equivalent to the discount rate at which the present
EEV value of the post-tax cash fl ows 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 reserves less premiums received, plus encumbered capital.
The impact of the time value of options and guarantees is
included in the calculation.
Investment grade
Investments rated BBB- or above for S&P, Baa3 or above for
Moody’s. Generally they are bonds that are judged by the rating
agency as likely enough to meet payment obligations that banks
are allowed to invest in them.
Investment-linked products or contracts
Insurance products where the surrender value of the policy is
linked to the value of underlying investments (such as collective
investment schemes, internal investment pools or other
property) or fl uctuations in the value of underlying investment
or indices. Investment risk associated with the product is usually
borne by the policyholder. Insurance coverage, investment and
administration services are provided for which the charges are
deducted from the investment fund assets. Benefi ts payable
will depend on the price of the units prevailing at the time of
surrender, death or the maturity of the product, subject to
surrender charges. These are also referred to as unit-linked
products or unit-linked contracts.
Market value reduction (MVR)
A reduction applied to the payment on with-profi ts bonds when
policyholders surrender in adverse market conditions.
Money Market Fund (MMF)
An MMF is an open-ended mutual fund that invests in short-term
debt securities such as US treasury bills and commercial paper.
The purpose of an MMF is to provide investors with a safe place
to invest easily accessible cash-equivalent assets characterised
as a low-risk, low-return investment.
Mortality rate
Rate of death, varying by such parameters as age, gender
and health, used in pricing and computing liabilities for future
policyholders of life and annuity products, which contain
mortality risks.
Net premiums
Life insurance premiums net of reinsurance premiums ceded
to third-party reinsurers.
Net worth
Regulatory basis net assets for EEV reporting purposes, these
net assets are sometimes subject to minor adjustment to achieve
consistency with the IFRS treatment of certain items.
New business contribution
The profi ts, calculated in accordance with European Embedded
Value Principles, from business sold in the fi nancial reporting
period under consideration.
New business margin
The value of new business on an EEV basis expressed as a
percentage of the present value of new business premiums
expected to be received from the new business.
Non-participating business
A life insurance policy where the policyholder is not entitled to a
share of the Company’s profi ts and surplus, but receives certain
guaranteed benefi ts. Also known as non-profi t in the UK.
Examples include pure risk policies (eg fi xed annuities, term
insurance, critical illness) and unit-linked insurance contracts.
Operational borrowings
Borrowings which arise in the normal course of the business.
Open ended investment company (OEIC)
A collective investment fund structured as a limited company
in which investors can buy and sell shares.
Participating funds
Distinct portfolios where the policyholders have a contractual
right to receive at the discretion of the insurer additional benefi ts
based on factors such as the performance of a pool of assets held
within the fund, as a supplement to any guaranteed benefi ts.
The insurer may either have discretion as to the timing of the
allocation of those benefi ts to participating policyholders or may
have discretion as to the timing and the amount of the additional
benefi ts. For Prudential, the most signifi cant participating funds
are with-profi ts funds for business written in the UK, Hong Kong,
Malaysia and Singapore.
Participating policies or participating business
Contracts of insurance where the policyholders have a
contractual right to receive, at the discretion of the insurer,
additional benefi ts based on factors such as investment
performance, as a supplement to any guaranteed benefi ts.
This is also referred to as with-profi ts business.
Present value of new business premiums (PVNBP)
The present value of new business premiums is 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.
Glossary
Prudential plc Annual Report 2012
395
Regular premium product
A life insurance product with regular periodic premium payments.
Rider
A supplemental plan that can be attached to a basic insurance
policy, with payment of additional premium.
Risk margin reserve (RMR) charge
An RMR is included within operating profi t based on longer-term
investment returns and represents a charge for long-term
expected defaults of debt securities, determined by reference
to the credit quality of the portfolio.
Scottish Amicable Insurance Fund (SAIF)
SAIF is a ring-fenced sub-fund of the Prudential Assurance
Company’s long-term fund following the acquisition of the
mutually owned Scottish Amicable Life Assurance Society in
1997. The fund is solely for the benefi t of policyholders of SAIF.
Shareholders of Prudential plc have no interest in the profi ts of
this fund although they are entitled to asset management fees
on this business.
Separate account
A separate account is a pool of investments held by an insurance
company not in, or ‘separate’ from, its general account. The
returns from the separate account generally accrue to the
policyholder. A separate account allows an investor to choose
an investment category according to his individual risk tolerance,
and desire for performance.
Single premiums
Single premium policies of insurance are those that require only
a single lump sum payment from the policyholder.
Stochastic techniques
Stochastic techniques incorporate results from repeated
simulations using key fi nancial parameters which are subject
to random variations and are projected into the future.
Subordinated debt
A fi xed interest issue or debt that ranks below other debt in order
of priority for repayment if the issuer is liquidated. Holders are
compensated for the added risk through higher rates of interest.
Under EU insurance regulation, subordinated debt is not treated
as a liability and counts towards the coverage of the required
minimum margin of solvency, with limitations.
Surrender
The termination of a life insurance policy or annuity contract at
the request of the policyholder after which the policyholder
receives the cash surrender value, if any, of the contract.
Surrender charge or surrender fee
The fee charged to a policyholder when a life insurance policy or
annuity contract is surrendered for its cash surrender value prior
to the end of the surrender charge period.
Takaful
Insurance that is compliant with Islamic principles.
Time value of options and guarantees
The value of fi nancial options and guarantees comprises two
parts, the intrinsic value and the time value. The intrinsic value is
given by a deterministic valuation on best estimate assumptions.
The time value is the additional value arising from the variability
of economic outcomes in the future.
Total shareholder return (TSR)
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-dividend date.
Unallocated surplus
Unallocated surplus is recorded wholly as a liability and
represents the excess of assets over policyholder liabilities for
Prudential’s with-profi ts funds. The balance retained in the
unallocated surplus represents cumulative income arising on the
with-profi ts business that has not been allocated to policyholders
or shareholders.
Unit-linked products or unit-linked contracts
See ‘investment-linked products or contracts’ above.
Universal life
An insurance product where the customer pays fl exible
premiums, subject to specifi ed limits, that are accumulated in an
account and are credited with interest (at a rate either set by the
insurer or refl ecting returns on a pool of matching assets). The
customer may vary the death benefi t and the contract may permit
the customer to withdraw the account balance, typically subject
to a surrender charge.
Variable annuity (VA) (US)
An annuity whose value is determined by the performance
of underlying investment options that frequently includes
securities. A variable annuity’s value is not guaranteed and will
fl uctuate, depending on the value of its underlying investments.
The holder of a variable annuity assumes the investment risk and
the funds backing a variable annuity are held in the insurance
company’s separate account. VAs are similar to unit-linked
annuities in the UK.
Value of new business (VNB)
Embedded value of new insurance contracts written in the year.
Whole of life
A type of life insurance policy that provides lifetime protection;
premiums must usually be paid for life. The sum assured is paid
out whenever death occurs. Commonly used for estate planning
purposes.
With-profi ts funds
See ‘participating funds’ above.
Yield
A measure of the income received from an investment compared
to the price paid for the investment. Normally expressed as
a percentage.
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Additional information Prudential plc Annual Report 2012
Shareholder information
Analysis of shareholder accounts as at 31 December 2012
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
2012 fi nal dividend
Ex dividend date
Record date
Payment date
Shareholder enquiries
For enquiries about shareholdings,
including dividends and lost share
certifi cates, please contact the
Company’s registrars:
By post
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
By telephone
0871 384 2035
Tel:
Fax:
0871 384 2100
Textel: 0871 384 2255
(for the hard of hearing)
Calls to 0871 numbers are charged at
8p per minute plus network extras.
Lines are open from 8.30am to 5.30pm
(UK), Monday to Friday. Other telephone
providers’ costs may vary.
International shareholders
tel: +44 (0)121 415 7026
Number of
shareholder
accounts
% of total
number of
shareholder
accounts
Number of
shares
% of total
number of
shares
281
152
466
1,810
2,432
15,931
39,450
60,522
0.46
0.25
0.77
2.99
4.02
26.32
65.19
2,228,388,165
108,886,675
108,837,221
47,851,960
16,863,068
35,314,408
11,100,855
87.14
4.26
4.26
1.87
0.66
1.38
0.43
100.00
2,557,242,352
100.00
Shareholders
registered on
the UK register
and Irish
branch register
Shareholders
registered on
the Hong Kong
branch register
Holders of
US American
Depositary
Receipts
Shareholders
with ordinary
shares standing
to the credit of
their CDP
securities
accounts
2 April 2013
27 March 2013 28 March 2013 27 March 2013 28 March 2013
2 April 2013
On or about
30 May 2013
2 April 2013
On or about
3 June 2013
23 May 2013
23 May 2013
2 April 2013
Annual General Meeting
The 2013 Annual General Meeting (AGM) will be held on
16 May 2013 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 on our website at
www.prudential.co.uk/investors/AGM information
Dividend mandates
Shareholders may 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, shareholders may download the form from
www.prudential.co.uk/prudential-plc/investors/shareholder_
services/forms
Cash dividend alternative
The Company operates a Dividend Re-investment Plan (DRIP).
Shareholders who have elected for the DRIP 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
Shareholder information
Prudential plc Annual Report 2012
397
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 benefi ts. Shareholders who
have registered will be sent an email notifi cation whenever
shareholder documents are available on the Company’s website
and a link will be provided to that information. When registering,
shareholders will need their shareholder reference number
which can be found on their share certifi cate 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 on page 396 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 have a only small number of shares, the
value of which makes them uneconomic to sell, may wish
to consider donating them to ShareGift (Registered Charity
1052686). The relevant share transfer form may be downloaded
from our website www.prudential.co.uk/prudential-plc/
investors/shareholder_services/forms or from Equiniti.
Further information about ShareGift may be obtained
on +44 (0)20 7930 3737 or from www.ShareGift.org
There are no implications for capital gains tax purposes
(no gain or loss) on gifts of shares to charity and it is also
possible to obtain income tax relief.
Irish branch register
The Company operates a branch register for shareholders in
Ireland. All enquiries regarding Irish branch register accounts
should be directed to Capita Registrars (Ireland) Limited,
2 Grand Canal Square, Dublin 2. Telephone: +353 1 553 0050
Hong Kong branch register
The Company operates a branch register for shareholders in
Hong Kong. All enquiries regarding Hong Kong branch register
accounts 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
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, PO Box 64504, St. Paul,
MN 55164-0504, USA. Telephone: +1 800 990 1135 or from
outside the US: +1 651 453 2128 or log on to www.adr.com
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.
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Additional information Prudential plc Annual Report 2012
How to contact us
Prudential plc
Laurence Pountney Hill
London EC4R 0HH
Tel: +44 (0)20 7220 7588
www.prudential.co.uk
Paul Manduca
Chairman
Tidjane Thiam
Group Chief Executive
Nic Nicandrou
Chief Financial Offi cer
Margaret Coltman
Group General Counsel
John Foley
Group Chief Risk Offi cer
Peter Goerke
Group Human Resources Director
John Murray
Group Communications Director
Prudential UK & Europe
3 Sheldon Square
London W2 6PR
Tel: +44 (0)800 000 000
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 Offi cer
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
Private Shareholder Enquiries
Tel: +353 1 553 0050
Hong Kong Branch Register
Private Shareholder Enquiries
Tel: +852 2862 8555
US American Depositary Receipts
Holder Enquiries
Tel: +1 651 453 2128
The Central Depository (Pte) Limited
Shareholder Enquiries
Tel: +65 6535 7511
Media Enquiries
Tel: +44 (0)20 7548 3559
E-mail: media.relations@prudential.co.uk
How to contact us
Prudential plc Annual Report 2012
399
Prudential public limited company
Incorporated and registered in England and Wales
Registered offi ce
Laurence Pountney Hill
London EC4R 0HH
Registered number 1397169
www.prudential.co.uk
Prudential plc is a company incorporated, subsidiaries of which
are authorised and regulated, as applicable, by the Prudential
Regulation Authority and the Financial Conduct Authority.
The Prudential Regulation Authority and the Financial
Conduct Authority replaced the Financial Services Authority
on 1 April 2013.
Forward-looking statements
This document may contain ‘forward-looking statements’
with respect to certain of Prudential’s plans and its goals
and expectations relating to its future fi nancial condition,
performance, results, strategy and objectives. Statements that
are not historical facts, including statements about Prudential’s
beliefs and expectations and including, without limitation,
statements containing the words ‘may’, ‘will’, ‘should’, ‘continue’,
‘aims’, ‘estimates’, ‘projects’, ‘believes’, ‘intends’, ‘expects’,
‘plans’, ‘seeks’ and ‘anticipates’, and words of similar meaning,
are forward-looking statements. These statements are based
on plans, estimates and projections as at the time they are made,
and therefore undue reliance should not be placed on them.
By their nature, all forward-looking statements involve risk
and uncertainty. A number of important factors could cause
Prudential’s actual future fi nancial condition or performance or
other indicated results to differ materially from those indicated
in any forward-looking statement. Such factors include, but are
not limited to: future market conditions, including fl uctuations in
interest rates and exchange rates and the potential for a sustained
low-interest rate environment, and the performance of fi nancial
markets generally; the policies and actions of regulatory
authorities, including, for example, new government initiatives
related to the fi nancial crisis and the effect of the European
Union’s ‘Solvency II’ requirements on Prudential’s capital
maintenance requirements; the impact of competition, economic
growth, infl ation, and defl ation; 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, accounting
standards or relevant regulatory frameworks, and tax and other
legislation and regulations in the jurisdictions in which Prudential
and its affi liates 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
benefi ts. Further discussion of these and other important factors
that could cause Prudential’s actual future fi nancial condition
or performance or other indicated results to differ, possibly
materially, from those anticipated in Prudential’s forward-looking
statements can be found under the ‘Risk factors’ heading in
this document.
Any forward-looking statements contained in this document
speak only as of the date on which they are made. Prudential
expressly disclaims any obligation to update any of the
forward-looking statements contained in this document 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 UK Prospectus Rules, the UK Listing
Rules, the UK Disclosure and Transparency Rules, the Hong
Kong Listing Rules, the SGX-ST listing rules or other applicable
laws and regulations.
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Prudential plc Annual Report 2012
Printed on Amadeus 75 Matt, a paper
made from 75 per cent recycled
post-consumer waste and 25 per cent
fibre sourced from fully sustainable
forests; and Amadeus 100 White Offset
which is made from 100 per cent
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All material used in this report has been
independently certified according to the
rules of the Forest Stewardship Council
(FSC). All pulps used are elemental
chlorine free, and the inks used are
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Designed by Further™
Printed in the UK by CPI Colour
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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,
subsidiaries of which are authorised
and regulated, as applicable, by the
Prudential Regulation Authority
and the Financial Conduct Authority.
The Prudential Regulation Authority
and the Financial Conduct Authority
replaced the Financial Services
Authority on 1 April 2013.